Skip to content

Your New Weapon to Win Bidding Wars: The Escalation Clause Bookmark and Share

Bidding War

By many estimations, bidding wars have become much more common in many segments of the U.S. housing market. In recent years, relatively high demand amid low housing supply has pushed up the price of homes throughout the country. This trend, coupled with the population density and heightened competition within many urban areas, creates the perfect storm for a bidding war. However, with a combination of luck and negotiating skill, it is possible to emerge victorious from a bidding war.

How to Win a Bidding War
The reality is that in many local housing markets today, conditions are ripe for bidding wars. The high level of demand for homes and low amount of supply means most cities in the U.S. are considered seller's markets. In general, that means homeowners can expect their properties to fetch higher sales prices than normal. At the same time, buyers can expect more fierce competition from others who might try to sweeten the deal with more cash or fewer contingencies.

To come out on top in a bidding war, homebuyers are advised to take a few steps that the most diligent of them may have been doing anyway:

  • Look over recent sales of comparable homes in the area (also known as comps). A good real estate agent should help their clients research and assess comps as they craft an offer on a home. Comps may provide ammunition to buyers in the form of evidence, helping to make a case that a seller's asking price is too high.
  • Ask the right questions of the seller to know what they are really looking for in an offer beyond price. U.S. News & World Report pointed out that in many cases, sellers don't just want more money - they might even consider faster closing or accommodations like a lease-back more valuable. Of course, buyers can't expect to know any of this without asking.
  • Finally, buyers need to ensure the essentials of the deal are aligned on their end before they enter into negotiations that could become competitive. That includes having cash on hand for a deposit and the down payment, plus a little extra just to be careful.

Escalation Clauses
One tool that's becoming more common as bidding wars continue to dictate a greater number of real estate deals: an escalation clause. According to Realtor.com, an escalation clause can be included in the terms of a buyer's offer to anticipate competing offers.

The basic structure of an escalation clause, in simple terms, dictates how much a buyer is willing to adjust his or her offer to make it competitive with other offers the seller may receive. Realtor.com summed up the clause like this: "I will pay X dollars for this house, but if another buyer submits a verifiable bid that's higher, I will raise my offer in increments of Y dollars to a maximum price of Z."

An escalation clause can be helpful, and even essential, in cases where a bidding war is expected. But it can also introduce additional risk on the buyer's part. For example, consider a hypothetical scenario in which a home is listed at $1 million by the seller. Even if a buyer offers $950,000 with an escalation up to $975,000, the seller now has justification to call the bluff and counteroffer at $975,000. In this way, an escalation clause doesn't really save them anything, and might even give them less leverage over competing offers in the end.

On the other hand, escalation clauses prove helpful in edging out other offers. Crafting them carefully should result in more success for buyers in a hot real estate market.

Investors Lose Their Appetite: How Mortgage Rates Benefitted

Return to recent posts