What is an Escalation Clause?
Updated: Feb 28, 2021
Have you ever wondered how some buyer’s agents consistently get the job done for their client, even in competitive markets? Typically, these results are achieved through relationships, shrewd negotiation, and understanding how to write a purchase contract to benefit their buyer, but there is one tactic that is often overlooked.
One way to stand out in a crowded field is with an escalation clause. When it is believed (or known) that many offers are received, an escalation clause can be added to a purchase contract to help ensure your offer is the highest, without submitting a higher lead offer than desired. The escalation clause is language added to the contract which will increase your offer in measurable increments if another offer is higher than yours.
Escalation Clause Example
A typical example of an escalation clause is when homebuyers have a strong desire to purchase a property, but there will likely be a number of interest and offers on the property. Before setting foot inside a property house, it may be known that several other offers had been received. Luckily for the buyer AND seller, the seller’s agent will likely not accept to first full offer if they know a bidding war could happen.
In this instance, a buyer’s agent can now submit an offer that contains an escalation clause. This way, buyers will know that they can stay in the race for a property through incremental price escalations within their budget. This may seem like a relatively simple tactic to implement, but its success will come in the verbiage of the clause.
Escalation Clause Verbiage
The beauty is in the verbiage. In order to get the most out of the transaction and increase likelihood of the success of the clause, it will be vital to use the correct terminology and cover all bases. The terminology may look something like this.
“In the event the Seller receives one or more additional bona fide offers to purchase the Property with terms acceptable to Seller (“Other Offers”), but which result in net proceeds of sale payable to the Seller equal to or greater than the net proceeds of the sale payable to the Seller under this Offer, then the sales price stated in this Offer shall automatically increase to an amount which generates net proceeds of sale to the Seller equal to $X,XXX in excess of the highest net proceeds of sale generated in such Other Offers.
Cap: “The sales price under this offer shall not exceed $XXX,XXX (“Cap”)”
Documentation: “In the event that Other Offers cause the escalation of the Sales Price in the Offers the Seller will provide the Buyer with sufficient documentation to justify the Sales Price increase within 2 business days.”
In layman’s terms, this clause says: If the seller received a NET offer higher than the buyer in question, after deducting for seller-paid closing costs and home warranties, the buyer will increase our offer by a set amount, and up to a certain amount (cap), to make sure they win. If they were to win by using the escalation clause, evidence would need to be provided of the other offers to make sure it was executed appropriately.
What this escalation clause effectively did is submitted a solid offer, increased the buyers chances of being the highest bidder, and let the owners know the buyers with the clause are SERIOUS about the property.
Please consult a real estate attorney before using an escalation clause.