W Henry Estates LLC

The underestimated Escalation Clause

What is the Escalation Clause, how do you use it, and should you? Discover everything you need to know.

With so many offers on the table and so few houses available on the MLS, buyers need to get creative to stand out. So what is something simple that adds some spice to your offer?

An escalation clause

Since buyers are unfortunately unequipped with the ability to read minds or see other buyer’s offer prices, an escalation clause is a smart tool to incorporate into your offer in a seller’s market. Working with your agent and lender to put this clause into play can be the difference between a rejected offer and an accepted one.

What is an escalation clause?

This clause allows the buyer to set an offer price, but then agree proactively and without a counteroffer needed by the seller, to increase their offer should they receive a higher offer, up to a certain limit.

How does this work? Let’s say Mr. and Mrs. Jones love a home in their neighborhood that’s listed for $495,000 and they want to put in a full price offer. They’re nervous that the seller’s might get an offer higher than theirs and they lose the house, but they don’t want to outright offer higher if they don’t need to. After speaking with their lender, they know they are approved for $510,000 and even if the appraisal is not $510,000 on this home, they have the money to cover the difference. In their offer submission, the Jones’s agent is going to add in an escalation clause stating that the Jones’s are agreeable to pay a certain amount, let’s say for this scenario $3,000 more than the seller’s highest offer, up to $510,000 and so long as the seller can furnish proof of the highest offer.

The Jones’s have removed the guesswork around what other offers the sellers receive and placed their best and final offer up front. This is a great incentive to accept for the seller as well. If their highest offer ends up being $500,000, they know they can get $503,000 from the Jones’s. Working with agents and lenders who have the knowledge to get creative with you will always increase your chances of standing out in a crowd.