Escalation Clause … what is it and should a Buyer use one?

In brief, the Escalation Clause is a provision added to a Purchase Agreement that allows your offering price to go up automatically by a specific amount if another bid/offer is placed that is higher than yours to a specific and given cap.

An Escalation Clause is utilized when a Buyer expects to be competing with another offer. The clause says the buyer will top any other offer on the table by $_______ (the “Escalating Factor”, $500 or $1000 more or less) up to $_______ (some other contract price, the “Cap”). As an example, if another offer comes in of $100,000 and you say you’ll pay $500 more up to $155,000 then your contract price becomes $100,500. This repeats with all other offers until it has met your limit or you have been out offered.

In our Escalation Clause, if the buyer “wins”, the listing agent is obligated to provide the buyer with the offer that has activated their escalation clause so the buyer can verify the actuality of the other offer. A copy of the other offer is a perfectly valid and reasonable proof of offer.

Simple and straightforward, an Escalation Clause can be beneficial in a bid situation or when immediate competition for the purchase is suspected.  The benefit… it gives a Buyer bargaining power if it is needed and allows a Buyer to spend as much as they need and not more. No money on the table. The drawback… it does tips your hand to what you are willing to pay at the top end. To avoid that, the only option is to offer your best and hope you get it and without leaving too much on the table.

It always comes down to the same thing … the bottom line.

So should a Buyer use an escalation clause? A Buyer must evaluate their situation and the potential outcome with a flat offer or an escalating offer. Their Agent should have investigated the potential competition for purchase with the listing agent.  Competition, market value, risk and finances available will aid in the decision.