How an Escalation Clause Can Enhance Your Offer

When you find the perfect home, being outbid by another prospective buyer can cause frustration and disappointment. Multiple offers are common in a competitive real estate market, and an escalation clause can help by allowing you to increase your bid when a seller receives competing offers for a higher purchase price.

An escalation clause — sometimes called an escalator clause — is part of a real estate contract stating that you’ll raise your offer if the seller receives competing bids. Including an escalation clause in your offer can make it more competitive, show the seller you’re serious about the home and help you win a potential bidding war.

In real estate, an escalation clause includes three parts:

• Your starting offer: The initial price you propose to pay for the house.
• Incremental increase: The amount you’re willing to pay above competing bids.
• Maximum cap: The maximum amount you’re willing to offer.

Your real estate agent can help you determine the best way to structure your offer and identify the homes priced within your budget.

If you include an escalation clause in your real estate contract, it will only be triggered if the seller receives higher offers.

For example, let’s assume you decide to offer $300,000 to buy a home but are willing to pay up to $320,000. You could include an escalation clause stating you’ll pay $2,000 more than other offers, up to a maximum cap of $320,000. 

• If there are no other offers, the most you’ll pay for the home is your original offer of $300,000.
• If the seller receives another offer for $310,000, your escalation clause will kick in. Your offer will increase incrementally over the competing bid, in this case to $312,000.
• If the seller receives a competing bid of $325,000, your offer will not exceed your $320,000 cap. The seller often favors the offer with the highest sale price, but not always. For some sellers, other offer terms might be more attractive. This is particularly true if a competing buyer waives contingencies that might lead to an easier home sale.

Even if your bid is the highest, the seller can accept or reject it. In most states, sellers who accept your escalated bid must provide you with proof of the competing offers.

Your real estate agent can advise on whether an offer with an escalation clause will be useful in your market. If the home or neighborhood is in high demand, an escalation clause can make your offer stand out. “If there are multiple offers or the hint of other offers coming in, I recommend that buyers use an escalation clause,” says Ruthann Hewgley, a real estate agent with Realty Pro Oregon in Portland, Oregon. However, using an escalation clause comes with some pros and cons. 

• You show the seller that you’re serious about buying the home.   
• You can remain competitive in a bidding war without engaging in back-and-forth negotiations. 
• It only triggers if there are other offers, so you might just pay your initial offer price.

Yes, there are situations where an escalation clause could cause issues for a homebuyer. Consider the following scenarios, and work with your agent to make sure that your offer is structured to minimize any concerns around these risks:

• The seller can see your price cap, which gives them a better bargaining position during negotiations.
• If your cap is set too high, or if you don’t set a maximum price, you might end up paying more than you can afford. 
• The final sale price could be higher than the home appraisal. If that happens, you may need to pay the difference in cash at the closing table. 
• The seller can choose to ignore escalation clauses and reject those offers outright. 
• The seller might try to trigger your escalation clause fraudulently. 

You might assume that the only way to beat a competing offer with an escalation clause is to offer more money, but there are additional things you can do to make your offer as attractive as possible. These could include:

• Putting down a more significant earnest money deposit.
• Waiving certain contingencies in your offer, such as the home inspection or appraisal.
• Choosing a closing date that’s more favorable for the seller. 

Keep in mind that the seller’s agent cannot reveal the maximum price in a competing offer that includes an escalation clause. You have to do everything you can to make your bid as attractive as possible while staying within budget. 

In some states, buyers must hire a real estate attorney to draft an escalation clause, while others allow the real estate agent to do it. Your real estate agent should be able to connect you to an attorney if necessary, but you will have to pay the attorney’s fees. 

Since the seller knows the most you’re willing to pay, they may reject your offer and counteroffer for that maximum price, even if there are no other offers. 

Sellers might also try to fraudulently raise the price by having someone submit a fake offer. “If the seller refuses to show you the offer, or they only show you parts of it, you should back out,” Hewgley says. Even if an offer is shown to you, it does not prove its intent was genuine. 

Adding an escalation clause to your offer can make it more competitive. Still, using one can carry some risks, and an escalation clause might not be needed in every market. An experienced real estate agent can help you decide if including an escalation clause in your offer is right for you.