The Escalation Clause
First of all, escalation clauses are permissible in the state of New Jersey.
In a bidding war, buyers and sellers have to adapt to the market’s temperature.
More buyers are using escalation clauses when making an offer to purchase a home. This tactic becomes increasingly popular when markets become highly competitive.
Before a buyer’s agent can submit an offer to purchase a property with an escalation clause in it, it needs the seller’s agent to be willing to accept such a stipulation.
Once the seller and the seller’s agent are willing to accept an offer to buy with the escalation clause, it will be included in the real estate contract stating that the prospective buyer making a bid on the property will pay a certain amount above each new bid with a capped amount.
One of the drawbacks to an escalation clause strategy is that it ultimately exposes to the seller how high the buyer is willing to go.
In addition, the willingness to pay more does not qualify or predict the buyer’s ability to gain the approval of the mortgage at the higher price unless that price has been pre-arranged.
The Way Escalation Clauses Work
Typically, when a buyer offers a certain amount for a piece of real estate, the escalation clause will indicate that the offer will increase by certain amounts if there is an offer at a higher price. So in the case of purchasing a home for $500,000, the escalation clause then increases the revised offer that exceeds the highest offered price.
Other Factors to Consider
Not all escalation clause offers are equal. They depend upon the assessment value of the house, the down payment and the ability of the buyer to secure the mortgage. This is why pre-approval is so critical because it will be scalable based upon the amount being mortgaged, pre-approving the buyer for a specific amount that may be more than is normally necessary.
If not properly worded, the buyer may open up too much to the seller to reveal the top price he is willing to pay for the property. But in a hot real estate market, with inventory at record historic lows, many buyers are primarily interested in closing the deal.
In some cases, such an offer may be considered to put the buyer in a weaker position if there was a second round, or if there are other offers being made with similar escalation clauses.
When a property is considered highly desirable, the decision from the seller to state that there will be a one-day review or multiple rounds of offense is important for the buyer’s agent to know before making such an offer with an escalation clause in it.
If you have any questions about this information or title insurance, please contact Ralph Aponte: 732.914.1400.
Counsellors Title Agency, www.counsellorstitle.net, founded in 1996, is one of New Jersey’s most respected title agencies, serving all 21 New Jersey counties with title insurance, clearing title, escrow, tidelands searches, and closing and settlement services for commercial or industrial properties, waterfront properties and marinas, condominiums, townhouses or residential single family homes. Counsellors Title also features its own Attorney Settlement Assistance Program™ [ASAP], which is an individual resource customized to fit the needs specifically of real estate attorneys, including, Documentation, Preparation, Disbursement of Funds, Attendance at Closing, HUD Preparation or Post-Closing Matters.