In the Virginia Real Estate Sales Contract, an escalation clause is also known as an ‘escalator’ or ‘step-up’ clause and refers to a clause within the contract that provides that the buyer has a right to pay a higher price for the home when specific conditions are met. An example of a tie-in is an escalation clause which is normally incorporated in a purchase offer where the buyer offer price is set to be increased by a fixed amount over the highest bidding offer up to a predetermined level. This clause is often seen in competitive housing markets such as in Northern Virginia where buyers make multiple offers on property.
The key elements of an escalation clause include:
- The initial price that the buyer offers
- The difference between the offer made and the maximum offer made by a competing buyer
- The pricing strategies include the maximum price the buyer is willing to pay
For instance, a buyer may bid at $500,000, then provides an increase of $5,000 above the highest bid up to $ 550,000. It would be $ 525,000 if any other buyer offers a bid of $ 520,000. The bid price is automatically increased to fend off any other buyer who may be interested in making an offer.
Advantages of Using an Escalation Clause
- Increases the competitiveness of your offer: This is because an escalation clause will assist you in securing a bidding war without speculating the extent to which you should bid.
- Allows you to set your maximum price: At least, in an escalation clause situation, you get to decide up to which amount you can go and keep your mind and your heart out of out-competing other bidders.
- Saves time in a fast-paced market: As has been observed, Northern Virginia is indeed a sellers’ market hence this means that homes can be sold within a short period. An escalation clause also reduces the time that is taken when negotiating the solutions to a problem because the parties have laid down clear terms as to what the next course of action will be.
- Hedges against wishing you offered more: The escalation will enable a buyer to bring their best bid to a home; the person will not worry that the home will be sold as soon as he or she can afford to pay more.
Drawbacks of Using Escalation Clause
- Reveals your maximum price to the seller: The seller will be aware of the maximum price that you are willing to pay for the home, hence the propensity to alter the selling strategy.
- Requires proof of competing offers: This means that the seller has to bring a copy of the highest bid to set off the escalation clause. It should be noted, however, that without substantiation, the clause may not even be legal.
- Appraisal issues: If your raised bid price is above the home’s appraisal value, you may be required to make up for the difference between the said value and your bid price.
- Encourages the seller to get other offers: The seller and their agent have an interest in waiting and approaching other interested parties to offer them a chance to bid up your escalation clause and net the seller more money.
- You might still get beat on other terms: Don’t think your escalation price is the end all to your full offer matrix and nothing else matters. It is only one aspect of the overall equation.
Using an Escalation Clause in Northern Virginia
- Discuss the strategy with your real estate agent: Decide whether or not including an escalation clause in your situation is suitable for the particular property or the general market conditions in your area.
- Set your maximum price: Determine the maximum amount of money that you can spend on the purchase of the home and how much you like the home.
- Include the clause in your offer: Discuss with your agent the escalation clause and outline your bid, the step-up, and the ceiling price that you are willing to pay.
- Be prepared to provide proof of funds: If your offer is raised to the next level, it is obvious that you should be able to prove that you have the necessary capital to be able to make the next bid amount.
- Review the seller's disclosure of competing offers: When using the escalation clause, make certain that the seller gives evidence that they have received the highest offer.
Bear in mind that an escalation clause is appropriate when there is competition in the purchasing process and you believe that there cannot be further negotiating with the owner of the house. It is also worth ensuring that the predicate will accept the offer with escalation or accept escalation each time the offer is made.
Mitigating the Risk of an Escalation Clause
- Appraisal issues: If the value of the home as appraised is less than your offer after raising the bid, there might be a cash differential that you have to meet. This should not be the case, but prepare yourself for this kind of situation prior to making an offer.
- Waiving contingencies: It has become a common practice that some buyers have decided not to include their contingencies such as a home inspection. However, this normally results in additional costs since other issues that may be serious may be found at this stage. Try a pre-offer inspection or a limited inspection contingency.
- Financing challenges: Your raising your bid may see you get closer to reaching your maximum limits with the loan. Discuss with the lender the amount that you will be able to borrow to buy the home at the increased price.
- Seller's discretion: The interaction means that even if you offer the highest price or go to the extreme of bidding to secure the seller the best deal, the seller does not have to accept your offer. In this case, they may decide to respond at a different price or accept any other bid.
Conclusion
The escalation clause can be one of the potent weapons in an aggressive market such as Northern Virginia. That way, with the same tick, you can raise your offer as far as a certain maximum price and outbid the competitors. However, it is important to admit that there are some risks involved in implementing this type of strategy; therefore, the potential problem should be controlled. The above-discussed realities make it advisable to seek advice from your real estate agent to plan appropriately for your investment; given the current market trends and your financial capabilities.
