What is an Escalation Clause When Buying Real Estate in a Multiple Offer Scenario? | Listing Naples Group | Blog | Naples Real Estate

What is an Escalation Clause When Buying Real Estate in a Multiple Offer Scenario?

In a busy seller’s market, it is not uncommon for a home to be listed and multiple offers received on the very first day! The listing agent in this scenario is in a great spot to drive the price up and will ask every buyer for their “highest and best” offer.

Buying a Home / Chris

What is an Escalation Clause When Buying Real Estate in a Multiple Offer Scenario?

In a busy seller’s market, it is not uncommon for a home to be listed and multiple offers received on the very first day! The listing agent in this scenario is in a great spot to drive the price up and will ask every buyer for their “highest and best” offer.

Dealing with a “Highest and Best” Scenario

As a buyer in this scenario, most agents will simply ask you to give your best price and hope that you are picked as the winning bid. You can guess what the other buyers are going to do (we won’t know the details of the other offers) and submit an offer you think will be the highest but this is not a good strategy and can cause you to pay more for a home than necessary.

So what’s a buyer to do? It’s time to pull out the escalation clause.

What is an Escalation Clause?

An escalation clause is a way for buyers to hopefully become the highest and best offer but without overpaying.

The escalation clause says, “I will pay $x for this home but if the seller receives an offer higher than mine, I’m willing to go up to $y price.”

How Does the Escalation Clause Actually Work?

We submit an offer on a standard contract and our escalation clause kicks in only if we are not the highest offer.

For example, let’s assume we offer $300,000 for the home. We’re actually willing to pay $315,000 if needed to get the home. We will define in our escalation clause that we will go up in $1,000 increments over the highest price.

In our example, if the highest and best offer for a home is $310,000, our escalation clause automatically kicks in and our offer becomes $1,000 higher at $311,000.

What if someone bids $320,000? In that scenario, our offer becomes $315,000 as that was our maximum and we hope that our offer is picked due to other factors such as our initial deposits, closing date, etc..

Does This Guarantee we get the Home?

No, it sure doesn’t. Someone could bid higher than our best offer. There may be someone paying cash for a home and that is more desirable for the sellers than our highest price. There are just too many reasons why our offer simply isn’t picked.

What are the Problems With Escalation Clauses?

One of the most common problems we see with escalation clauses is that the seller’s agent has no idea what they are or how they work. That is where I, as a buyer’s agent, can explain the clause to the other agent. It will not guarantee that they accept it though.

Another problem with an escalation clause is that we’re showing our cards. Remember that when asked for a highest and best offer, the seller does not have to choose one. Or, the seller can still counter.

In our scenario from before, our max was $315,000. The seller will know that so if the highest and best offer from someone is $305,000, the seller can always counter us with $315,000 since they know that is what we’re willing to pay for the home. Rest assured though that this is uncommon. Simply put, I don’t see this happen.

Should I Use an Escalation Clause?

My opinion on escalation clauses is that they’re a fantastic tool to use when there are multiple offers. However, I think they’re best suited for scenarios where there are 3 or more offers. If there is only one other offer on the table, offering your highest and best may be your best bet.


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