What’s an Escalation Clause?
In a competitive seller’s market, one popular strategy to help win a bidding war – when multiple offers are made on one property – is implementing an escalation clause.
What is an escalation clause?
Sometimes referred to as an “escalator,” an escalation clause is when a buyer submits an offer on a home for sale and adds a clause into the contract stating that they are willing to exceed their offer by a certain amount of money in order to outbid competitors. The buyer would also likely state a maximum cap price to ensure they don’t make an offer beyond their financial means.
Like at an auction, the escalation clause works in the buyer’s favor to prevent them from rewriting their offer contract over and over again to compete with fellow interested buyers.
An escalation clause can be especially useful when the seller calls for “highest and best” – a protocol designed to narrow down offers on the house to the best one possible. In the case of highest and best, an escalation clause can potentially outbid the other highest bidder.
Susan Loparo, a real estate agent with RE/MAX Traditions in Ohio, explains what goes into helping interested buyers construct escalation clauses.
“When we’re writing [escalation clauses], I say to people, ‘If the house is, for example, $350,000, and you only want to go up to $360,000, and then you hear you lost the house for $362,000, will you be upset?’ The buyers usually say yes – that they would be,” Loparo shares.
In today’s seller’s market in the U.S., homes are selling quickly. It could be a matter of days or even hours before the sign in the front yard switches from “for sale” to “sold.” Escalation clauses are sometimes appreciated for their ability to streamline the home-selling process and wrap-up a sale faster, especially when multiple offers have been made on the same property.
Are there any downsides to an escalation clause?
That said, sellers don’t always love grappling with escalation clauses. If a sale closes with an escalator, the seller loses the ability to issue counteroffers to the other interested buyers.
An additional downside can be the buyer’s perception of the home once they know they paid over their initial offer for it.
“At the end [of the homebuying process], buyers sometimes can have high-expectations [from the sellers] because they ended up paying more than top-dollar,” Loparo explains.
However, buyers are often relieved to have locked down their new home without enduring a tedious back-and-forth negotiation process.
Ultimately, an escalation clause is a tool meant to aid a buyer in winning out on their potential new home. With fewer homes for sale and a frenzy of buyers looking for a new place, these clauses have become a more common practice.