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An escalation clause works by automatically increasing your offer by a certain amount each time another buyer makes a higher offer. It’s the real estate equivalent of bidding in an eBay auction and essentially eliminates the back and forth of offers and counter offers. As long as a higher offer doesn’t exceed your maximum bid, this clause might help you get the home you want.
The escalation clause should only be used when the buyer has been given advice from a knowledgeable realtor that they will be facing a lot of competition. The reality is the buyer is revealing to the seller exactly what they’re willing to pay, which is beyond their initial offer. The seller then holds all the cards and may counteroffer for higher than the seller’s initial bid – since they already know he’ll go higher.
As a buyer, you should never make an offer you aren’t prepared to make good on. You and your realtor must be on the same page before you add an escalation clause because once you begin you are legally required to start the whole process and put down an earnest money deposit. Pulling out of the deal before the home is bought is a risk of losing the deposit.
Have your realtor include contingencies in the purchase offer to be sure certain conditions are met before finalizing the sale. If they aren’t met, you can back out penalty-free.
As a seller, it’s in your best interest to deal honestly with any prospective home buyer. The buyer has the right to ask for proof of an offer or proof of a bona fide offer to prove that there was another offer that activated the escalation clause. If you can’t provide the proof, you, as the seller and your realtor could find yourselves in trouble legally.
The Bottom Line: Should you use an escalation clause? If you’re shopping for a house in a seller’s market where homes are getting multiple offers from buyers—an escalation clause can help you win a bidding war. It can keep you from losing a home just because another buyer offered a little more money than your first offer. It also shows that you’re a serious buyer with a strong offer. If a home does not have any competing offers, there’s no reason to include an escalation clause in your contract. An experienced real estate agent can offer guidance on this topic. Get the guidance you need.