What Is an Escalation Clause?

Kristine Cameron

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Kristine Cameron

September 13th, 2021
Updated September 13th, 2021

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What’s in an escalation clause? | When to use an escalation clause | How escalation clauses affect sellers | Key challenges | Other ways to make your offer stand out

If you're making an offer on a home, an escalation clause explains that you're willing to increase your purchase price if the seller receives a higher bid from another potential buyer. Your offer will increase, or “escalate,” by a specific amount above each competing offer, up to a maximum price (or "cap") that’s outlined in the contract.

Why would you do this? In a seller’s market, home buyers face fierce competition with other bidders. Including an escalation clause can help your offer stand out to the seller!

💸 An escalation clause in action

You offer $200,000 for a home, and add an escalation clause to automatically increase your offer by $2,000 above other bids. You set your cap at $210,000.

If an offer of $205,000 comes in, the escalation clause would increase your original bid to $207,000 ($2,000 above $205,000). If another offer comes in at $210,00, your offer won't increase because it's at your cap.

What’s in an escalation clause?

The standard verbiage of an escalation clause can vary by state or by transaction, but they include the same basic components:

  • A cap: This is the highest price that you’re willing to pay for the property.
  • The escalating factor: This establishes the amount of money you’re willing to pay above higher offers. This will generally be a round number between $1,000 and $5,000.
  • Documentation requirements: Most buyers require sellers to provide “proof of a bona fide offer,” or proof that a legitimate offer was made. Most often, a buyer will ask for a copy of the other bidder’s purchase agreement to see how much was offered.

These details make it clear to the seller that you’re willing to outbid other interested buyers without the need for additional negotiations. In other words, the clause will go into effect immediately, without requiring you to submit any more paperwork.

✍️ Editor's note: Listing agents need permission from the prospective buyer to share details from their purchase agreement. It's unethical for agents to copy information from other bidders without their expressed knowledge or permission — even if they hide those personal details within those documentation requirements.

When to use an escalation clause

Using an escalation clause in the right situations has two key benefits:

  • First, it reduces your need to go back and forth in negotiations with the seller. Since your escalation clause will kick in whenever another bona fide offer comes in, your offer will remain competitive without requiring you to get involved.
  • Secondly, an escalation clause helps your offer stand out in a competitive market. It shows that you’re willing to pay more than other bidders to get your offer accepted.

An escalation clause can be especially useful if a property is expected to get multiple competitive offers, or you're planning to buy a home in a hot seller’s market, when the demand for homes vastly exceeds the number of available properties.

For better insights into your local market, talk with a real estate agent. They can help you recognize the best opportunities to use an escalation clause, including the following.

🏡 Find your agent: Clever can match you with local realtors who can help you find your perfect home!

You expect the home to get multiple offers

Including an escalation clause in your offer can help you stand out to sellers when several competitive bids will likely be on the table.

An escalation clause tells the seller that you’re willing to increase your offer as soon as another bid comes in. It will reflect your determination to purchase the property by automatically outbidding offers below your cap price.

You want to streamline negotiations

Since your offer will automatically increase if a higher bid comes in, the listing agent or seller won’t have to repeatedly contact you to ask for a new highest offer. You won’t need to submit additional offers because the escalation clause will adjust as needed to beat the competition.

✍️ Editor's note: Including an escalation clause won't guarantee that your offer will be accepted. Even if you offer the highest price, the seller might select another bid instead. For instance, the seller might prefer a buyer who's willing to waive contingencies or close by a specific date.

When not to use an escalation clause

In some cases, an escalation clause can end up working against you. Your real estate agent might advise against adding an escalation clause if:

  • There won’t be very much competition from other buyers. One downside of using an escalation clause is that it tells the seller exactly how much you’re willing to pay for the property. If there aren’t any other offers on the table, the escalation clause won’t be utilized, and the seller could simply ask for a counteroffer at your cap price.
  • An escalation clause could cause you to go over budget. If you’re desperate to find a new home, it can be tempting to stretch your budget to stand out to the seller. However, your cap price should never go above what you’re comfortable spending.
  • The seller is asking for best and final offers. If the seller or listing agent makes it clear that they want bidders to make their best and final offers, they may not even consider your escalation clause. In this case, it’s in your best interest to clearly state the maximum amount you're willing to pay up front.

How escalation clauses affect sellers

Many sellers like offers with escalation clauses because they can help their home close faster at a higher sales price. An escalation clause also lets the seller know the buyer’s cap price up front, which gives the seller more negotiating power. In practice, a seller could confidently counteroffer at any price up to the buyer’s cap.

Secondly, offers with escalation clauses increase without the seller or their agent needing to negotiate directly with the bidder. This streamlines paperwork and eliminates negotiating time between buyers before accepting an offer.

