Escalation Clause Automates the Bidding Process

In the increasingly vigorous real estate market, motivated home shoppers may want to consider an “automated” method for making bids on a property of particular interest.

You can often match or beat offers that come in later than your own by including an “escalation clause.”

Here’s how it works: Say you put in an offer of $260,000, and someone comes along later and offers $265,000. Your escalation clause might come with instructions to match it, or to offer $5,000 more than the highest offer, so your offer automatically goes up to $270,000.

The escalation clause can also include a “cutoff” or a maximum amount you are willing to pay – say $275,000. If someone comes along and bids $280,000, you’re not going that high.

In situations where a property is likely to see multiple offers and even a bidding war, an escalation clause can give a buyer a leg up.

Make sure you qualify for that “maximum” amount. A mortgage lender will let you know your upper limit when you apply.

Buyers shouldn't be tempted to escalate their purchase price above what they are comfortable paying.

Each situation is unique. Always consult with your real estate agent to see if he or she thinks a higher bid will even be necessary - it's possible that yours will be the seller’s only workable offer.

Part of an escalation clause means arming the seller with the knowledge of your “maximum” offer and putting all your cards on the table up front could sacrifice some of your negotiation power. The seller may try to push you to that mark with a higher counter-offer.

It’s not unheard of for a seller to claim a higher bid without proving it. Make sure he or she shows proper documentation.

Add a contingency allowing you to back out if the lender appraisal comes in lower than your offer, and make sure to have another contingency for problems discovered during inspection.

Your real estate agent's knowledge of normal practices and probable outcomes in your market will make your offer much more likely to succeed.

Bidding up is sometimes necessary to winning a good home in a competitive market.

It’s important to remember not to get too tied up in bidding on any home, escalated or not. The nature of the home shopping beast is you will soon find another one you like just as much or better.