Escalation Clause: Love It or Hate It, Here’s What Homebuyers Need to Know

  • 5 months ago
  • 1

With buyer competition reaching new heights, it’s no wonder homebuyers feel they need to pull out all the stops to ensure their offer rises to the top. There’s nothing like the frustration of losing out on a house that checked all your boxes—especially if it turns out to be a matter of a few thousand dollars you would be willing to throw into the deal, if given the chance.

Pursuit of the top spot

Enter the escalation clause. An escalation clause in a real estate purchase contract allows for incremental increases of your offer price, but only up to a certain pre-determined amount. The clause only kicks in when competing offers top the original offer made with your contract. 

Here’s an example:

Buyer Kate makes an offer of $340,000 for Kyle’s home. But, Kyle receives a competing offer for $355,000 and his agent lets Kate’s agent know. Without an escalation clause, Kate ends up either increasing her offer to the very top dollar she would pay for the house or she can come back at a lesser amount, hoping it’s enough to top the current high bid. 

With an escalation clause calling for Kate’s offer to increase by increments of $1,000 up to a limit of $365,000, Kate is now able to have the highest offer at just $356,000 compared to her top dollar of $365,000. Of course, that assumes an even higher offer doesn’t come in, exceeding Kate’s maximum. 

Less back and forth—but at a price

An escalation clause eliminates the stress of the back and forth of offers and counter offers. It’s not without its risks, however. For starters, it forces you to reveal how high you are wiling to go, right from the start. For that reason, escalation clauses should only be used when there is near certainty that there will be multiple offers on a property. 

But, what happens if there aren’t multiple competing offers? You have now revealed how high you would be willing to go. That means the seller can counter back at that price, rather than negotiating with a lower counter.

Another example is when an escalation clause is used too early in a process where a listing agent and seller are gathering offers over multiple days. An escalation clause submitted early under those circumstances, gives away the buyer’s negotiating position too soon.

There is, of course, also the worry that the listing agent could use the escalation clause in negotiating higher offers from other contending buyers. Or, that the listing agent isn’t being completely truthful about another offer. That’s why it’s so important that you are comfortable with your top price, because you could be escalated.

One last word of caution: unless you remove the appraisal contingency from the offer, the property will still need to appraise for the final price. 

Bottom line? As your agent, I know what the listing agent’s process will be for reviewing offers and can offer you advice on how best to proceed with your offer to have the greatest chance of success. The important thing to remember about an escalation clause is simply to never offer more than you’re comfortable with spending. No matter the market, you should plan to aggressively pursue a quality home at a competitive price.

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