What is an Escalation Clause and Should You Use One?

Are you in the market? Have you been competing with other offers and losing out? If so, you may want to consider an escalation clause.

What’s an Escalation Clause?

Basically, it’s a clause in a purchase contract that lets a home buyer say, “I will pay x price for this home, but if the seller receives another offer that’s higher than mine, I’m willing to increase my price to an amount above the highest offer price received.” Usually, the higher number is capped. For example, “Buyer will pay $5,000 more than the highest offer received, not to exceed a certain sales price.”

Escalation clauses aren’t always warranted and should only be used when you are confident that the competition is stiff. Extremely stiff. After all, you will essentially be laying all your cards on the table. By inserting an escalation clause, the Seller will know just how far you are willing to go to buy the property. When you use an escalation clause, you are giving up your negotiating power and you take the risk of paying too much. But, if you love the property and would rather risk overpaying than losing it, an escalation clause might be worth considering.

Know the Facts

However, before you consider the use of an escalation clause, be sure you know the facts. Is the property priced-well to begin with? Are you competing with other buyers? How is the market trending? Are you making your decision on facts or are you getting carried away by emotion? Keep in mind that getting caught up in a bidding war may cause you to overpay. It might also cause a Seller to wonder why you are hedging your bets. Why didn’t you just submit at your highest and best offer to begin with? Not all Sellers favor escalation clauses.

Stay Realistic

The key to using an escalation clause effectively is to stay realistic. Know how much you are willing to pay for the property. Don’t escalate the purchase price to a figure that is not within your comfort zone. Ask yourself, “Do I really want this property at this price?” Be calm and confident in your approach.

In today’s market, if you want to secure a good home in a competitive market, you may have to be aggressive. An escalation clause is an aggressive way to secure a property. Just don’t be too aggressive or you might end up regretting it.