4 Top Questions Answered About the Escalation Clause

According to the North Carolina Association of REALTORS®, an escalation clause is legally enforceable when buying a North Carolina home, as a means of increasing the offer in your purchase contract up to a predetermined limit, to compete with other offers. 

It’s a strategy that can improve your chances of winning a bidding war on a home you want to buy.  But before you include one with your offer when buying a North Carolina home, here are the answers to the 4 most-asked questions about having an escalation clause in your real estate contract:

1. Should I use an escalation clause? 

In North Carolina, the use of an escalation clause is at the discretion of the seller to accept or reject as part of your offer and the rest of its terms, as they would with other submitted offers; the clause may only be written into your contract by a lawyer, and not your real estate agent.  With Charlotte’s economy at an all-time high (Read Charlotte, NC Ranked 3^rd Best in U.S. Real Estate Market), it can really make all the difference in how likely and how quickly your bid is accepted.

2. Can you give me a price escalation clause example? 

When adding in an escalation clause to your offer, you are suggesting an exact amount for your limit.  Say the home is priced at $399,000, and your offer is $400,000, with an escalation clause to increase it from $1,000-$3,000 above the highest bidder’s amount.  If another buyer offers at least $401,000, but doesn’t have an escalation clause, then you would have the winning bid at $402,000.  However, if other higher bids are placed, or if other bidders also have an escalation clause, then each bid will continue to increase until their limits are reached.

3. Isn’t an escalation clause risky? 

There has been many a debate over escalation clauses, mainly because people tend to be concerned about the existence of higher bids may be fabricated so that the seller can obtain a higher price from a bidder, and that disclosing a bid is a breach of privacy.  However, when using an escalation clause, always ask for proof of the higher bids to ensure their validity – and when you do, know that that proof is name-redacted so that privacy is maintained.  Also, adding the following legal language to your contract will be helpful: “The prevailing party in any litigation or arbitration shall be awarded reasonable attorney fees and court cost.”

4. How does an escalation clause work with my lender? 

Depending on the amount of your down payment towards the total purchase price from your lender or bank, your home loan may cover a portion of the difference between the asking price and final selling price, so that you will only be responsible for the remaining amount at the time of closing.  This may or may not affect the terms of your home loan.

Ultimately, the addendum of an escalation clause can be effective in winning a bidding war when buying your new home. 

To make sure that the offer you are placing is on a home you really want and can afford on the terms that best meets your needs, turn to the expertise of Showcase Realty.  Contact us at today at 704-997-3794 or send us a message here!