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Ask Adam: When to Use an Escalation Clause

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This regularly-scheduled sponsored Q&A column is written by Adam Gallegos of Arlington-based real estate firm Arbour Realty, voted one of Arlington Magazine’s Best Realtors of 2013 & 2014. Please submit your questions via email.

Q. This may be a silly question, but I am wondering if I can use an escalation clause if I am offering less than the listed price for a home? 

A. It’s not a silly question at all, but let me briefly explain what an escalation clause is and how it works for anyone who may not be familiar with it.

An escalation clause allows you start with an initial offering price and specify how much you are willing to escalate your offer price above the next best offer. You may start at $500,000, but specify that you are willing to go up in increments of $1,000 above the next best offer. If the next best offer is $525,000 then yours would escalate to $526,000.

You also specify a maximum amount that you are willing to let your offer price reach. For example, you may set a maximum of $535,000. Your offer will not escalate above $535,000 even if the other offers meet or exceed this number. The process of using an escalation clause is very similar to the process of bidding on eBay.

Back to your question… You will not want to use an escalation clause if you are the only one writing an offer for the property. All that will accomplish is showing the sellers how much you are willing to go up to. Savvy sellers are going to use this information to formulate a counter offer.

The only time it may make sense to include an escalation clause in an offer for below asking price is if you are competing to purchase a property for which you expect all other offers to be below asking price. An escalation clause in this scenario, has the potential to put you in the strongest position in terms of price, without going higher than you need to in order to outperform the other offers.

In a situation where an escalation clause reaches or exceeds the asking price, it is rare that a seller would counter on price. If an offer escalates to a price below the asking price, don’t be surprised if you receive a counter from the sellers if they still don’t think your offer is strong enough, even if you had the highest price.

To learn more, please check out a previous Ask Adam article I wrote about escalation clauses.

The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of ARLnow.com.

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