The Risks of Using an Escalation Clause When Submitting a Home Buying Bid
Posted on: 27 February 2018
If you are preparing to bid for a house, you may be tempted to include an escalation clause that automates your bids up to a predetermined maximum. An escalation clause does have its benefits, but it also has its drawbacks. Here are some of the potential risks of an escalation clause:
It Tips Your Hand to the Seller
One of the main problems with an escalation clause is that it tips your hand to the seller by telling them how much you are willing to pay for the house. In fact, the seller can believe that their house is worth at least as much as you are willing to fork out for it; you can't blame a seller for seeking to sell their house for the highest price possible. That may make the seller hold out for other higher bids or even take a hard stance in the negotiations.
It Ignores Other Factors
Another problem with an escalation clause is that it focuses solely on the purchase price at the expense of other factors. This is not good given that price is not the only thing sellers consider when evaluating purchase offers. Sellers consider other factors such as mortgage prequalification status, buyer contingencies, and closing speed, among other things. If you include an escalation clause, you are mainly focusing on the price; this means other buyers who haven't automated their bids may upstage you in other areas, such as the contingencies.
It Raises the Risk of Fraud
Another danger of including an escalation clause with your bid is that the seller may be tempted to include fake bids so as to increase your bid. For example, they can talk to a relative or friends to submit bids so that your bid can automatically increase to a point, after which they accept your bid. This may not be a common practice, but you can't rule it out entirely.
It Complicates Issues in the Case of Similar Bids
Lastly, you should know that an escalation clause only addresses the issue of the seller receiving a higher bid, but what happens if the seller receives two or more similar bids? What if there are several competing bids with escalation clauses, which mean the bid may equal each other after some time? In such a case, you will be placing yourself at the mercy of the seller because you can't predict which bid they will accept. That would not be the case if you were handling your bid manually.
To get a better handle on the home buying process, contact companies such as Mckee Kubasko Group Real Estate.
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