What Is An Escalation Clause and Should I Use One?

What Is An Escalation Clause and Should I Use One?

In this tight sellers’ market, where every property listed receives multiple (and over-asking price) offers within hours, agents are looking for creative ways to make their buyers’ offers stand out.

One method that has gained a lot of traction lately is the escalation clause. What is it?

Simply put, an escalation clause is like putting a cap on a bidding scenario. The buyer makes an offer and decides how high he or she is willing to go above that price. The agent then puts this in writing, with wording that may read something like this: “Buyer agrees to pay $____________ more than the next highest offer, not to exceed a final purchase price of $___________.”

Let’s say a property is listed for $275,000. Buyer A offers $280,000 and Buyer B offers $285,000. Buyer C submits an offer of $278,000 but includes an escalation clause indicating a willingness to increase the offer in increments of $1000, up to a top limit of $300,000.

What? Does this mean Buyer C has to pay $300,000 to get the home? Not necessarily. In this scenario, Buyer B’s top original bid offers $285,000, but that buyer has NOT included an escalation. However, as Buyer C has agreed to increase his original offer by $1000 OVER the highest offer, this means his new offer is effectively $286,000, making him the new highest bid.

While this is the basic concept of an escalation clause, other components are sometimes a factor, such as:

  • Whether the financing amount will increase, or whether the buyer will pay cash to cover the escalation amount
  • What happens when there are two or more competing escalation clauses
  • Whether the seller is obligated to show the buyer a copy of the next highest offer to calculate the final purchase price
  • Whether the buyer or seller will be obligated to sign or initial further documents if the escalation clause is triggered

An escalation clause can be a very effective way to make a buyer’s offer stand out, while also including a kind of ‘highest and best’ without necessarily having to pay the highest amount the buyer is willing to go. But at the end of the day, the decision about which offer to accept is up to the sellers. It may not just be about the highest price. Financing, inspection and appraisal contingencies, closing timeframes – all of these can play a part, and sellers are free to choose whichever offer is most appealing to them.

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