By Nick Acosta
If you’ve tried to buy a home in the Tampa Bay area sometime in the last year, you’ve probably noticed – it’s tough. With inventory down and demand up, the whole region is experiencing the hottest real estate market in years, but St. Pete, which is steadily climbing the list of most-livable U.S. cities, leads the field. According to a recent Forbes analysis, pending sales in St. Pete increased by 32.1% from May 2020 to May 2021, while the number of available homes dropped by 59.6% over the same period. With homes flying off the market, buyers are looking for any advantage they can find. If you’re currently on the hunt for your St. Pete dream home, an escalation clause can make the difference between clinching the deal and being left out in the cold.
Escalation clauses – also known as escalators – aren’t new, but they’re becoming more popular. They are a type of contract that includes a series of price increases above the initial offer, if another buyer enters with a higher offer. That lets the first buyer leap over the second buyer’s offer automatically – hence, escalating the price by a set amount. Generally, an escalation clause will specify that the buyer is willing to escalate by a fixed amount each time (say, $1,000), and will include a price cap so the offer doesn’t balloon above what the buyer can afford.
Why are escalation clauses a useful tool? Essentially, escalation provides you with an advantage in case of a bidding war – a likely outcome in a hot market like St. Pete – by automatically increasing your bid over those of other hopeful buyers. It also helps your offer stand out, by letting the seller know you’re serious about buying their home. Given the dual dynamic of low inventory of homes for sale and many interested buyers, a seller is likely to get a pile-on of offers in a short amount of time. An escalation clause can set your offer apart by making it clear how much you’re willing to spend on the property, and elevating yours above the fray.
There are drawbacks to escalation clauses to consider. For one, you lose some bargaining power by including a price cap, because the seller will know exactly how high you’re willing to go. If another buyer includes an escalation with a higher price cap, then the seller will know from the beginning that they can get more from your competitor. Furthermore, escalation clauses should only be used if you’re confident that other offers will be made: if yours ends up being the only offer, the seller may decline your first offer, knowing how much higher you’re willing to go. That makes escalation clauses useful primarily in hot markets or neighborhoods that are always competitive; St. Pete is both, so when you make an offer here, you’re less likely to be the only offer.
Another point to consider: not all sellers will allow escalation clauses, asking instead that all prospective buyers provide only their best, final offer. That’s because an escalation clause can leave money on the table – an outcome that’s good for the buyer, but bad for seller. Consider a scenario where Buyer A makes an offer on a house for $450,000, with an escalation clause stipulating that they will outbid other offers by $3,000, up to $460,000. Buyer B offers a flat bid of $452,000, so Buyer A’s escalation automatically raises their offer to $453,000, winning them the house. Had the seller insisted on final and best offers first, Buyer A may have offered more. On the other hand, some sellers prefer an escalation clause, as it helps stoke competition between buyers, and makes bidding wars more organized and predictable, with less paperwork and back-and-forth between parties.
Finally, it’s important to know that an escalation clause does not guarantee that your offer will be accepted. Sellers consider many factors when selecting the winning big: cash offers, settlement timeline, or personal preference may all go into the seller’s decision.
To summarize, an escalation clause can give you a crucial advantage in a fast-moving housing market, demonstrate your interest to the seller, and maintain a competitive edge against other offers. Before deciding whether to include an escalation clause in your offer, talk to your realtor to discuss whether it’s a smart move for that home. When it comes to a real estate market as hot as St. Pete’s is right now, it’s helpful to consider all the tools available to you, and how to use them smartly to find the right home, at the right time, for the right price.