Escalation clauses: a bidding-war option

If you’re vying for housing in a red hot real estate market, you may want to add a new tool to your arsenal: an escalation clause. An escalation clause is an addendum to your offer stipulating you will raise your offer to beat any competing buyers, up to a set price.

Escalation clauses are useful in competitive markets where homes get multiple offers. If you end up in a bidding war, the escalation clause automatically raises your bid, giving you the advantage over other buyers.

For example, you might offer $400,000 on a home with an escalation clause stipulating that you will outbid other offers by $2,000, up to $426,000. If the seller receives offers of $410,000 and $418,000, you’ll come out on top at a purchase price of $420,000. The escalation clause allows you to put your best foot forward, financially, without feeling like you overpaid for the property.

Some sellers won’t accept an escalation clause because they want every buyer to submit their best price from the beginning. In the above scenario, the seller may leave money on the table, assuming the buyer who offered $418,000 could have gone higher in negotiations.

Then again, an escalation clause strips away your bargaining power by revealing exactly how much you are willing to pay. Even if your bid comes out on top, the seller can reject your offer and counter at or above the maximum price in your escalation clause.

Buyers also need to keep in mind that price is not the only factor influencing seller decisions. Other terms, such as closing date, an all cash payment, or the size of the buyer’s down payment may influence the seller. An escalation clause doesn’t guarantee you’ll win the deal, even if you’re the highest bidder.

Before using an escalation clause, make sure your agent and the listing agent are comfortable with how it works. Because of the added complexity, and because rules vary by state, you should consult a real estate attorney who will draft the clause for you.