Goodspeed: Use caution with escalation clause


QUESTION: What is an escalation clause? Is it a good idea for buyers to use one?

ANSWER: I’ll answer your second question first: Should buyers put an escalation clause in their offer to purchase a home? The answer depends on how hot the market is and how much you want the home you are making an offer on.

Let’s say you are looking for a home in a very hot housing market with lots of buyers and not much inventory. Sound familiar?

In such a market, it is not unusual for sellers to receive multiple offers. If a home is listed for $475,000 and you offer $475,000, but another buyer offers $476,000, you will lose out. That’s where an escalation clause comes in.

Some buyers include a clause in their offer stating they will pay $1,000 higher than the highest offer the seller receives, up to x amount.

In the example above, if your offer included an escalation clause, and a second offer came in at $476,000, your escalation clause would bump your offer up to $477,000, and you win. If there was a third offer for $478,000, your escalation clause would bump your offer up to $479,000, and you win.

It is important to set an upper limit on your escalation clause, for example, up to $5,000 over your initial offer, or maybe $10,000 over your initial offer.

However high your upper limit, make sure you can afford to pay the extra amount. Also, be sure to include in your escalation clause a statement demanding proof of a higher counter offer. If you use an escalation clause and your offer increases, you can handles the extra amount in different ways. Typically, an offer lists your loan as a percentage of the sales price. You can either pay the extra in cash so there will be no need to change the terms in the contract, you can change the loan amount (provided your lender agrees) in the contract, or you can do a hybrid - Partially increase the loan amount and pay the rest in cash.

If you do use an escalation clause, make sure you can afford to go higher and that the clause includes the necessary safeguards listed above.

Linda Goodspeed is a longtime real estate writer and author of In and Out of Darkness. Email her at: