If you are an active or previous home buyer, then maybe your agent has told you at one point or another that your offer wasn’t accepted because your competition used an escalation clause. If you are a former seller, maybe you hit the lottery and had the opportunity to accept an offer with an escalation clause. And maybe, just maybe, you have never heard about the escalation clause and you don’t know what the hell I’m talking about. This strategy in a real estate transaction can help you or hurt you, and In this article I’m going to:

1. Define the escalation clause
2. Show you how I apply it when working with home buyers
3. Show you how I handle them as a listing agent

What Is The Escalation Clause?

In traditional business jargon, an escalation provision, or clause, is a contractual instrument that increases a price when certain conditions are met. In residential real estate, they are found in examples of a bidding war, defined as a situation in which two or more prospective buyers are competing for a property, driving up the market value in the process. For our own definition, we consider the escalation clause to be a clause written into the contract to purchase that indicates a buyer will pay a nominal amount over the highest current offer price. While not always the case, typically the escalation clause equates to an offer that is significantly higher than the asking price. Buyers often like the escalation clause because they want their offer to be competitive, but are afraid to outbid themselves. They look to this device to make their offer better than the next, but there are also significant pitfalls that a home buyer can run into.

“Buyer to pay $X above the highest offer price.”

How I Use It, And When to Use It

The obvious use case for the escalation clause is a highly competitive market. We haven’t seen a buyer’s market since the 2009–2012 years immediately following the recession, so should we be using it all the time? Of course not. I recommend the use of this tool under special circumstances, and with many caveats. When buyers find themselves losing out over and over again, it means that either I am not preparing them properly for the competition they are facing, they are not ready or willing to compete in the price point, or they are just extremely unlucky because all of their lost offers were great, and they were edged out. I’ll typically recommend this as the nuclear option for the latter case, or, a case in which clients need to secure housing quickly. I’ve written before on what happens when a home buyer “chases” the market, and sometimes the escalation clause can help stop that bleeding.