Submitting an offer for a property can be stressful for real estate investors and homeowners alike.
“Was the offer good enough?”
“Are we going to get the property?”
There is one strategy you can use to improve your chances of securing the contract in a bidding war.
It’s called an escalation clause.
In this article, we’ll explain the nuances of an escalation clause in real estate to see if it’s right for you to use whether you're buying your next home or bidding on your next investment property. Plus, we will explain when you shouldn't use an escalation clause in your real estate offer.
What is an Escalation Clause?
An escalation clause tells the seller you are willing to pay more if they receive a higher offer.
An escalation clause in a real estate contract tells the seller you are willing to pay X, but if they get a higher offer, you will increase your offer.
A real estate escalation clause can strengthen your offer and make your contract more attractive to sellers.
When you include an escalation clause in a real estate offer you are telling the seller two things.
First, you are conveying the message that your offer is serious.
Second, you are telling the seller that you are willing to increase your offer.
You remain competitive even after the seller receives a higher offer.
While a real estate escalation clause is relatively simple, in practice there are many details to consider.
It is important to get professional advice when crafting the language to give you the best chance to land the deal and protect your best interests.
How an Escalation Clause in Real Estate Works
Real estate escalation clauses can vary, but they all include several basic components, such as:
- the original purchase price offer
- how much you will escalate the offer above a competitive bid
- the maximum amount you are willing to spend on the property
Escalation Clause Real Estate Example
You may submit an offer of $200,000 for a property with an escalation clause of $2,000 and a cap of $240,000.
If the seller receives an offer of $210,00, your offer will jump to $212,000, $2,000 more than the intervening offer.
Your offer will automatically increase until you reach the cap limit of $240,000.
When to Use an Escalation Clause in Real Estate
There are times when an escalation clause is advantageous — and sometimes it's best to not use one.
An escalation clause is most useful when:
- you are reasonably sure the property will receive multiple offers
- if you are offering a low price
- if you have the funds and/or financing to purchase the property at a higher price
If there is not a lot of competition for the property, it does not make sense to reveal the highest amount you are willing to pay.
An escalation clause can also work to your advantage if the property is a great deal that you do not want to pass up.
It is not a good idea to use an escalation clause if you are close to your budget limit with your first offer.
Also, some sellers will not entertain a contract that contains an elevator because they prefer to have buyers submit the exact price they are willing to pay.
Escalation Clause: Considerations for the Seller
When sellers accept your offer that contains an escalation clause, they give up the right to negotiate with the highest bidder.
They cannot give counter offers to other parties who are interested in the property.
This situation puts them in a position where they may stand to lose a substantial amount of money on the sale.
Escalation Clause: Considerations for the Buyer
An escalation clause in your real estate offer can keep you in the running if the seller receives a higher offer.
However, it also tells the seller exactly how high you are willing to go to buy the property.
As an investor, you might have a better outcome if you negotiate with the seller.
Also take into consideration that you may be able to get the home at a good price using other avenues, such as submitting an all cash offer.
The Bottom Line: Escalation Clause in Real Estate
You may be willing to pay a little more to get a great deal, especially if you expect the property to attract multiple offers.
However, it’s important to seek the advice of an experienced real estate attorney to find out if an escalation clause is in your best interest — and to enhance your real estate knowledge. The language of the clause matters, so make sure to consult with a professional if you decide to include it.