What Is An Escalation Clause

It’s not uncommon for sellers to receive more than one offer in a soaring real estate market. Therefore, depending on the type of real estate market you’re buying a home in, an escalation clause in real estate may be necessary for getting the home of your dreams. Just ask anyone who has been trying to purchase a home. The competition is fierce! Demand continues to outweigh supply, so it’s important to be smart and even a little aggressive when you find a home you can’t live without.

Buyers are looking for ways to stand out from other prospective buyers, and one tool that has become increasingly popular is adding an escalation clause to an offer. If you’re unfamiliar with this term, I wanted to take the opportunity to explain escalation clauses in more detail.

What is an escalation clause?

In short, an escalation clause is a provision that is added to an offer (or counteroffer) where the buyer offers to outbid any other buyers on a property without them knowing. These are also called “relative bids” or “sharp bids” sometimes.

How do escalation clauses work?

Have you ever been outbid for something on eBay? Many buyers will go in and bid with the highest amount they will pay, but eBay only incrementally increases the purchase price as other buyers enter into the auction. You can do something similar in real estate with escalation clauses. Think of it this way: you put in an offer on your dream home, but someone else comes along and outbids you. An escalation clause written into your offer usually says that you will beat any additional offers the seller receives by $1,000 up to your best and final purchase price. If you are utilizing this strategy, it is important to put a cap on how much you are willing to pay. This usually works best when there are not several other offers though, so speak to your realtor to determine the best course of action.

One way to help mitigate risk if you are interested in using an escalation clause is by including a provision that allows you to verify the next highest competing offer. Since your offer will be dependent on what other buyers offer, you will certainly want to make sure that any additional offers that come in are valid.

While escalation clauses can be effective, there are also pitfalls to be aware of. As a local real estate agent with years of experience assisting buyers, I always advise my clients to speak with their own financial and legal experts before proceeding with such an offer. Generally, escalation clauses would only make sense in a situation where you couldn’t stand the idea of losing the home to someone else.

I’m a local real estate professional who has decades of experience in the Pasadena area. I am available to assist you in buying or selling a home, so please contact me if you would like to schedule a time to discuss your needs. 626-714-6808