Even with the Fed’s recent rate hike, the housing market in Florida still looks strong. Demand is high, so buyers must find ways to make their offers stand out. One method that grew in popularity during 2021 is using an escalation clause.
Escalation clauses vary in verbiage but essentially state that a buyer is willing to increase their initial offer by a set amount of money to beat out competing bids. Using this strategy may help you land the Floridian home of your dreams.
Below, we’ll explore escalation clauses in more depth and look at the pros and cons of using an escalation clause in Florida.
What is an Escalation Clause?
An escalation clause, or escalation addendum, is a real estate document that outlines a buyer’s willingness to raise their initial purchase price offer to beat out the highest competing offer.
Parts of the escalation clause
Every escalation clause contains three main parts. Give careful consideration to each before submitting your offer. You will need to provide proof that you can afford the escalation amount.
- Escalation Amount: The increment at which the purchase price should be increased to beat out a competing offer
- Escalation trigger: The escalation clause is triggered (buyer agrees to raise purchase price) if there is a higher bonafide and unexpired competing offer received by the seller that the seller finds acceptable
- Maximum Purchase Price: Also called the escalation cap, this is the highest a buyer is willing to offer
Escalation clause scenario
The following is a simplified scenario to help you understand how an escalation clause can work:
- Kelly offers $350,000 for a home. She also submits an escalation clause stating she will escalate at $5,000 increments up to $400,000 to beat the highest bidder.
- Mark places an offer of $385,000 for the same home. He has the highest initial bid, but he doesn’t use an escalation clause.
- Mark’s offer triggers Kelly’s escalation clause. Her offer escalates up to $390,000, beating out Mark’s offer.
- The seller accepts Kelly’s offer with the escalation clause, so both parties sign the escalation addendum.
In this scenario, the escalation clause helped Kelly win the bid. Without it, the seller likely would have gone with Mark’s higher initial offer.
What Happens When a Seller Accepts an Offer with an Escalation Clause?
It’s entirely up to the seller whether or not they accept your offer with an escalation clause. However, if they do accept it outright, it is binding, which is good news to the buyer.
Once the seller accepts your offer, they cannot make counteroffers to other sellers or negotiate with the previous highest bidder. Instead, they have to go ahead with your bid. The seller will also have to present you with proof of the higher offer that triggered the escalation clause.
Pros of Using an Escalation Clause
Adding an escalation clause to your real estate offer in Florida can help make the home buying process a little easier. Here are three ways how:
- Speeds up bidding wars – Bidding wars can be stressful. Escalation clauses help automate them. If you’re outbid, your escalation clause will kick in and bump up your offer. This limits the back and forth between you, your real estate agent, and the seller’s real estate agent.
- Keeps you within your budget – When you fill out the escalation clause form, you’re forced to consider how much you can afford. Having your maximum purchase price set from the get-go prevents you from letting emotions guide your decisions in a bidding war.
- Helps offer to stand out – Escalation clauses are one of many ways to catch a seller’s eye. Others include paying in cash, a preapproval letter, and removing as many contingencies as you’re comfortable with. In a competitive market, using a number of these methods could mean the difference between landing your dream home or being back in the house-hunting game.
Cons of Using an Escalation Clause
Escalation clauses have a few downsides that you should know about before moving forward with one.
- Seller knows you’re able to pay more than your initial bid – Escalation clauses can give your offer an edge. But, you’re also disclosing to the seller that you have the financial means to pay more for the house than your initial offer. The seller could counter offer at or close to your maximum purchase price. In this scenario, you could end up paying more for the home than if you had just submitted a fixed price offer from the start.
- Seller can always reject or ignore it – A seller isn’t bound by the escalation clause unless they accept the offer. As bids come in, the seller can ignore your escalation clause and offer the house to a different buyer without informing you of a competing offer. They could also reject the escalation clause entirely and ask for your best fixed offer.
- It may not actually improve your chance of success – An analysis of Redfin home-buying clients from July 2022 to February 2021 found that an escalation clause didn’t have a significant impact on whether the buyer wins a bidding war. However, that doesn’t mean you shouldn’t use an escalation clause. The findings likely indicate that escalation clauses are becoming so common in a competitive market that they keep you in line with your competitors rather than giving you an upper hand.
Tips For Getting Your Escalation Clause Accepted
Remember, an escalation clause is just one tool that may help you win a real estate bid. Since escalation clauses have pros and cons for sellers just as they do for buyers, it’s wise to pair your escalation clause with other sound strategies to create a winning bid. These can include:
- Put down a large amount of earnest money: A larger deposit and an escalation clause show the seller that you’re very serious about purchasing their home.
- Pay with cash: Sellers would rather accept cash offers. If you can’t pay in cash, at least obtain a loan pre-approval.
- Contingency waving: Waiving contingencies like financing, inspection, and/or appraisal shows a seller that you’re serious. Just be sure to discuss this decision with your real estate agent, as you could assume a large amount of risk.
Document: Escalation Addendum to Contract for Florida (2021)