Is an Escalation Clause Your Key to Winning a Bidding War?

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If you’re home shopping and looking for an edge as a buyer, you may have heard of escalation clauses. These clauses can be useful, but they’re definitely not a guarantee that your offer will win. Many other factors may influence a seller’s decision to accept or reject your bid.

Keep reading to learn more about what escalation clauses involve, what their risks are, and how they can sometimes help buyers stand out in a competitive market.

What is an escalation clause and how does it work?

An escalation clause is a type of legal clause you can add to a real estate contract such as a home purchase offer. It allows you to automatically increase your offer to beat a better, competing offer if the seller receives one. If no other offers surface, then your original bid stays in place.

An escalation clause includes the offer price and how much above a competing offer you’re willing to escalate — up to a maximum purchase price. Escalation clauses are more common in seller’s markets when homebuyers need to compete with a lot of other house hunters.

Important: Adding an escalation clause to your offer doesn’t guarantee a seller will choose yours over any other bids they receive. But it may make your offer stand out in a competitive housing market, provided other aspects of your offer also work well for the seller.

Sellers aren’t obligated to accept an offer with an escalation clause and some sellers will only consider final offers. In those situations, coming in with your highest offer up-front may be the best way to get the home.

Getting prequalified for a mortgage can help you understand how high you can afford to bid on your dream home. You can compare mortgage lenders and rates through Credible.

What are the parts of an escalation clause?

Escalation clauses can vary based on the city and state you live in, as well as the real estate agent involved. Generally, however, escalation clauses include the following elements:

• Escalating factor:The increment by which your offer would increase to beat a competing bid.

• Cap: The maximum amount the bid can rise to.

• Documentation: Proof that the seller has received a better offer. . As the buyer, you have the right to request this if the escalation clause goes into effect.

• Number of escalations: A limit on the number of escalations protects the buyer. Some homebuyers may be fine with having multiple escalations in smaller increments, whereas others may only allow a single escalation.

If you’re considering using an escalation clause, it’s a good idea to work with a knowledgeable real estate agent who can guide you through the process, including setting key limits.

What are the pros and cons of an escalation clause?

Escalation clauses have benefits and downsides. Let’s take a look at both.

Pros

• May increase your chances of getting the house you want.

• Can get your higher bid in front of the sellers faster.

• Reduce the risk of missing out on a home with a too-low offer.

• Offers can stand out more in a competitive housing market.

Cons

• Sellers may only consider offers that have final prices and conditions.

• Escalation clauses don’t guarantee you’ll win a bidding war.

• If appraisal doesn’t match or exceed your higher price you may need to pay for an appraisal gap.

• May end up making a much higher offer than originally desired.

When should you include an escalation clause in your offer?

In some situations, an escalation clause can be helpful:

• When you’re competing in a seller’s market

• You expect multiple bids on a house

• An escalation clause elevate your already-good offer

• You can cover an appraisal gap or are confident the house will appraise for your highest offer.

When you probably shouldn’t

An escalation clause isn’t a good fit for everyone. Here are some scenarios where an escalation clause may not make sense:

• Competing offers are unlikely

• You’re ambivalent about the house.

• You’re not confident the house will appraise for your highest offer.

• Escalation will take you out of your budget and you can’t set a significant escalation amount.

Can you rescind an escalation clause?

Depending on how the escalation clause is written into your offer, you may be able to rescind it if you change your mind about a home.

If an offer contains an escalation clause, it isn’t enforceable until proof of another offer with a specific price is presented. If the seller fabricates an offer to drive up the sale of the house, this can make the clause unenforceable.

If your escalation clause offer was accepted and you need to back out of the deal, consider working with a real estate attorney to figure out your next steps.

Alternatives to an escalation clause

In a competitive market, homes can sell very quickly. For example, the National Association of Realtors found that in March of 2021 homes sold in just 18 days on average. Many buyers are finding themselves in bidding wars. If you want your offer to stand out, but don’t want to use an escalation clause, consider trying some of these tactics instead.

• Get pre-approved: Being pre-approved for a mortgage shows sellers you’re serious about buying the home and are qualified to do so. Plus, it indicates that you’re ready to act quickly.

• Waive contingency clauses: Sellers are more likely to accept offers that don’t have contingencies that allow the buyer to back out of a contract under certain circumstances. Just be sure you fully understand the risks associated with each contingency you may be waiving before pulling the trigger.

• Make an all-cash offer: Redfin found that making an all-cash offer quadruples a homebuyer’s chances of winning in a bidding war. If you can afford it, going all cash can make an impact.

Most homebuyers will need a mortgage. You can compare lenders and get pre-approved for a mortgage through Credible.

About the author: Jacqueline DeMarco interned at a retirement plan advisory firm during college and was tasked with creating a presentation on the importance of financial wellness. During her research into how money can affect our health, relationships, and career, Jacqueline realized just how important financial education is. Jacqueline has worked with more than a dozen financial brands, including LendingTree, Credit Karma, Fundera, Chime, MagnifyMoney, Student Loan Hero, ValuePenguin, SoFi, and Northwestern Mutual.

Jacqueline received a bachelor’s degree in literary journalism from the University of California, Irvine.

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