As many who are considering entering the homebuying market (or have already done so recently) are well aware, it’s what most would call a “seller’s market” out there. Good homes that hit the market will engender significant competition, and many prospective buyers are looking for ways to make their offers more attractive in such a competitive situation.
At Primary Residential Mortgage in Fort Myers, we’re here to help. Not only do we offer a comprehensive range of mortgage loan programs, from conventional to FHA loans, VA loans and numerous others, but we also assist our clients with expertise on navigating the market and the entire homebuying process. One tool that’s sometimes used to improve a home offer is known as an escalation clause – what is this, why is it used, and should you consider one? Here’s a primer.
Also called an escalator, an escalation clause is an amendment to a purchase offer that states that while the buyer is offering a certain amount to the seller, they are potentially willing to go above this number if the market dictates it. Essentially, it’s a willingness to “beat” any other offer that another buyer puts in.
In most cases, the escalation clause will have two numbers: The amount you’re willing to go over other offers, plus a final “ceiling” amount that you won’t go over under any circumstances. Say you’re offering $210,000 on a home listed at $200,000, but you include an escalation clause that says you’ll beat other offers by $1,000 all the way up to $225,000. If the highest other offer comes in at $215,000, your escalator automatically changes your offer to $216,000. However, if someone else offers $230,000 – above your ceiling of $225,000 – the escalator will not be triggered.
The primary reason to include an escalator clause is to show a willingness to negotiate above and beyond your offer, plus to show sellers you’re serious. When your agent speaks to the seller agent about the home, they should get an idea of how competitive the offer market is – and if you know there are multiple or even numerous offers on a given home, including an escalator is often a way to stand out.
On the flip side, escalation clauses come with some risk. If you place an escalator on an offer for a home that only has one or two offers, you risk telling the sellers that you’re willing to pay more than what you actually offered – and ruining your negotiation power. In other cases, if escalation clauses aren’t written correctly, they may lead to cases where buyers are stuck paying for a home well above their budget. For this reason, some real estate agents prefer not to include escalation clauses in their offers.
For more on escalation clauses, or to learn about any of our mortgage rates or other mortgage services, speak to the staff at Primary Residential Mortgage today.
*PRMI NMLS 3094. PRMI is an Equal Housing Lender. Some products and services may not be available in all states. Credit and collateral are subject to approval. Terms and conditions apply. Programs, rates, terms, and conditions are subject to change and are subject to borrower(s) qualification. This is not a commitment to lend. Opinions expressed are solely my own and do not express the views of my employer.