How do I add it to my loop?

Can a buyer back out of their contract and get their deposit back if they used an escalation clause and the property does not appraise? 

What are the basics/pros and cons of an escalation clause so that I can explain to my client?

Dalton Wade provides an Escalation Clause.  You will find it in Dotloop and can add it to your INITIAL DOCS folder:          

1. Click “ADD DOCUMENT” to the right of the folder
2. “TEMPLATES”
3. Scroll to “COMMON ADDENDA” on the right & you will see the “Escalation Addendum to Contract” on the left
4. Check the box next to the addendum
5. Click “COPY”
6. Be sure to check the “Other” box on PG 11 of the FAR/BAR Contract and type in “Escalation Addendum” in the blank space to indicate inclusion of your escalation clause.

What if my buyer used and escalation clause and the property does not appraise? Can they back out of their contract and get their deposit back?  If they have an appraisal contingency, then they are within their rights to back out and get their deposit back.  If they do not have an appraisal contingency, then they may have an issue.  Time to negotiate.  Can they still get the loan if it does not appraise? If not, and they are within the financing contingency period, then they can cancel due to a loan denial. 

Here is some handy information about the escalation clause.  If you aren’t very familiar with it, please take a look.  This will provide you some great information. You should be comfortable discussing the basics of an escalation clause with your clients so that they can make the best decision for themselves. See below:

 How Does An Escalation Clause Work?

Real estate escalation clauses can vary significantly, however, they generally provide the same basic components. Here are the primary questions an escalation clause will answer: 

• What is the original purchase price?
• How much will that price be escalated above other competitive bids?
• What is the maximum purchase price in case of multiple offers?

Escalation clauses are relatively simple to understand; they essentially allow prospective buyers to offer slightly more than any additional offer that is submitted after their initial offering. If, for example, an investor submits an offer of $400,000, they could supplement their offer with an escalation clause that specifically states they are willing to beat any additional offers by a specified amount, up to the maximum amount they are willing to spend. Therefore, in the event a $405,000 offer is submitted after their initial offer, an escalation clause will make it possible to beat the competing offer by a predetermined amount. As a result, the investor needs to clarify how much they are willing to beat subsequent offers by, and up to a maximum price point. That way, the escalation clause will incrementally beat out any subsequent offers, up to a designated price point.

Escalation clauses are commonly used when a lot of interest has been expressed in a particular property; in other words, when multiple offers are expected to be submitted on the same home. In a scenario where you can image a property to receive multiple inquiries, it may be in your best interest to submit an offer complimented by an escalation clause. That way, your offer won’t automatically be ignored if—and when—it’s beaten out.

Pros of Using an Escalation Clause

Using an escalation clause has many apparent advantages, not the least of which combat the possibility of becoming an afterthought. If for nothing else, the single most important reason investors include an escalation clause in their initial offer is to remain relevant. In suggesting you are willing and able to increase your offer when necessary, it’s a lot less likely to be relegated to the trash bin. Of particular importance, however, is the ability of an escalation clause to keep an interested buyer in the running. An escalation clause is nothing less than a rebuttal to the most recent offer, and it could be the one decision that lands you the property of your dreams.

Outside of the obvious, the inclusion of an escalation clause in real estate deals may result in the following additional benefits: 

• Escalation clause real estate contracts provide peace of mind for buyers who want the subject property.
• Done correctly, including an escalation clause in real estate deals may prevent the buyer from overpaying. Provided the verbiage is up to the task, the clause should escalate the offer just enough to land the deal without going too far over.
• An escalation clause works heavily in favor of sellers, as they are almost always guaranteed a higher offer under the right circumstances.
• Prospective buyers won’t be left out of negotiations or overlooked in the event they provide an escalation clause.
• Sellers my look at offers with an escalation clause more seriously, giving the edge to anyone willing to include one.

Cons of Using an Escalation Clause

Escalation clauses have many benefits, but they aren’t perfect. Here are a few things to consider:   

• For a buyer, you are laying all of your cards on the table, showing your top number.
• Many people that don’t know what an escalation clause is. In the event a listing agent doesn’t understand what an escalation clause is, for example, the inclusion of it may cause some confusion and delays.
• Select sellers may be put off by the inclusion of escalation clauses. While they are most likely welcoming of the idea of buyers paying more, they are usually made at the original intent to undercut impending offers.
• There are times when the inclusion of an escalation clause can cause issues with bank appraisals. It is recommended to re-write the contract to establish the final sale price and numbers
• While rare, some sellers don’t want to deal with the inclusion of an escalation clause.