How do you negotiate an escalation clause in a hot market?

1 Know your limit

Before you use an escalation clause, you need to know your maximum budget and how much the home is worth. You don't want to overpay or stretch yourself financially. A good way to determine your limit is to get pre-approved for a mortgage and consult with your agent or appraiser. They can help you analyze the market value, comparable sales, and potential appraisal issues. You should also factor in other costs, such as closing fees, taxes, and repairs.

2 Set your increments

An escalation clause should specify how much you're willing to increase your offer price by in response to a higher bid. For example, you might offer $500,000 with an escalation clause of $5,000 up to a maximum of $550,000. This means that if another buyer offers $505,000, your offer will automatically go up to $510,000, and so on, until you reach your limit or win the deal. The increments should be reasonable and realistic, not too high or too low. You want to show the seller that you're serious and competitive, but not desperate or irrational.

3 Provide proof of funds

An escalation clause is only as good as your ability to back it up. The seller will want to see proof that you can afford the higher price if your offer is triggered. You should provide a pre-approval letter from your lender and a bank statement showing your available funds. You should also be prepared to waive any financing contingencies or appraisal gaps if the escalated price exceeds the loan amount or the appraised value. Otherwise, you might risk losing your earnest money deposit or the deal altogether.

4 Review the terms

An escalation clause is not a guarantee that you'll get the home, as the seller has the right to accept, reject, or counter any offer with or without an escalation clause. It is important to carefully review the terms and conditions of the clause before signing it. You should consider questions such as how the seller will verify a competing offer, how they will notify you if your offer is escalated, how it will affect other aspects of the contract, and how it will affect your negotiation power if the deal falls through or the seller requests repairs or concessions.

5 Consult with your agent

An escalation clause is a complex and risky tool that should be used with caution and expertise. You should consult with your agent before deciding to use it or not. Your agent can help you weigh the pros and cons, draft the clause, and negotiate with the seller. Your agent can also advise you on alternative ways to make your offer more attractive, such as offering a larger deposit, a shorter closing time, or a personal letter. Ultimately, your agent can help you achieve your goal of buying your dream home in a hot market.