What Is An Escalation Clause in Real Estate?
In real estate, sometimes we run into situations with our buyers when we’re offering on a property and we find ourselves up against multiple offers. Adding an escalation clause can often times be the edge that you need.
What is an escalation clause?
An escalation clause is simply an additional term on your offer stating “my offer is x, unless the seller receives an offer above x, then I will increase my offer to y.” Seems simple enough, but there are a few protections you want to put into place.
When to use an escalation clause?
If you have a transparent enough relationship with the agent or seller on the other side of the transaction, and you know that you are the only offer on the table, then there is no need to add an escalation clause. There is no reason to admit up front that you’re willing to pay more than your original offer. But if you have received a “multiple counter offer”, or you know that there is only going to be 1 round of offers on a home, you would want add it in.
How do you protect yourself?
There are a couple of things that you can do to protect yourself when writing an escalation clause.
- Use the words “highest verified offer.” -By adding in “verified”, you’re cutting down on the likelihood of a questionable scenario where the other side just “says” that they received something higher. To do something shady, they would now have to draft up a fake offer and forge signatures, which carries very stiff penalties.
- Put a cap on it. - To ensure things stay within the realm of comfort for you, you can also cap your escalation clause. Simply say, “offer is x, willing to go $1,000 over highest verified offer, capped at y.”
Remember, the most important thing about writing offers on a home is that you don’t lose sight of your comfort zone. Multiple offers and escalation clauses can lead to over paying for a home. Its always a good idea to review comps, market conditions, and the home’s condition and then determine your maximum desired price and stick to it. Best of luck.