Once you've found your dream home, it's time to work with your real estate agent to write up a strong offer. If you and your real estate agent are confident that there will be competing offers, you may consider including an escalation clause, also known as an escalator, in your offer.
The goal of an escalation clause is to guarantee that your bid is the highest so that you can secure the home.
What is an escalation clause and how does it work?
An escalation clause is language written into a purchase offer that automatically increases your purchase price by a certain amount above competing offers, until the offer reaches the maximum price you are willing to pay for the home. An escalation clause only goes into effect when there are competing offers.
Once the escalation clause is triggered, it will continue to increase your offer amount above competing offers until your designated limit has been reached. If another prospective buyer also presents an offer with an escalation clause, both clauses are triggered. In that case, the offer price on the home automatically increases until one of the buyers' price caps has been reached and the other buyer has a higher bid.
A typical escalation clause includes three parts:
- Proof of a bona fide offer. This requires sellers to provide proof that they received another offer that was higher than yours.
- Escalation amount. This is the amount by which your purchase price will increase above the competing offers. For example, if your escalation amount is $3,000 and the competing offer was $300,000, the escalation clause would automatically increase your offer to $303,000.
- Price cap. This is the maximum amount you are willing to pay for the home.
An escalation clause may also include an appraisal contingency, meaning that the purchase can only proceed if your purchase price is not more than the value of the home, as determined by the lender's appraisal.
Your real estate agent may have standard escalation clause language ready, or your agent may need to work with a real estate attorney to help make sure you are protected.
When should I use an escalation clause?
You want to stand out. Including an escalation clause in your offer indicates to the seller that you are serious about buying the home, which can help your offer stand out when there are multiple interested buyers.
You want to streamline the bidding process. An escalation clause can help streamline the bidding and counteroffer process because your position and price cap are already written out.
When should I not use an escalation clause?
Competing offers are unlikely. An escalation clause is only triggered if there are competing offers, so you should not include an escalation clause in your purchase offer unless you and your real estate agent are confident that there will be multiple offers.
The seller is not accepting escalation clauses. Some sellers do not accept offers with escalation clauses. Your real estate agent will look into the seller's process for reviewing offers and advise about whether an escalation clause would be accepted.
You are giving up the chance to negotiate. Once the sellers accept the escalation clause, they know your highest offer right away, and you don't have the opportunity to negotiate, including on factors outside of price that may be more important to the seller.
An Escalation Clause Is Not a Guarantee
Remember that the highest bid on a home won't necessarily win out. When considering competing offers, sellers take into account many factors, such as the settlement timeline and contingency clauses.
Your real estate agent is your best resource for deciding how you can make a strong offer and approach negotiations, including whether an escalation clause is appropriate.
To learn more about making an offer on a home, visit My Home by Freddie Mac®.