The Escalation Clause, Explained
WHAT IS AN ESCALATION CLAUSE?
An escalation clause is used when there are multiple offers on a property. It’s designed for your contract for the property to be the winning one by escalating your offer higher than any other offers. Note: the seller will be looking at the net gain (sales price – commission).
To improve your chances of winning in a multiple contract situation, the escalation clause allows you to offer a price in set increments (with a cap) above your original offer. If another contract has the same or a higher sales price, your offer amount would move above the other to your cap. It could escalate multiple times. Most buyers feel comfortable with using the escalation clause instead of offering the top number they’re willing to pay off the bat. It allows you to make an offer that will increase to your top price ONLY if another offer is higher than your offer.
HOW DOES IT WORK?
You would select two numbers:
- Your escalation increment. The increment is how much you will escalate your price over the next best offer. Some buyers say why not $1,000 over the other? Sellers weigh other factors so offering $1,000 more than another offer might not make your offer enticing enough to beat out another. It is often best to offer $10,000-$25,000 over the other offer, depending on the situation. Just having the highest price does not automatically make you the winner!
- Your price cap. This is the highest you are willing to pay for the property. Fear not, your escalation will not exceed this number no matter what price the escalation goes to. You will want to be sure that if you have an appraisal there are comparable properties supporting your escalated price, or you are comfortable paying the difference should the appraisal come in lower.
Note: A listing agent is only able to escalate any offer only based on the next best offer. So, they cannot escalate your offer without proof of a competing offer (the listing agent must send proof of the escalating offer when they send back a ratified contract at an escalated price).
EXAMPLE
Let’s assume your original offer is $1,000,000. If you have an escalation clause with a $15,000 escalation increment and a price cap of $1,100,000, your offer would escalate in increments of $15K over the next highest offer.
YOU COULD WIN IF ….The next highest offer was $1,050,000. Your offer would escalate to $1,065,000.
YOU COULD LOSE IF… The next highest offer was $1,120,000. Your offer would not escalate since you capped at $1,100,000.
Note: The listing agent will see each submitting parties escalation addendum (anyone that submits one) at the same time. The listing agent then reviews all of the offers and their escalations together and select the offer with the best terms and the highest net.
THE BOTTOM LINE
The escalation clause is tricky and not the only way to win a contract. It is one tool to use and not always the primary factor in winning the contract and therefore the home.
This strategy involves a discussion with your Realtor and a thorough understanding of the market, along with the other strengths of your contract that could interest the seller. In multiple contract situations, pleasing the sellers and meeting their needs is ultimately what will win.
The strategy for an escalation clause is complex. Be sure to chat in detail with your Realtor before using an escalation in a contract. We’re always here to help!
