An escalation clause is a useful tool to stay in contention when buying a home, but revealing what you're willing to pay could backfire.
Homebuyers in competitive markets are sometimes advised to write an escalation clause into their offers. The terms may vary, but in essence, the buyer agrees to beat any offer above theirs by a certain amount, often up to a certain limit.
This can, for example, turn a $500,000 offer into a $515,000 offer, if another buyer offers $510,000. In theory, this strategy is useful if you want to remain in contention for a home without pushing all your chips in at the start of negotiations.
But despite some protections, there are still potential downsides to telling a seller that you have more to spend than what you’re first offering.
Plus, some experts say there are ways to make a compelling, winning offer for a home besides offering the most money.
The case for escalation
An escalation clause allows a prospective buyer—with a clear head, rather than in the middle of a bidding war—to both make it known that they’re willing to go higher with their offer, as well as set a ceiling if they so choose.
“Escalation clauses can be a great tool to use when executed properly,” says Veronica Peter, a real estate agent with Compass in the San Francisco Bay Area. “It is particularly advantageous when you are competing for a property that you are confident will receive a high volume of offers and the market is hard to gauge accurately for that specific property.”
Peter has seen this exact situation play out—not for a client, but for herself personally.
“I used an escalation clause when I was buying a home in a hot market and the property was severely underpriced. I knew there would be an overwhelming number of offers and that the seller was likely to counter the top offers. The property ultimately received 42 offers,” she says. “Including an escalation clause is what moved my offer from the middle of the pack to the top five. ... If I had written my opening offer without an escalation clause my offer wouldn’t have been considered and my dream home would belong to someone else.”
In a vacuum, the case for an escalation clause is clear. If you have a little budget to play with, you’d hate to make an offer on a home and then lose out over a few thousand dollars—which is not a small amount of money, but could feel that way spread out over a 30-year loan.
Does an escalation show strength or weakness?
There are two sides to the same coin that is an escalation clause. One side shows strength: You have the means to go further to secure the home, if necessary. The other side is weakness: You are making an initial offer that you know can be beaten.
“You're giving away your ceiling before the negotiation even starts,” says Olivia Casa Monday, a real estate agent with Berkshire Hathaway in Colorado. “I recently had a listing with four offers where one buyer came in below asking but escalated up to $200,000 over asking, in $5,000 increments above the next-best offer. The seller felt that the buyer wasn't fully committed to the home, so we negotiated with the parties who were ready to put their strongest number down without conditions.”
Escalation clauses don’t need to go hundreds of thousands over the original offer, and buyers aren’t expected to spend every available dollar on a home regardless of its value. But making it plain that you could go higher, or even markedly higher, may demonstrate a lack of conviction in your own offer.
“Too often it signals that the buyer won't risk putting a strong offer forward on their own, especially when the increment is only $1,000 to $2,000 over the next offer,” says Monday.
Trying to avoid a bidding war could cost you in the long run. (Getty Images) Sellers could take advantage
Sometimes, the downside of an escalation clause isn’t simply losing out to another offer without conditions, but having the clause actively work against you.
“It's common practice for a listing agent who receives offers to ‘shop’ them to drive up competition,” says Jon Weintraub, a licensed real estate agent in Virginia and Maryland who avoids escalation clauses whenever he can.
Though ethics rules allow agents to disclose only that other offers exist, they can use vague terms to nudge other offers higher.
“An escalation clause hands them the ammunition to do exactly that, because now they know how high you'll actually go.”
In softer markets, where multiple offers are less common, the seller and their agent may just counter your offer at the top of your escalation ceiling.
“A seller could counteroffer at the buyer's cap price, refuse to produce documentation regarding another offer, or accept the higher price and then proceed to negotiate other aspects of the agreement, such as the buyer's broker commission, credits, or repairs,” says Melanie Zimmerman, owner and real estate agent at MVP Chicago Real Estate. “While an escalation clause establishes one price component, it does not establish all other components of the sale."
Making a strong offer with or without escalation
If your agent does advise an escalation clause, there are a few important details to keep in mind to ensure your offer doesn’t put you in a tough position.
“I would suggest setting a cap at a price that you would be comfortable paying regardless of whether you are bidding alone or with others. I would also ask for proof of a competing offer prior to increasing my purchase price,” says Zimmerman.
The first tip prevents you from overcommitting—especially when the market is soft—and the second one helps prevent sellers from using your offer against you.
“The better way to stay competitive is to win on terms, not necessarily price. Price is only one piece of an offer,” says Weintraub. “A clean offer with limited or waived contingencies can beat a higher number that comes with strings attached. We offer your strongest clean number at or below that, no escalation, and we make the rest of the offer as easy for the seller to say yes to as possible.”
It can be tempting to add an escalation clause to an offer, especially if it’s a home you don’t want to lose out on. Just be sure your escalation is one you’ll want to live with—because, after all, that’s exactly what you’ll be doing once you close on the home.