The real estate market in Massachusetts is extremely competitive. As buyers look for ways to make their offer stand out from others, the use of escalation clauses is becoming more prevalent. Below, we take a look at escalation clauses for MA home purchases and the pros and cons from both buyer and seller perspectives.
Overview of Escalation Clauses
Escalation clauses are terms that potential buyers insert into their offer contracts. It states that the buyer is willing to pay a certain number of dollars above and beyond the highest competing offer, up to a certain maximum dollar amount. For instance, a buyer may offer $480,000 but include an escalation clause that they will pay $2,000 above the highest competing offer up to $500,000. This would be subject to evidence of said competing offer (basically, submission of a copy of that other offer).
Pros and Cons of Escalation Clauses for MA Home Purchases
Why would a buyer include an escalation clause? With some homes selling 50k or even 100k above list price, buyers don’t always know how high they should go in their offer. They fear that they will offer too much, but the escalation clause still offers some level of protection should market competition demand such a price. For buyers, escalation clauses are a way to shield themselves from paying too much for a home.
For sellers, the thought of escalation clauses initially sounds appealing. If multiple buyers include escalation clauses, it essentially bumps prices up to the maximum for each. However, the downside is that buyers will come in offering less than they otherwise might,… relying on the escalation clauses instead. It’s not uncommon to see some listings exclude escalation clauses from offers.
So, are escalation clauses good for buyers and sellers? They are always beneficial to buyers but not necessarily for sellers. For sellers, it depends on the circumstances. Most sellers would much rather see buyers come in with their best and final offers at a high price. In the example above, if the buyer offered $500k right off the bat, that’s better than offering 480k with the potential to increase to 500k. In essence, escalation clauses are a bit of a cheat, allowing buyers to potentially avoid paying their maximum.
Before including escalation clauses in MA home purchases, make sure the seller would entertain it. Additionally, discuss the pros and cons with your agent as it applies to the particular property and circumstances.