Due to the limited inventory of homes for sale in Albuquerque, the low interest rates, and the highly competitive housing market, the use of an escalation clause makes sense at this point. What are escalation clauses and when might you need them when buying a home in Albuquerque?
How Escalation Clauses Work
When you’re trying to buy a home, you can include an escalation clause in your offer. This clause is one way to win a house in a bidding war.
Your offer might include an escalation clause that guarantees that if a specific factor arises, your agreed-upon price will increase. An escalation clause in a real estate contract states that in the event of another offer on a property, your bid will automatically increase so that you will remain the highest bidder.
The escalation clause can specify that initially you, as a buyer, agree to pay a specific amount. When competing offers are received, you will move up to a predetermined limit.
Add this clause if you are pretty certain a property will receive multiple offers, which your real estate agent can help you with.
That being said, no matter how strong your escalation clause is, there’s no guarantee you’ll win the bid.
How Does It Work?
In theory, if you find the perfect home and make an offer of $300,000, but you think the house will receive another offer, you put in the escalation clause. As an example, you might say that if you’re outbid, you will go up $10,000 over any other offer. For instance, you might offer $310,000 as your highest bid.
When someone outbids you, most of these clauses are set up to increase your offer gradually and incrementally.
In order to avoid overspending, the ceiling is crucial. As well, if someone makes a bid that is above your ceiling, then you are outbid.
The escalation clause can be useful in a seller’s market, which is where we are right now.
A real estate agent or an attorney should be consulted first if you plan to add an escalation clause. You’ll learn whether your situation calls for it, along with the appropriate amount and ceiling.
For an escalation clause to go into effect, the seller must prove the competing offer. Sellers can’t use your escalation clause to get you to pay more for the home.
Are There Risks?
The downside of escalation clauses is that you have to put everything on the line from the start, which can be difficult in a competitive market. In doing so, you tell the seller right away how much you are willing to pay. Therefore, their counteroffer can be your ceiling price. Aside from that, it’s impossible to determine whether the competing offer was legitimate.
Furthermore, not all sellers prioritize the highest price when accepting an offer.
How to Use Escalation Clauses
Having an escalation clause can make you a more competitive buyer, but you need to be realistic. Consider your financial situation and your preapproval letter when determining your price ceiling. You should also remember that you can still be outbid.
You shouldn’t use an escalation clause on every house. Take advantage of it strategically and when you truly love a home.
If you’re going to include an escalation clause, you may also want to include an appraisal contingency. An appraisal contingency requires that, once the home is appraised, it must meet the purchase price agreed upon. You don’t want to end up paying more for the house than the market value.
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