Escalation clauses explained

Definition: 

A clause in a purchase offer that enables buyers to make a strong offer while reducing the risk of paying significantly more than the next highest offer. Rather than coming up with a flat number when asked for “highest and best”, the buyer starts with an initial number and offers to beat a competing offer by X up to a cap of Y.

Example: 

For a house listed at $300,000, the buyer offers $305,000 but adds an escalation clause indicating they will pay $1,000. More than the highest offer up to a cap of $350,000. Therefore, if the highest offer is $315,000, the buyer wins the house for $316,000. If the highest offer is $351,000, the buyer would not be the winning bid.

Considerations:

• It allows buyers to be competitive while avoiding paying way more than their competition.
• Some sellers react negatively to escalation clauses and some agents and sellers will explicitly indicate that they will not consider offers with such clauses.
• These clauses could encourage some buyers to submit higher offers than they would otherwise because of the reassurance that they are only paying a bit more than the next highest bidder.
• By not asking for a single number "highest and best", a seller might be leaving money on the table.

Like so much in real estate, there is no right answer in terms of whether or not to utilize an escalation clause as a buyer or whether to consider them as a seller. We talk to our clients about their specific situations and help them determine what make the most sense for them. 

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