When the Ocean City real estate market or a particular property sale within it become highly competitive, buyers often look for ways to make their purchase offers stand out.  One popular and effective way to do this is by utilizing escalation clauses.  Escalation clauses make a buyer's offer more attractive by automatically increasing their initial offer price in response to competing offers in multiple offer situations.  This article will explain what escalation clauses are, how they work, their pros and cons and when it might make sense to use one.

An escalation clause is a provision added to a purchase offer that enables a buyer to automatically increase their offer price incrementally if a higher competing purchase offer or offers is received by the seller during initial contract negotiations.  When an escalation clause is used, instead of submitting a fixed priced offer the buyer establishes an initial offer price, the offer cap or maximum price they are willing to pay for the property and the incremental increase (escalation) that will be applied to their initial offer price if multiple offers are received.

As an example, suppose an Ocean City condo for sale is listed for $400,000 and is generating a lot of buyer interest.  Buyer #1 submits an offer for $400,000 that includes an escalation clause with $5000 price increments up to a maximum price of $425,000.  Buyer #2 submits an offer for $405,000 without an escalation clause.  In this scenario, the escalation clause in Buyer #1's offer would automatically increase their offer to $410,000 and make it more competitive.  If buyer #2 had submitted an offer for $430,000 buyer #1's escalation clause would not come into play since it would exceed their $425,000 maximum price cap.

Escalation clauses enable buyers to make competitive real estate offers without paying more for the property than they have to or are comfortable with.  Instead of offering the maximum price the buyer is willing to pay outright, escalation clauses only increase the offer as needed and can potentially save the buyer thousands of dollars compared to submitting a higher, fixed-price offer.  The amount the offer will increase (escalator) is typically in the $500 to $1000 range, but that is not set and will vary from situation to situation.

There are a variety of factors to consider in determining the maximum price cap to put on the offer in the escalation clause.  The key factors to consider are current real estate market conditions, the subject property's market value, recent comparable property sales, interest rates, the property's condition, inventory levels in the segment of the Ocean City real estate market that you are interested in and overall real estate market forecasts.  The Ocean City Realtor you are working with should be able to provide you with all of this information and help you interpret it, which will ultimately put you in a position to make informed buying decisions that you can be confident in.

Sellers are not obligated to accept or engage with escalation clauses and some sellers or their real estate agents will prefer definitive, straightforward offers.  The real estate agent the buyer is working with should check with the seller's listing agent prior to preparing the offer to ensure the seller will accept an offer with an escalation clause in it.  In a multiple offer scenario where an escalation clause is exercised the seller is required to provide signed documentation evidencing the other offer the buyer is competing with.

Escalation clauses are useful tools that can help buyers compete in competitive Ocean City real estate markets.  By automating the real estate offer increases, buyers can remain competitive without overpaying for the property from the outset.  There is a fair amount of strategy that goes into making escalation clauses work effectively.  I have had a lot of success utilizing escalation clauses in competitive real estate markets to secure some of the better deals for my clients, without them overpaying for the property.

If you would like to discuss escalation clauses in greater detail or have any other questions pertaining to real estate in Ocean City or the surrounding areas, feel free to contact me directly anytime at 443-614-9179 or via email below.