As the name Escalation clause implies, it is an offer that escalates in price. It is used often in a multiple offer situation when competing against other buyers.

What is an Escalation Clause?

An escalation clause is a clause that is written in an offer that escalates price under a certain condition

When do you use an Escalation Clause?

Typically you use an escalation clause when you’re fairly certain that you’re going to be competing with multiple offers.

How do you use an Escalation Clause?

Basically, an escalation clause is structured in a way that says, “I’m willing to pay x but I will pay y under these conditions, and I will continue to paying a certain increment more up to a certain amount.” So there is a capping on the escalation clause since you wouldn’t want an escalation to infinity because you may not be able to afford that.

What’s the upside and downside of an Escalation Clause?

The upside is if you’re fairly certain there are multiple offers, and the sellers may not be going back for another rounds of bidding, this is a an opportunity for you to put a bid in that goes higher than other bids without the seller having to come back to you asking for another round of biding.

The downside is, if you’re using it by yourself, against yourself, the seller is now aware that you’re willing to pay y coming in at x. So, you really only want to use this when you are certain there will be multiple offers. The other downside is there is no on guarantee of confidentiality with offers so the seller may be able to use your offer to go against someone else to get a higher price as well. Although a lot of agents try not to do that, but with the sellers permission they certainly can do that.

An escalation clause is great to use, especially in a hot market where pricing tends to go over asking prices and there are plenty of people out there bidding on the same property. So talk with your realtor, ask a lot of questions, have that realtor ask a lot of questions of the other realtor and how they’re going to present offers and handle the process. Every seller and realtor will handle offer situations differently.

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