In an Escalating Market, What you Need to Know about Escalation Clauses

Season is upon us and the local real estate market is heating up! As with any hot real estate market, it is not at all uncommon for Sellers to receive multiple offers on their property. For obvious reasons, multiple offer situations can be exhilarating for Sellers and infuriating for Buyers. How many times have you or your Buyer missed out on a property due to a better offer being on the table?
While there are numerous negotiation tactics that can be used in multiple offer situations, an often overlooked strategy is the use of an escalation clause. An escalation clause states that the Buyer is willing to outbid any competing offer on the real property by an incremental amount, up to the maximum purchase price. An escalation clause is typically presented as an Addendum to a real estate contract. Below is an example of an escalation clause:

“If, prior to Seller’s acceptance of Buyer’s offer to purchase, Seller receives from another prospective purchaser a bona fide offer to purchase the property (“Competing Offer”), with terms acceptable to Seller and a Net Purchase Price (the Purchase Price less any identified Seller financial concessions) higher than the Net Purchase Price offered by Buyer, Buyer agrees that the Purchase Price of Buyer’s offer is increased so that the Net Purchase Price is XXX higher than the Net Purchase Price in the Competing Offer(s), up to a maximum Purchase Price of YYY. Seller will provide a copy of the Competing Offer to the Buyer no later than the time Seller returns a copy of the executed Agreement to Buyer.”

In the above example, the escalation clause will automatically increase the Buyer’s offer by the predetermined increment (XXX), up to the maximum amount the authorized by the escalation clause (YYY). The use of the escalation clause will effectively eliminate the back and forth of offer and counteroffer between the Buyer and Seller.
Be careful, escalation clauses may not work for every Buyer/Seller and it is important to note that there is significant risk involved with presenting/ accepting an offer with an escalation clause. Before using an escalation clause, it is imperative for all parties involved in the offer process to fully understand the escalation clause before submitting/accepting the clause.
As always, we highly recommend consulting with your Broker and local real estate attorney before submitting or accepting an offer containing an escalation clause.

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relaying upon any information contained herein.

Sincerely,
Berlin Patten Ebling, PLLC

Article Authored by William C. McComb, Esq. wmccomb@berlinpatten.com

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

www.berlinpatten.com

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