What is an escalation clause?
An escalation clause is a condition added to a home purchase offer or counter offer where the buyer says “I will pay x price for this home, but if the seller receives another offer that’s higher than mine, I’m willing to increase my offer to y price.”
How does an escalation clause work?
Generally, the escalation addendum has a few basic components:
- What is the original offer or purchase price that you are making on the home?
- How much will that price be escalated above any other competitive bid? $1,000. $5,000.
- What is the maximum amount that the purchase price can reach in case of multiple offers? In other words, what is the highest you will go with your escalated offer.
Why and when to make an offer with an escalation clause?
Escalation clauses should only be used when the buyer is fairly confident that there will be multiple offers, or when the buyer expects to pay an increased price.
In hot real estate markets, a wide variety of offer-review processes can be available. Some might specify, for example, that the property is going on the market on Friday, and that all offers will be reviewed the following Thursday. The sellers and their Realtor will make a final decision that day.
This situation can be ideal for the escalation clause, when a buyer knows it’s an all-or-nothing offer. Other sellers take a back-and-forth approach.
The escalation clause allows the buyer to make the highest offer but only by the minimal amount necessary to beat out other offers. At first blush, it seems to be a savvy strategy.
Cons Of Using An Escalation Clause
- Their inclusion downplays one of an investor’s greatest advantages: negotiations. By including a clause that discloses the amount someone is willing to pay, there’s less room to negotiate.
- There are still many people that don’t know what an escalation clause is. If a listing agent doesn’t understand what this clause is, the inclusion of it may cause some confusion and delays.
- Some sellers may be put off by the inclusion of escalation clauses.
- There are times when the inclusion of an escalation clause can cause issues with bank appraisals.