What is an Escalation Clause? | Escalation Clause Real Estate Example | Arlington VA Real Estate Agent Matt Leighton takes a look at the Escalation Clause that purchasers can add to their sales contract when purchasing real estate. This escalation clause example takes place in the state of Virginia.
For more information regarding the escalation clause and how to use it when purchasing condos for sale in Arlington VA, email matt [at] OrangeLineCondo.com
ESCALATION CLAUSE ADDENDUM -- imgur.com/a/VH4gx
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Today we are looking at the escalation clause used when purchasing a home. Buyers can add an escalation clause to their contract to make it stronger.
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In today’s video, we’re going to take a look at what is an escalation clause?, go through an escalation clause example and take a look at a few mistakes people make when using an escalation clause.
Escalation Clause Definition
An escalation clause is an addendum to a sales contract that states the purchaser will increase their offer by a certain dollar amount over the next highest bidder, but not higher than what’s known as the escalation cap.
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Escalation Clause Real Estate Example
Say I make an offer on a property and submit my contract at $500,000. You also submit your contract and your offer is $495,000. My offer wins right? Well since you’re a smart buyer and used a real estate agent, that agent recommended that you include an escalation clause of $10,000 with increments of $1,000.
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So because my offer is present, my offer triggers your escalation clauses and now your $495,000 offer escalates to $501,000.
Your offer could escalate up to $505,000 but there needs to be another offer at $504,000 for your offer to be at $505,000.
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Common Mistakes -- Escalation Clause Real Estate
Mistake #1 -- Too small of escalation intervals.
If you are only escalating $500, or $1,000 each time, it may not be enough to move the meter for the seller if another offer has a better close date or not as many contingencies. So take into consideration the price point you are at and adjust your interval accordingly.
Mistake #2 -- Including the Escalation Clause without Knowledge of a Competing Contract
The listing agent will just counter your offer at your max escalation or somewhere in the middle of your escalation. Officially, you need proof that there is another offer to utilize the escalation, but they could just cross out your escalation clause thereby voiding it, and counter back at a price they know you are willing to pay.
What I would recommend if you have been told that “another offer is on the way” is to submit your contract and tell the listing agent to update you if they get the other offer. Then at that point, you submit the escalation clause, so the sellers actually have another offer that would trigger the escalation. Otherwise, you are showing all your cards at once and could lose your entire bargaining strategy.
BONUS -- Escalation Clause Tip
Use Unique Intervals.
Escalate by $1,250 instead of $1,000 or $1,850 instead of $1,000. Make your cap escalation $12,750 instead of $10,000. Everybody likes nice round numbers. Well I can tell you this much that sellers like numbers that are larger. Most offers will escalate using nice round numbers To stand out, use uneven numbers that are a few hundred or a a few thousand more than what you would commonly think to escalate by.
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Arlington VA Real Estate
Century 21 Redwood Realty -- Orange Line Condo
Matt Leighton
1711 Wilson Blvd
Arlington, VA 22209
All information deemed reliable but not guaranteed
• What is an Escalation ...