Homebuyers

What Is an Escalation Clause? This Little-Known Strategy Can Help Homebuyers in Competitive Markets

The fun part of looking for a home is attending open houses and touring beautiful homes. Once you’ve found the right home for you and your family, then the hard part begins.

The key to securing that home is crafting a strong offer, often with the help of your real estate agent. In competitive markets, you may even face heated bidding wars. So, your offer has to stand out.

There are a number of different ways to give yourself a competitive edge in red-hot housing markets, including using an escalation clause.

Santa Cruz, Calif.-based real estate agent Jayson Madani said he’s seen an escalation clause used successfully roughly 35% of the time.

“They could work in certain scenarios where it’s a really good offer and there are a couple different offers that are really close,” said Madani.

However, buyers need to be careful with these clauses as they can sometimes backfire.

“[An escalation clause] needs to be in conjunction with a really good offer,” said Madani of Room Real Estate. “It's really the whole package to get your offer accepted.”

What is an escalation clause?

Also called an escalator, an escalation clause is a special provision you can add to an offer to buy a home. It automatically increases your offer if the seller receives a higher competing bid up to a certain amount.

The escalation clause sets an upper limit on how much you are willing to pay for that property. It also specifies the amount your offer can increase by in steps.

This type of clause is often used in competitive markets where multiple offers are expected, helping buyers stay in the running without making an extremely high offer.

An escalation clause can show the seller that you are serious about purchasing the home. But it doesn’t guarantee that you’ll win the bid.

How does an escalation clause work?

An escalation clause provision typically includes the following:

• The prospective buyer’s original offer
• The amount they are willing to increase over a competing bid
• The maximum they will pay for the home

If the seller receives a legitimate higher offer, the clause will kick in. That will raise the bid of the buyer who used the clause by the set amount.

For example, you may offer $450,000 on a home that you expect will receive other bids. You may include an escalation clause that increases your offer by $3,000 over any other competing bid, up to a maximum of $475,000.

So, if another buyer offers $455,000, your offer would automatically increase to $458,000.

Keep in mind that if someone else offers above your $475,000 maximum, your clause is no longer in effect.

Usually, the agents for the buyer and seller handle the process. However, it can also be helpful to consult with a real estate attorney to make sure you fully understand the provisions of the escalation clause.

When should buyers use an escalation clause?

Escalation clauses don’t always work, especially on those adorable, move-in ready homes that attract lines down the block.

Sellers who ask for highest and best offers may expect the offers that come in to be as high as the buyers are willing to go. They may not like it that a buyer is only willing to offer more only if someone else makes a larger bid.

“My advice would be to never use one, especially if they are not under the assistance of an attorney,” said Greg Nino, a Houston-based real estate agent for RE/MAX Compass.

He added that many real estate agents are advised to steer clear of escalation clauses.

There may be other ways to put together an attractive offer for a seller, said real estate agent Madani.

Sellers often care about factors beyond price, such as how much someone puts down in earnest money, how quickly a buyer can close, or even if the seller can have additional time in the home.

“There are other things that are really important too, like getting the deposit really quickly and finding out if they need to rent back,” Madani said.