Escalation Clauses: What? When? Yes or No?

What Is An Escalation Clause?

An escalation clause is an addendum added to a purchase offer. It allows for you to put in an offer at the price that you would prefer to get the property at, but states that if there is a higher offer that comes in, that will trigger the escalation clause to then offer x amount higher than that offer, up to a max predetermined price.

The 3 main components of your escalation clause are:

1. What is the original purchase price offer?
2. What is the difference between a competitive bid and your escalation?
3. What do you want your all-in max escalation price to be?

Now that we’ve covered what an escalation clause is, we’ll take a look at when you should use it, and then what are the pros and cons of using it.

When Should You Use An Escalation Clause?

Escalation clauses are typically used in a hot market where houses are almost guaranteed to have multiple offers on it, and typically offers that go above asking price. In the event that your original offer gets outbid, it keeps you in the running for the property. Simply put, if this is your dream house and you are worried about losing it to other buyers, an escalation clause is something you should seriously consider.

What Are The Pros Of Using An Escalation Clause?

• Keeps an interested buyer in the running when outbid.
• Shows you are willing to increase your original big.
• Can help keep the buyer from overpaying.
• Can be taken more serious by sellers.

What Are The Cons Of Using An Escalation Clause?

• Can take away a lot of negotiation power from the buyer, as the seller knows your top dollar.
• Some sellers, and even some realtors are unfamiliar with escalation clauses.
• Can sometimes cause issues with appraisals.
• Some sellers and realtors don’t like the idea of an escalation clause, they want the ‘best and final’ and not have to go back and forth between offers.
• If calculated poorly, the escalation clause could negatively impact the future revenue received from the selling the home.

Talk with your realtor if an escalation clause will be right for you. Sellers do have to have proof of a bonafide offer in order to trigger the escalation clause.