When there is a shortage of homes for sale, the real estate market can become more competitive than usual. This occurs when there are more buyers than sellers, and it can cause house prices to rise and bidding wars to occur. During a time like this, you may want to add an escalation clause on the offer you make for the house you want to buy. Here are three things to know about escalation clauses.

What Is An Escalation Clause?

An escalation clause is an added line on an offer for a home that automatically causes your offer amount to increase if the buyer receives other offers. Once the buyer accepts your offer, he or she can no longer accept offers from other buyers, which means the escalation clause is exempt once this happens.

An escalation clause can be worded in any way you would like. For example, if you place an offer on a house for $150,000, the clause could state to increase this amount by $1,000 over any other offers the homeowner receives. You should always include a maximum amount though. In this situation, you might want to place a maximum offer amount at $160,000.

What Is The Purpose?

The purpose of an escalation clause is to help you get the house you want to buy by not allowing other offers to be higher than yours. This is something that is not used a lot, but it is often used when the real estate market is in a competitive state.

When several offers are expected for one particular house, your agent might suggest using this clause in your purchase offer. If other offers are not expected, your agent would probably not recommend using an escalation clause.

What If The Homeowner Rejects It?

When you make an offer that includes an escalation clause, it may give the seller an incentive to accept it. This can work out good for homeowners that are trying to sell, but there are times when some may not want offers with escalation clauses. Before you decide to do this, you should find out what the appraised value of the house is, so that you can be careful not to go over it. If you do, you may have trouble getting a loan on the house for the amount you need to borrow.

You can talk to your real estate agent to find out how you should handle this. If you need assistance locating a house for sale, an agent can also help with this. You may also want to hire a company like Shaske & Zeiner Appraisal Consultants Ltd to perform a real estate appraisal before proceeding.