You finally found it—the dream home you want to make an offer on. Maybe it was love at first open house. Maybe it was a slow-building certainty with every new detail you learned until you knew in your bones this was the home for you.
Buying your next home can feel incredibly exciting. At the same time, it’s a substantial financial investment. You don’t want to overpay for a new home, no matter how much you love it. At the same time, you don’t want to miss out on a house you love when you could have had it with a slightly higher bid.
The real estate market is a competitive market. Whether buying your first home, your next home, or buying an investment property, closing the deal is the most unpredictable because that’s when the deal could go either way. Luckily, there’s a bidding option to help you achieve that balance. Using an escalation clause, real estate buyers can raise their offer on a home if the seller receives a higher bid from a competitor buyer.
To understand escalation clauses in real estate, it helps to understand how home buying in general works.
In the simplest version of selling and buying a house, a seller lists an asking price for their house. A prospective buyer then submits a bid on the house.
If the buyer expects a multiple offer situation, they may bid above the asking purchase price to try to beat out other buyers. If, however, the buyer suspects that few other people want the house, they may submit a bid below the seller’s purchase price.
The seller then looks at your competing offer and either accepts it, rejects it, or reaches out to the potential buyer or highest bidder to begin bargaining with them until they both reach an agreeable compromise.
In real life, buying a home can quickly become more complicated than the above model. For example, what if you don’t know how interested other buyers are in this home?
That’s where an escalation clause can help.
An escalation clause lets you submit an initial bid with the caveat that you’re willing to bid more if certain conditions are met.
For example, if you’re submitting a bid of $750,000 on an L.A. home, you might include an escalation clause stating that you’re willing to beat any competing bids by $5,000, up until the bidding reaches $800,000—or whatever the top of your budget is—at which point you automatically stop bidding.
In short, if you’re using an escalation clause in your bid, you’ll have to specify:
It’s important to have an honest and realistic conversation with yourself when setting your final point at which you want to stop bidding. Otherwise, you could end up paying more than you’re comfortable with when the bidding process has finished.
You might also hear an escalation clause referred to as an elevator clause, or a laddering clause. It’s the same thing—a clause that can help you be more specific about exactly how much you’re willing to bid on a house, and under what conditions.
While escalation clauses can prove effective for many buyers, there are a few scenarios where they can make less sense. We’ll walk you through when to consider using an escalation clause, and when you might want to consider other tactics.
Benefits of using an escalation clause include:
Here’s why an escalation clause doesn’t always make sense:
When it comes to deciding whether or not an escalation clause makes sense for your specific situation, it’s normally best to have an expert in your corner. That’s one of the many reasons we recommend working with a qualified and respected REALTOR® when purchasing a home.
An escalation clause often makes more sense in particularly competitive housing markets, such as California. Our state has some of the fastest-selling homes in the country—it’s not unusual for homes in certain markets to sell in 35 days.
A REALTOR® can help you know what to expect in your specific market, from how fast homes typically sell, to current sale prices for the type of homes you’re considering, to how you can make your bid as attractive as possible to sellers.
While buying a home can seem daunting, especially in competitive markets, home ownership can offer a range of critical long-term financial benefits, such as:
In addition to financial advantages, home ownership can offer emotional and psychological ones as well. There’s nothing quite like building the life you dreamed about in a home you love.
Here are some other tactics to help your offer stand out in a competitive market like L.A. or San Diego, above and beyond your initial bid:
For additional ways to help make your bid as appealing as possible, try working with an experienced REALTOR® who can leverage their knowledge, reputation, and connections to help you buy your dream home.
Using a respected local REALTOR® can help guide you through the best ways to find—and buy—your perfect home. In addition to walking you through decisions like whether or not to use an escalation clause, REALTOR®s can help you in several other important ways.
Here’s why experts recommend using a REALTOR®:
There’s also something reassuring about having an experienced guide to help you navigate this incredibly exciting—but occasionally challenging—life step. That’s even more true if you’re a first-time home buyer, or haven’t bought a home in the last decade.
When it comes time to choose a real estate agent, we recommend looking for an official REALTOR®. When you see “REALTOR®,” you know you’re dealing with a member of the National Association of REALTORS®.
We adhere to a code of ethics that prioritizes serving our clients and acting with utmost professionalism.
Why hire a real estate agent? At Berkshire Hathaway HomeServices California, we believe everyone deserves to find their perfect home.
Serving home buyers in San Diego, Los Angeles, Orange County, Santa Barbara, Ventura, and Riverside, we help people all over California find their next home. With nearly 3,000 real estate agents in 60 offices across Southern California, we can help match you with an agent who can help make your home-buying journey efficient, less stressful, and ultimately rewarding.
We’re ready to help you move into your future.
Sources:
Like what you see here? Sign up for more! Our free e-newsletter informs you of listings in your community, insider real estate tips, the latest in home trends, and more.
November 2nd, 2022 at 11:00 am