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What is an escalation clause?

| Sep 5, 2018 | Real Estate Transactions & Litigation |

If you fall in love with a home and want to buy it, it is important to know that you could run into some competition from other potential buyers. As such, you want to make your offer as attractive as possible.

This could mean including an escalation clause, which is a clause that increases your offer by specific increments if the seller receives a higher offer.

For instance, if you offer $200,000 for a house, you might include an escalation clause that says you will increase your offer by $500 increments until it is the higher offer, with a maximum set at $250,000.

Pros and cons of escalation clauses

As this Forbes article notes, there are benefits of using escalation clauses. They can protect a buyer from paying more than he or she is willing to pay, and they can force the seller to prove that they have received a higher offer. This is because in many escalation clauses, one requirement is that the seller provide to the buyer the competing offer, with personal information blacked out.

There are drawbacks to these clauses, though. They can show the seller just how much a buyer is willing to spend on the home, which puts the negotiating power in the seller’s hands. Including these clauses could also jeopardize the offer, as there are sellers who will not accept offers with escalation clauses.

Using caution when including escalation clauses

Understand that there are also legal issues that can arise with these clauses. In some cases, there are concerns regarding the release of private information. There can also be misunderstandings over conditions like closing costs that lead to lawsuits.

If you are buying a home, especially if you are buying your first home, then you will likely hear many phrases and terms with which you are unfamiliar. This can make the process seem daunting and overwhelming.

However, you don’t have to navigate these important – and complex – transactions alone. You can discuss with an attorney terms like escalation clauses as well as what you can do to ensure you understand the agreement and terms you may be offering or accepting.