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How do you determine the best escalation increment and cap for your first-time home buyers?

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In a competitive real estate market, you may face multiple offers on the property you want to buy. How can you make your offer stand out and increase your chances of winning the bidding war? One strategy is to use an escalation clause, which allows you to automatically raise your offer by a certain amount if another buyer offers more. But how do you determine the best escalation increment and cap for your first-time home buyers? Here are some tips to help you craft a smart and effective escalation clause.

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1 What is an escalation clause?

An escalation clause is a provision in your offer that states that you will pay a certain amount above the highest competing offer, up to a maximum price. For example, you may offer $300,000 for a home, but include an escalation clause that says you will pay $5,000 more than any other offer, up to a cap of $325,000. This way, you can show the seller that you are serious and willing to pay more, but also protect yourself from overpaying.

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Laura Duncan

Learning & Development Professional | Change Management | Project Management | Onboarding | Gap Analysis | Leadership Development | Succession Planning | Sales Training | Coach & Mentor |
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The escalation clause works to the advantage of the buyer - whether first time or repeat. Their agent can guide them on the amount of the increments but the final decision on increments and cap is up to the buyers' budget and comfort level. It adds value to your negotiating power and reduces anxiety and stress for your client.

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2 Why use an escalation clause?

An escalation clause can be a useful tool for first-time home buyers who want to secure their dream home in a hot market. It can save you time and hassle from having to submit multiple counteroffers or negotiate with the seller. It can also give you an edge over other buyers who may not have an escalation clause or who may have a lower cap. However, an escalation clause is not a guarantee that you will win the bid, and it may not be appropriate for every situation. You should always consult with your agent and lender before using an escalation clause.

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Keith Townsend Multi-Million Dollar Producer

" I close deals, that open doors! "
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I'm not a big fan of escalation clauses, especially for first time homebuyers. 1. There's no benefit to overpaying for a home, especially in a bidding war. Escalation clauses just drive the price up for the sellers, which is the only winner. As first time homebuyers we will establish a budget and guide lines and stay within them, we will research the market for comps and I will encourage the buyers not to exceed this price point unless you want to be upside down in your home, meaning you paid more for it then what it's worth. As first time homebuyers, establish a budget and stick to it. We don't want your first home to be a nightmare.

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3 How to choose an escalation increment?

The escalation increment is the amount by which you will increase your offer above the highest competing offer. It should be based on several factors, such as the market conditions, the value of the home, the seller's motivation, and your budget. You want to choose an increment that is high enough to make your offer attractive, but not so high that you overpay or exceed your loan limit. A common range for escalation increments is between $1,000 and $10,000, depending on the price range of the home and the level of competition. You should also consider using odd numbers, such as $3,500 or $7,500, to avoid matching another buyer's increment.

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4 How to choose an escalation cap?

The escalation cap is the maximum price that you are willing to pay for the home. It should be based on your financial situation, your appraisal contingency, and your market research. You want to choose a cap that is within your budget and your loan approval, and that reflects the true value of the home. You don't want to risk paying more than the home is worth, or losing your financing if the appraisal comes in lower than your offer. A good way to determine your cap is to look at the comparable sales in the area, and adjust for any differences in features, condition, and location.

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5 How to present an escalation clause?

An escalation clause should be clearly written and included in your offer contract. You should also provide proof of funds and a pre-approval letter to show the seller that you can afford your offer. You should also communicate with your agent and the listing agent about your escalation clause, and ask for confirmation and documentation of the highest competing offer if your clause is triggered. You should also be prepared to waive or reduce your contingencies, such as inspection or financing, if the seller requests it.

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Jenifer Hoffman

Vermont Realtor of the Year 2021, Broker/Owner of Hoffman Real Estate
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I have standard language for escalation clauses, including that the seller provide a copy of the competing offer that trigger the escalation clause to go into effect. It’s very important for a buyer’s agent to ask the listing agent in advance how they/seller will handle an escalation clause. It is a powerful and smart negotiation tool, but unfortunately, some real estate agents do not use them ethically, and instead, give the buyer a counteroffer at their cap, even if there is no competing offer. That is bad business, not the way it should be done. All buyers, especially first time homebuyers, need to know if the listing agent has that reputation and be prepared to put in their highest and best offer without an escalation clause.

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6 How to handle an escalation clause?

An escalation clause can be a powerful tool for first-time home buyers, but it also comes with some risks and challenges. You should always be ready to walk away if the price goes beyond your cap or your comfort level. You should also be aware that some sellers may not like or accept escalation clauses, or may use them to negotiate with other buyers. You should also be careful about revealing too much information about your cap or your motivation to the seller or the listing agent. You should always work with a trusted and experienced agent who can advise you on how to use an escalation clause effectively and ethically.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you determine the best escalation increment and cap for your first-time home buyers?

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1 What is an escalation clause?

2 Why use an escalation clause?

3 How to choose an escalation increment?

4 How to choose an escalation cap?

5 How to present an escalation clause?

6 How to handle an escalation clause?

7 Here’s what else to consider

Working with First-Time Home Buyers

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