Escalation Clause, To Do Or Not To Do

Let’s talk escalation clause today.  I am not a fan, but it is a tactic used by many buyers and sellers so it is worth a discussion. An escalation clause is verbiage included in the purchase contract that normally would be used if the buyer thinks there will be multiple offers.  Rather than the buyer offering their top number, they submit a clause that will “escalate” the price they are offering for the property by an amount over the next highest offer, up to a certain amount.  This escalation clause has a few parts:

1) Offer price – the price on the contract that you are willing to pay for the property, usually the list price or right now above the list price.

2) Escalation amount – the amount that you are willing to increase your offer price over another bone fide offer.  Usually in increments of at least $500 or $1,000.

3) Maximum amount – the max amount you are willing to pay. This is the amount at which the escalation amount will stop.

Seller implications:  The escalation clause will likely require the seller to provide written proof that another bone fide offer was received and the amount of that offer.  This means that the seller is disclosing information to the buyer on another offer.  More analyzing required…if you have 5 offers that are similar, but one escalates you have to ensure that the escalation amount is covered in the event of a short appraisal, or make sure that the other terms of the escalated offer fit into your needs.  What if you receive several offers with escalation clauses?  How do you get to the top price someone is willing to pay?

Buyer implications: You are undoubtedly going to escalate over the asking price, so are you also going to provide an appraisal gap, as previously discussed? As a buyer you might not always know if there are multiple offers, so essentially you are giving the seller an idea of what you are willing to pay without having all the information. If you want to use this clause, make sure your agent is asking the listing agent if there are other offers. If no they may just counter back at your max price and take the negotiation out of it.  If you KNOW FOR A FACT that there are multiple offers, then maybe it is a good idea.  Sometimes price isn’t the only thing driving the seller.  There are plenty of other terms that might be as important or more important to the seller that an additional few thousand might not be worth it if they got everything else they wanted. However, if you don’t want to lose the deal over a small amount or you have a fixed amount to spend, this might be the way to go.

Anymore, I am seeing agents indicate in the listing that their seller does not want escalation clauses.  You are now seeing “highest and best” by a specific date and time to address multiple offers rather than allowing escalation.

I have extensive experience is multiple offers on both sides of the deal, including escalation clauses. If you are thinking about buying or selling this year, let’s chat about your options! I would love to help you reach your real estate goals.

Below is the exact addendum from the Columbus Board of Realtors Standard Forms that is used when submitting an escalation clause.

Premises Address: ______________________________________________ Date: ___________________
Buyer offers $_________________ as the purchase price. The following terms shall apply to this offer to
increase the purchase price.
1. If Seller, prior to this offer or during the acceptance period of this offer, receives any other bona fide offers
with a purchase price equal to or greater than Buyer’s offer, the purchase price of this offer shall
automatically increase to $______________ more than the highest third party offer.
All offers are calculated less any seller-paid concessions.
2. The purchase price under this offer shall, in no event, exceed $_________________ which is the maximum
amount of this offer as escalated.
3. To complete the escalation of the purchase price, Seller shall submit a counteroffer signed by Seller with the
escalated purchase price.
4. Seller shall attach to the counteroffer all pages relevant to purchase price and the signature page of any
third-party offer used by the Seller to escalate the price.
5. Once the parties are in contract, the escalation provisions are terminated and will have no further legal
effect.

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