What is an escalation clause and what to real estate investors need to know about them?

I got a few questions about “escalation clauses” and what they are and what Indianapolis real estate investors need to know about them.  Today we’ll talk about what escalation clauses are, how they are used and how you can make the most of these situations while avoiding pitfalls.  Just be nice and take care of people and things like this you’ll never need to worry much about.

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Now for today’s class on escalation clauses…

What is an escalation clause?  What do real estate investors need to know about making offers with escalation clauses?  How can you stay safe and protected with escalation clauses?

Indy Anna explains what an escalation clause is and when they are appropriate and a good idea to use- and when they aren’t necessary to use when offering on a property.

There are two basic types of standard offer methods:

Offering a single amount in what a buyer is willing to pay

Or, offering an amount the buyer is willing to pay that can increase in increments up to a set price- the escalation clause method.

An escalation clause is…

An escalation clause is stating, “I, the home buyer, am willing to offer this specific amount for your property now, but IF you get a higher offer, I will increase my offer by this amount – a set denomination dollar amount in increments- up to a final end stopping offer amount.”

I’m going to include a blank sample escalation clause for you to see the verbiage and how it works here in Indy- the link to the DL will be in the description below.
Parts to an escalation clause…

There are a few parts to the escalation clause to consider in terms of money

The original price offered
The increment amount to increase by above original offer price
The cap or maximum offer to be made
The difference payoff, will it be cash or loan term change

Here’s an example from this week where we used an escalation clause
A Class A+ area property with an asking of $279K
The buyer offered $267K, with an escalation clause of $500 increments up to $292.5K, paid in the difference between the pre-approval amount and the maximum amount accepted as noted in the clause by cash.

Will your offer and escalation clause be accepted?
Some agents/brokers and sellers will not accept any offers that have an escalation clause addendum attached. There is more work involved for the agent and laziness is one part of this, while some sellers simply want a solid price offered without the back and forth.
Other times, sellers and agents see the value in accepting offers with escalation clauses as it leaves a window open in bidding war style to get the best offer possible- usually in a seller’s market.

When do you use an escalation clause?
Escalation clauses should only be used in cases where it’s a safe assumption that multiple offers will be made.

Buyers should be aware that it does mean they are maybe losing any leverage in negotiations, especially if a higher offer comes in that does not include an escalation clause.

It also means that the seller and seller’s agents know how much the buyer is willing to pay at most, from the day the offer is submitted.

It makes the most sense to use an escalation clause when you’re pretty certain of multiple offers, you’re not making a low ball offer, it’s a seller’s market, and the maximum amount of your offer still makes sense in your bottom line.

Did the listing agent clearly state a day/date review of offers, or stated no acceptance of escalation clauses?

There are times where the MLS description might state, ‘no escalation clauses accepted’ which means there’s no point in submitting one and it’s time to make your higher and best offer that still makes sense.

More professional agents will update the ‘agent remarks’ and make it known that multiple offers have been received ahead of time, directly to the buyer’s agent in MLS note communications.

Most of the time an MLS description of “highest and best offer by X day/time with response by X day/time” means there are multiple offers. Sometimes however, this is a marketing ploy and it’s not accurate. This is why having someone here in Indy that knows the market well and part of your boots on the ground is vital.

Bid with reason…
It’s never reasonable to make an escalation clause that will simply be rejected in terms of incitement amounts

If you want to do deals here in Indy, we can set up a time to chat and see if we’re a good fit to work together, but for now- go to BigREIA.com, go there and…

You’ll make the Universe SMILE.  = )

Want more (brilliantly) EPIC posts of real estate investing and bidness badasssery...?

There is a great post and class on the 38 Ways to Buy Apartment Buildings Zero Down with Pet Policies, and here are some other helpful and EPIC posts... for starters as a real estate investor if you ever want to build a business that makes you 30 grand a month then you MUST do this...

There's also a great class Azam did on how anybody can retire in the next 1-2 years with $30,000 a month in passive income by buying and selling businesses zero down.  What about Micro Flipping?  We have a great class on how to start micro-flipping real estate zero down from your house and make $500/day, speed wholesaling 101.

There’s also another great class on how to buy apartment buildings zero down that you can check out as well.  This relates directly to growing income on rental properties.  Speaking of which make sure to check out our epic page on 14 ways to avoid tenants from hell.  Also we have a great post on how to make build a "six figure a month" real estate wholesaling business.

Also here is a post on how I did this and I flipped a house off Zillow for 30.  Also you can check out the post on five steps to flip a house right off Zillow for 40 grand.  You can also check out our other epic post on 57 ways to make money with vacant land.

Here’s another post on how a Hero flipped a house off Zillow and made 40k in a few weeks while he was learning to read.  Also you want to check our post on the EPIC $25 million letter and the copy writing lessons for real estate investors, you'll love it.  Also you can see how ONE letter is making me $9,000 a month.  Also you can check out the post on 101 FREE places to advertise your houses.

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Also we have some great posts on 30 ways to buy real estate with no money down.  That is a two part series so make sure to watch the second part on the 30 ways to buy real estate zero down and with no loans or credit.  I also get questions about our "Epic Flipping" and how to turn $1 into over $25,000 by flipping ordinary items for exponentially high ROI.

And don’t forget our EPIC page on 100 FREE ways to find motivated sellers, we are making the number one page in the world on FREE ways of finding motivated sellers.  Also check out how I find motivated sellers from code violation properties, and also how I make over $1,500 a week giving investors access to that list.  Speaking of lists, for a list of the "Good People" and My Indy Anna Homeys you can go to our People Page at https://www.BigReia.com/people.

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Go to BigReia.com and you’ll become allergic to being an LC and addicted to improving the world and creating Social Mobility for you and yours… 

Thanks so much!  = )

Make the Universe Smile.

~ Indy Anna
Love (at) BigReia.com
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