March 10, 2021

Discover what an ESCALATION CLAUSE is in Real Estate

If you’re in the business of buying and selling properties, you surely know that escalation clauses can appear along with offers. They attached to them as a message to the seller, and they have pros and cons to consider before placing them. Join us while we keep diving into real estate words (and feel free to see our glossary here)!

An escalation clause is a brief legal text -usually written by a lawyer- indicating that a potential buyer is willing to increase their bid if another offer surpasses theirs, up to a specified amount. It’s like saying, “I’ll pay x price for this home, but if you receive a higher offer, I’ll increase my bid to y price, but my limit is z.

Even though it might improve the buyer’s odds, it’s not a resource to use in every situation. It would be best if you considered the context to determine whether it’s useful. It can be of service at competitive markets, with few houses on sale and many potential buyers. And in particular, when an agent asks for the offers to be presented on a specific day and time since it indicates he or she is expecting several offers.

How escalation clauses work

Let’s think about this example: you want to buy a $300,000 home. You can bid either on it regularly or use an escalation clause. This way, you make an offer and precise that, if a superior one comes in, you’ll beat it by a certain amount of money (let’s say $2000), but only up to $320.000. So, if you bid to pay full price, but someone offers $310,000, this clause says, “I’ll give you $312,000 for your home.”

Therefore, escalation clauses have three main components

  • An original offer on the purchase price (in the example, $300,000)
  • The amount of money that the buyer is willing to escalate above the highest bid ($2,000)
  • The maximum price the buyer can pay for the property ($320,000)

Escalation clauses: buyer’s considerations

As we said above, an escalation clause could make an offer more attractive to the homeowner. It shows you’re committed to getting the place, it tries to ensure you’re not outbid, and it might also speed up the negotiations. However, it will show them exactly what you intend to pay, which could become a liability. Therefore, sometimes it’s best just to place an offer and see what happens without giving away too much information. Who knows, you might end up with a better deal. Just keep in mind that using it could limit your options when negotiating.

Escalation clauses: seller’s considerations

The first thing to know is that accepting the offer with an escalation clause means that the seller cannot negotiate with other interested parties, not even the highest bidder. 

That being said, it’s important to note that a homeowner is not compelled to accept an offer with an escalation clause. Its advantage depends on the other bids: compare them to see which one provides the best profit. Sometimes it’s better to issue counter-offers to other potential buyers or even raise the selling price and start the process again.

Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is designed to be legal or financial advice.