When building a house, negotiating this clause in my contract saved me a lot of money.
Once my husband and I made the decision to expand our family, we knew the original home we lived in wasn’t going to cut it off. It was then that we decided to buy a new house.
Some new homes are shown to buyers after they are fully built. So even if you get the benefit of owning a house that has never been lived in, you miss the opportunity to personalize it. However, the house we bought was completely built and we decided on how many bathrooms we wanted, what type of flooring we wanted and what paint colors would beautify our walls.
Of course, buying a new build usually costs more than buying an existing home, especially when you are making comparisons in the same neighborhood. So my husband and I wanted to make sure we weren’t going over our heads. As such, before signing our purchase contract, we read it very carefully. And with the help of our lawyer, we removed a clause that otherwise would have cost us a lot of money.
Read on to learn more about the escalation clause and why it might be a good idea to try removing it.
Start your journey to financial success in style
Get free access to selected products that we use to help us achieve our financial goals. These fully verified choices could be the solution to help you increase your credit score, invest more profitably, build an emergency fund, and more.
By submitting your email address, you consent to us sending you tips and products and services that may be of interest to you. You can unsubscribe anytime. Please read our privacy statement and terms and conditions.
Beware of the escalation clause
When buying a new home that is under construction, it is common for builders to include an escalation clause in a contract. This clause states that if the cost of construction is higher than expected, the builder has the right to pass this higher cost on to the seller, up to a certain percentage.
Get $ 150 off closing costs with Better Mortgage
This is one of the major lenders that we have personally used to achieve big savings. No commissions, no set-up costs, low rates. Get a loan estimate instantly and $ 150 off closing costs.
Our builder, for example, wanted to include a 10% escalation clause, which could cause our house to cost 10% more. We said no.
The price we agreed to pay for our house was, in our mind, fair. And we weren’t looking to go higher. Our builders pushed back, but our lawyer made it clear that we would abandon the deal. In the end, the builders backed off and the clause was removed. This, in turn, saved us from potentially having to pay a lot more for our house.
Escalation clauses for new construction can be a particularly dangerous thing in today’s market. This is especially true when the cost of lumber and other building materials appears to be going nowhere but rising. If you are buying new construction today, be sure to look for an escalation clause in your contract and attempt to negotiate it.
Having said that, at the time we bought our house, the housing market was pretty consistent. This means that there was a decent supply of inventory. On top of that, we weren’t particularly keen on buying new builds. On the contrary, the opportunity presented itself.
These days, however, the housing market is extremely tight. The sellers and the builders therefore have the upper hand. As such, while it may have been easy for us to remove this escalation clause from our contract, you may not have the same luck in the current market. If that’s the case, you’ll need to make sure that you have enough wiggle room in your home buying budget to potentially pay more for a home.
Don’t let an escalation clause derail your home buying goals. If you can’t negotiate it under contract, make sure that you are able to not only afford that higher price, but also qualify for a mortgage high enough to allow it. The last thing you want is to focus on a new home, only to realize that you can’t actually swing it due to an escalation clause.