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What is an escalation clause?

You've been searching for what feels like years for a home that checks (almost) all of your dream home boxes. FINALLY, you've found it! You are so excited you don't even consider that someone else (or quite possibly, many others) may be ecstatic about the same house that you are. Thankfully, your Real Estate Agent is one step ahead and mentions to you that just to be on the safe side — you should include an escalation clause in your offer. It's a useful tactic when making an offer to score your dream home. Okay, great! But what is an escalation clause and how does it work?

escalation clause explained

Escalation Clause, Explained

An escalation clause is used in situations where it's believed that the seller may receive many offers on a home and the buyer wants to ensure they offer the winning bid. The offer is made for a set amount but states that the buyer is willing to pay a certain amount more than the highest offer that the seller receives, up to a certain amount (usually no more than the buyer is approved for).

How it works

Suppose there are three offers made by different buyers on the same house of $190k, $200k and $210k. At first glance, the offer of $210k is the winning offer, right? Well, not so fast. Looking closer the offer of $190k includes an escalation clause stating that the buyer is willing to pay $2,500 more than the highest offer received, up to $230k. So now the winning offer becomes $212,500 which started at $190k to include an escalation clause.

The great thing about an escalation clause is that it bakes in a bit of insurance to your offer without requiring you to pay an additional amount — if for some reason no other offers are received or if your offer was already the highest. Referring to the previous scenario, if the offer of $190k had been the only offer that the seller had received, then the offer would have remained at $190k and the escalation clause would have been void and not gone into effect.

Escalation Clause Considerations

An escalation clause sounds like the perfect way to make sure you win your dream home, right? So then why doesn't every offer include one? There are a few considerations and we suggest talking through them with your Real Estate Agent to decide how to best move forward in your specific situation.

what is an escalation clause?

  • Not every seller is willing to accept an offer with an escalation clause. Although there are pros and cons for a seller when it comes to escalation clauses, it does remove the possibility of a bidding war which ultimately scores the seller the most amount possible for their home.
  • By submitting an offer with an escalation clause it's communicated to the seller just how serious and invested the buyer is in their purchase offer. If by some chance no other offers are made on the house, the seller may counter-offer knowing that the buyer was willing to pay a higher price if necessary.
  • In some cases, the seller will decide to collect offers over a period of time and then respond to the most favorable bidders with the option to "send their highest and best offer". However, a buyer may still choose to submit an offer which includes an escalation clause and it still may not meet the sales price the seller desires. In this case, the buyer may be forfeiting their participation in the next round of offers since they've already set what their "highest and best offer" is per their escalation clause.

While it's always best to lean on the knowledge and experience of your Real Estate Agent when making an offer on a home, it's especially true when it comes to including an escalation clause. Even though an escalation clause may seem like a viable way to make sure the perfect home doesn't slip through your fingers, trust that your Real Estate Agent will be able to evaluate each situation and guide you through the best way to score your dream home. Happy Bidding!

Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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Ready To Become A Smarter Homebuyer?

By signing up, you agree to Nestiny terms of use .
Whether you need a step-by-step guide, video resource or one of our many helpful tools, Nestiny has your back 24/7 for all things home buying and selling. You choose the pace, material, and when and where to learn. Unlock your free access to Nestiny today!
Are you a real estate professional? Go here .
By clicking this button, you'll enjoy free unlimited access to Nestiny and agree to our terms of use . And don't worry! Nestiny will not share your information with any parties without your consent.