What is an Escalation Clause and why it is important?

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     Property sellers are pleased to get home buying offers sometimes a penny more than the initial listed price, but buyers are often frustrated when they lose their dream home to a higher bid.

     Buying a property today not only involves checking the legal status of the developer, approvals or a whole list of other documents. It also includes checking for an escalation clause. What is an Escalation Clause? The web definition of Escalation Clause– It is a clause in a contract that allows for a rise in wages or prices under certain conditions.

What is an Escalation Clause?

     It is a condition where a home buyer agrees to pay a particular amount for the property. However, if the seller receives a higher offer than the previous one, and the buyer is ready to increase and match the higher offer value, then the seller can sell the property to the one offering higher value. The clause may seem to be simple but there are a lot of intricate details associated with it.

The Escalation Clause mechanism

In an escalation clause agreement there are a few factors:

Escalating factor: This factor includes that the buyer receives one or more additional bona fide offers to purchase the property with terms acceptable to the seller. But if the seller receives a greater deal for the property then the sales price stated in the offer shall automatically increase to an amount which generates net proceeds of the sale to the seller.

Cap: Under this factor, the sales price offer shall not exceed to X amount (cap).

Documentation: Under this factor are the offers that cause escalation in sales price. The seller of the property will have to provide the buyer with sufficient documentation to justify the increase in sales price.

Multiple Escalations: Under this factor, the buyer acknowledges that the escalating factor of a particular offer and the escalating factors of other offers may result in multiple escalations and in some cases escalation to the cap as well.

Why should the seller accept an escalation clause?

     In some cases home sellers simply state that they will not accept a property offer with an escalation clause and would prefer every buyer to submit exactly what they’re willing to pay. The reason why is the preferred method is to motivate buyers to outbid one another on the first try. Not only this, the process also streamlines the paperwork along with the decision-making process.

What do you need to know before considering an escalation clause?

     Remember each situation is unique therefore bid carefully and with confidence. Escalation clauses can cause a lot of stress only if you are not updated on the basics. Remember to be realistic and think on how much you are willing to offer. Do not get tempted to escalate the offer price or pay above what you are comfortable paying.

     It’s always important to look at the inventory and the property prices before aggressively pursuing a good home in order to be a winner in a competitive market.

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