Escalation Clauses
There is currently a considerable lack of inventory in the real estate markets of Ocean City and the surrounding areas, which is leading to multiple offer situations on most new homes and condos listed for sale. Many of these offers are written higher than the listing price, which is necessary in a lot of situations in order to secure a deal.
There are several ways to structure deals in multiple offer situations, but the most effective way is with an escalation clause. An escalation clause is a way to automatically increase your offer in a multiple offer situation without paying more for the Ocean City property than you have to.
There are two parts to an escalation clause. The first part is the amount your offer will increase when a competing offer is at a higher price. The second part is the cap that you put on how high you are willing to take your overall offer price via the escalation clause.
The amount your offer will increase (escalator) will vary from situation to situation, however it is typically in the $500 to $1000 range. As an example, let's say you were in a multiple offer situation where you offered $300,000 and the competing offer was at $305,000. You put an escalation clause in your offer with a $500 escalator. In this situation your offer would automatically increase to $305,500 and likely secure you the deal.
The second part of the escalation clause is the price cap that you put on the offer. In the previous example, let's say you capped your escalation clause at $307,000. In the $300,000 and $305,000 offer situation nothing would have changed. Your offer would have increased to $305,500 and there would have been no reason to go higher. The escalation clause would have saved you $1500 in this scenario, hence its tactical efficiency. Let’s consider another scenario where the competing offer is $308,000. Your escalation clause would only increase your offer to $307,000 per the price cap and you would likely lose the deal.
There are a variety of factors to consider when choosing the price cap to put on the offer in the escalation clause. Key factors to consider are current real estate market conditions, the property’s market value, recent comparable sales, interest rates, property condition and real estate market forecasts.
In a multiple offer scenario where an escalation clause comes into play the Seller is required to provide signed, written evidence of the other offer.
Escalation clauses are useful tools that can help you compete and prevail in competitive real estate markets. There is a lot of strategy that goes into making them work effectively. I have had a lot of success using escalation clauses in assisting my clients secure attractive deals without overpaying. I would be glad to discuss escalation clauses in greater detail with you. Feel free to contact me directly anytime at 443-614-9179 or via email below.
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