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What is an escalation clause?

Did you find the home you really want? Are homes in your area regularly going for over the asking price? In this situation, you may want to consider using an escalation clause.

escalation clause explained

Escalation Clause, Explained

An escalation clause is an addendum that states you are willing to raise your offer by a certain amount over the next highest offer, to a maximum price. For example, if a house’s listed price is $285,000, you can include with your offer an escalation addendum that raises your offer $1,000 over the NEXT highest offer, up to whatever amount you are willing to pay. If that maximum is $305,000, and the closest highest offer is $303,000, your offer would escalate to $304,000 and theoretically, you would get the house under contract. The list agent must provide a copy of the offer that you beat out, so you know that your offer did indeed escalate to the amount you will pay.

Escalation Clause Considerations

Here are a few issues to consider before using an escalation clause:

what is an escalation clause?
  1. Are there other offers? If there are not, you have just “showed your hand” and let the seller know your maximum price. If there are no other offers, the seller can counter at that price. And even if there ARE offers, the seller can come back to you and counter at your maximum, so it’s a risk you are taking. In every escalation, you are essentially setting your “best and highest” offer—the protection you get is that the price may not escalate as high as your maximum, but that doesn’t mean the seller cannot counter there.
  2. What if the appraisal comes back lower than your escalated price? An escalation is only as good as your willingness to cover appraisal gaps, in whole or in part. Discuss this with your agent.
  3. Will the listing agent accept an escalation? Sometimes, they only want best and highest offers, and so your offer would be rejected. Ask your agent—this information is usually in the listing notes they can see.
  4. Do you really love the house, and is the escalation worth it to you? If you are escalating because you’re caught up in “winning,” rather than owning this particular home, you may end up with buyer’s remorse.

All these issues are ones to discuss with your agent who is knowledgeable in using escalation addendums. Together you can decide if the benefits outweigh the risks!

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