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What is an Escalation Clause? | Escalation Clause Real Estate Example | Arlington VA Real Estate - YouTube
Channel: Matt Leighton
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What is an Escalation Clause? | Escalation
Clause Real Estate Example | Arlington VA
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Real Estate
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Today we are looking at the escalation clause
used when purchasing a home. Buyers can add
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an escalation clause to their contract to
make it stronger.
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But there are some things about the escalation
clause that I donât think all purchasers
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understand so in todayâs video weâre going
to take a look at what an escalation clause
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is, go through a sample escalation clause
and take a look at mistakes people make when
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using an escalation clause. So stay tuned,
weâve got a great video coming up.
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Ok so an escalation clause is an addendum
to a sales contract that states the purchaser
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will increase their offer by a certain dollar
amount over the next highest bidder, but not
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higher than whatâs known as the escalation
cap.
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So letâs go through a hypothetical escalation
clause. Say I make an offer on a property
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and submit my contract at $500,000. You also
submit your contract and your offer is $495,000.
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My offer wins right? Well since youâre a
smart buyer and used a real estate agent,
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that agent recommended that you include an
escalation clause of $10,000 with increments
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of $1,000. So because my offer is present,
my offer triggers your escalation clauses
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and now your $495,000 offer escalates to $501,000.
Everybody understand how that works? Your
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offer could escalate up to $505,000 but there
needs to be another offer at $504,000 for
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your offer to be at $505,000.
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Think of it like eBay. You are making a bid
and you want to pay the lowest, but you are
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willing to pay the highest.
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So now you understand what an escalation clause
is and how it is used, letâs take a look
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at some common mistakes buyers often times
make when using the escalation clause.
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And the first one is not having your escalation
interval at a big enough amount. I work with
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a lot of buyers and sellers in the $700,000+
price range and if you are only escalating
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$1,000 each time, it may not be enough to
move the meter for the seller if another offer
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has a better close date or not as many contingencies.
So take into consideration the price point
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you are at and adjust your interval accordingly.
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The next mistake I see is submitting the escalation
clause without knowledge that another contract
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is present.
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Donât do this!
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The listing agent will just counter your offer
at your max escalation or somewhere in the
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middle of your escalation. So officially,
you need proof that there is another offer
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to utilize the escalation, and I personally
have not take this route. But what you are
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conveying to the sellers is that you will
only pay X amount, but you could really pay
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x + $10,000. Even if there isnât another
offer. The sellers could reject your offer,
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counter back at $5,000 more and you might
get the home and feel great because you didnât
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have to pay an extra $10,000, but at the end
of the day, you just lost $5,000.
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What I would recommend if you have been told
that âanother offer is on the wayâ is
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to submit your contract and tell the listing
agent to update you if they get the other
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offer. Then at that point, you submit the
escalation clause, so the sellers actually
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have another offer that would trigger the
escalation. Otherwise, you are showing all
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your cards at once and could lose your entire
bargaining strategy.
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Just please only include an escalation clause
when you are 100% sure that there is another
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contract in play.
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Okay so weâve gone over a few mistakes purchasers
make now letâs close it out with one last
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tip. And that is to use unique intervals.
Donât escalate by $1,000. Escalate by $1,250
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or $1,600. Make your cap escalation $12,750.
Everybody likes nice round numbers. Well I
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can tell you this much that sellers like numbers
that are larger. Most offers will escalate
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using nice round numbers To stand out, use
uneven numbers that are a few hundred or a
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a few thousand more than what you would commonly
think to escalate by.
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Great so in this video you learned what an
escalation clause is, the top two mistakes
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that buyers make, and I just told you my number
one tip for purchasers.
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Hey if you learned anything in this video
or took value from watching, please go ahead
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and click the subscribe button. That would
be awesome.
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Check out my channel for more helpful tips
and videos on real estate. Thanks for watching
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until next time, create a productive day.
Take care.
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