by Maurie Backman | Published on July 30, 2021
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It's a tough housing market for buyers. This strategy could help.
If you're selling a home in today's market, you're in a pretty sweet position to make a nice profit on your property. But that also means that if you're a buyer, you may get stuck paying a lot more than usual -- assuming you can get an offer accepted at all.
These days, housing inventory is extremely limited, and between that and low mortgage rates, buyer demand is surging. That's driven the price of homes up, which benefits sellers.
But even if you are willing to pay a premium to buy a home today, that still may not be enough to get a seller to accept an offer you make. In fact, even if you come in with an offer on a home that's above its asking price, you could easily lose that home to a higher bidder.
One tactic, however, can help you avoid that unwanted situation. Enter the escalation clause.
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In the context of a real estate offer, an escalation clause states that you're willing to pay more for a home if the need arises.
Typically, when you make an offer on a home, you present a single number you're willing to pay for it and call it a day. With an escalation clause, you present that same offer, but you also state that you're willing to increase your offer to a certain price if another potential buyer comes in with an offer that's higher than yours.
Here's how that might play out. Say a home is listed for $400,000 and it's a property you really want. You might make an offer at $405,000 along with an escalation clause stating that if a competing offer comes in, you're willing to pay $5,000 above that competing offer, up to $425,000.
So, say you make your offer at $405,000 and another buyer does come in and bids $410,000. As per your escalation clause, your offer would automatically increase to $415,000 so that you're coming in higher than your competition off the bat. And if your competition then backs down, you'd potentially get that home for $415,000.
The upside of including an escalation clause when making an offer on a home? It could be just the thing that lands you that property.
But there are drawbacks to consider, too. For one thing, not every seller will accept an escalation clause, though in today's market where bidding wars are so common, one of these clauses could work to a seller's advantage.
Another issue, of course, is that with an escalation clause, you could end up paying more for a home than you're comfortable with. Granted, capping your escalation clause at a reasonable level can prevent this scenario. Just make sure to use a mortgage calculator and crunch your numbers carefully to make sure you're not getting in over your head.
In a normal housing market, an escalation clause may not be necessary when you're seeking to buy a home. But today's housing market is anything but normal. So it could pay to include one of these provisions the next time you make an offer on a home you really want.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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