In real estate, an escalation clause, also known as “escalator”, is a provision or addendum to a purchase agreement that allows the homebuyer to raise their offer in case the seller receives a higher offer on the property. A typical escalation addendum includes the buyer’s original offer price, the maximum amount the buyer is willing to disburse in the event multiple offers are made on the house, and the amount the buyer’s offer will be escalated by over competing bids.

In highly competitive seller’s markets, escalation clauses are used as a tool to strengthen the buyer’s offer and increase the likelihood of success in snapping a home. Other common strategies to improve one’s offer include an all-cash offer and contingency waivers.

While an escalation clause can help a buyer’s offer stand out, it is best used when buyers are confident that they will face steep competition. By inserting this provision, buyers are essentially putting all their cards on the table and telling sellers how high they are willing to go to close on a home. Armed with this information, sellers could potentially reject the offer with the escalating clause and negotiate a higher price, regardless of whether more offers had been submitted.

While escalation clauses have a slew of benefits, it can pose significant problems to the buyer. It is important that the terms be drafted carefully and realistically. In other words, make sure to work with your real estate agent to include language that sets a ceiling amount within your budget and ensures competing offers triggering an escalation clause are verifiable and bona fide.

To learn more about escalation clauses, click  here.

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