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The Pros and Cons of an Escalation Clause

You may be in a bidding war if a house is desirable and competitively priced. If you love the house, most likely other buyers will as well. But of course, you don’t want to offer more than you have to. It’d be ideal to submit an aggressive offer that’ll beat out every other offer yet not go higher than you need. An escalation clause in your offer may be the answer. An escalation clause allows you to submit an initial lower offer, which will automatically bump up in specific increments above any other offer up to a certain capped amount you set.

pros and cons of using an escalation clause

For instance, if you made an offer of $1,000,000, and another offer came in at $1,010,000, if you had an escalation clause that said to offer $10,000 over any higher bid, your offer would go to $1,010,100. If no one offered more, your bid would effectively be the highest. But let’s say you capped it at $1,050,000. Your bid would continue to increase until someone went over that amount, but it wouldn’t go higher, protecting you from paying more than you wanted to.

What are the pros and cons of an Escalation Clause?

Pros
It can give you an advantage by showing the seller that you are serious and willing to pay more than another buyer.
An escalation clause may make negotiating simpler. It automatically happens if (and only if) another bona fide offer triggers the price increase.
It can help you stay within the range you’re willing to pay rather than get caught up in the heat of the moment. If and when the price goes above your capped amount, your price will no longer continue to increase.

Cons
It may annoy the sellers by showing that you’re willing to offer a higher amount and make them wonder why you wouldn’t just offer to pay that.
It could invite sellers to issue a multiple counter offer with your capped price of $1,050,000 or the highest and best.
The listing agent may prefer buyers to make their best and final offer instead of invoking an escalation clause. Submitting one to an agent who dislikes them can turn them (and therefore their client) off.

In summary, regardless of the market conditions, a well-priced house will likely get multiple offers. Using an escalation clause in your offer can help you rise to the top of a multiple-offer situation, but it can also have drawbacks. So if you find yourself going after a house with multiple offers, know the pros and cons of using an escalation clause, and discuss whether or not it makes sense to use one with your agent before including one in your offer.