WHAT YOU NEED TO KNOW ABOUT THE ESCALATION CLAUSE
With DC being one of the hottest real estate markets in the country, it's common for buyers to find themselves competing with other buyers for the same home. One of the most common strategies used is the escalation clause.
WHAT IS THE ESCALATION CLAUSE?
An escalation clause is an optional part of an offer stating the buyer will increase their offer by X amount over a higher bid — but usually no higher than a stated amount (the cap). The clause is triggered by a competing offer, and can be a way to beat out the competition. Here's an example: If Buyer 1 puts in an offer of $750,000 on a home priced at $750,000, and Buyer 2 offers $751,000, Buyer 2 should get the house, right? Well, not if Buyer 1 has an escalation clause increasing her offer to $2,000 above the highest bidder up to a cap of $775,000. In the aforementioned case, Buyer 1 would get the house for $753,000. An escalation clause can move up in various increments, usually ranging from $1,000 to $5,000.
DOES IT IMPACT FINANCING?
Let's say you put in an offer with a 25 percent down payment, so you are getting a loan of 75 percent of the purchase price from the bank. If an offer with an escalation clause ends up being the winning offer, that loan can be dealt with in one of three ways:
No changes are made to the loan, and the buyer makes up the difference in cash.
The loan automatically applies to the new amount, assuming that the borrower is approved for 75 percent of the final sales price.
The loan covers some of the difference between the asking price and final sales price, and the buyer will pay the difference between the loan and the purchase price at settlement.
HOW DO YOU KNOW IF THERE WAS ACTUALLY ANOTHER OFFER?
The escalation clause contains language that allows the winning bidder to get proof of the other offer. This is typically done by providing a copy of the first page of the other offer's contract, and/or their escalation clause. Once you have proof of the other offer and receive the final sales price, the winning buyer must provide the final signature to officially go under contract.