If you’re a seller who receives an offer with an escalation clause, you still have the freedom to choose whether to accept, reject, or counteroffer.

Remember, you’re not required to select the highest offer. You may choose to consider other perks or benefits unrelated to the sales price, such as a faster closing timeline. Always talk to your agent about the best strategy for selling your home to meet your goals!

Challenges of escalation clauses

In some state realtor associations, escalation clauses are frowned upon due to ethical and legal grey areas.

Chiefly, an escalation clause can make it challenging for a listing agent to remain unbiased and fulfill their responsibilities according to the Code of Ethics and Standards of Practice of the National Association of REALTORS®: “When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client.”

If you're buying a home, you should also be prepared for any gap between the home's final appraised value and your cap.

Preventing bias

Real estate agents earn commission once their client's home sells.

An escalation clause could make it harder for an agent to keep the seller’s best interests in mind when they know the offer with an escalation clause will earn them the highest commission.

Protecting confidential information

Listing agents need permission from buyers to share their offer amounts in order to provide bona fide proof to the bidder with an escalation clause.

Buyers have every right to refuse to share this information. If an agent shares a buyer’s information without their permission, it’s both unethical and illegal.

Preparing for an appraisal gap

An appraisal gap occurs when a home’s estimated value is less than what a buyer agreed to pay. When this happens, a mortgage lender might not be willing to offer the full price of the loan, and you’ll need to pay the remaining amount. This is due to the LTV (loan to value) ratio that’s set by your lender.

Lenders set LTV ratios to calculate the risk of a loan going into default if you're unable to pay off your loan. It compares the size of your loan to the value of the property, as determined by the appraiser, and is calculated by subtracting your down payment from the sale price, dividing the loan amount by the appraised value of the property, and multiplying it by 100 to reflect the ratio as a percentage.

A higher LTV means that you have very little put down on the loan, and the bank carries the majority of the risk.

Mortgage approval amount
$80,000
Appraised value
$100,000
LTV ratio
80%

With escalation clauses, you could end up paying more on a home than you originally planned for. Let’s say you offer a cap of $110,000 for a home that’s appraised at only $100,000.

The bank needs to keep the same LTV ratio of 80%, as outlined in your mortgage approval. In this case, the lender may only offer you $80,000. and you’ll have to pay the remaining $20,000 out of your own pocket or pay private mortgage insurance (or PMI) on the loan until your LTV drops below 80%.

The role of a real estate attorney

To avoid some of these challenges, a real estate attorney can help. In fact, some states require you to use attorneys for most types of real estate transactions.

A real estate attorney can give you legal advice about contract details (such as escalation clauses) for home sales, or even draft the purchase offers themselves. This helps protect the home seller and buyer from complications after the transaction, since real estate agents can't provide legal advice.

Make sure to check with your agent to see what the requirements are in your area. If you want extra legal support, you can always contact a real estate attorney to review your escalation clause or purchase offer, even if your state doesn’t require it.

Other ways to make your offer stand out

An escalation clause isn’t always the best choice if you're bidding on a home. If you want to maintain more negotiating power, there are other options you can add in your purchase offer to make your bid more attractive to sellers.

Get preapproved for a mortgage

Getting preapproved for a mortgage means that a lender has determined the approximate amount they’d be willing to offer you. It shows the seller that you’ll have the funds necessary to buy the house at a specific price, as long as your financial situation doesn’t change.

Although preapprovals are fairly common today, it can still be reassuring for sellers to know that you’re certain of how much home you can actually afford.

Waive contingency clauses

Contingencies are conditions outlined in a contract where buyers can choose to retract their offer if issues are found. For example, if a home inspection reveals that a house needs more expensive repairs than expected, a buyer may have a contingency that allows them to back out of the agreement.

Waiving contingencies is one way to tell the seller that you’re committed to buying the property, regardless of what problems or issues may crop up. While this can definitely be appealing for sellers, you should take great care to understand the possible risks of waiving contingencies.

» MORE: What Is The Difference Between Pending And Contingent?

Make an all-cash offer

An all-cash offer can greatly increase your chances of getting accepted during a bidding war because it gives the seller extra reassurance that the deal will go through.

This is reflected in the data. According to Redfin, approximately 30% of homes sold in the U.S. in 2021 were purchased with cash, during a year with historically low inventory of homes available for sale. This is the highest percentage since 2014, when about 30.6% of houses were bought with cash.

Offer to cover the seller's closing costs or realtor fees

It’s usually the seller’s responsibility to pay for closing costs and agent commissions. Offering to cover these fees can definitely help your offer stand out more if you have the funds available.

Offer additional benefits unrelated to the sale price

Does the seller have specific needs or wants that you can leverage to make your offer stand out? For example, they might want to close within a certain timeframe or avoid making time-consuming repairs before closing. If you don’t want to use an escalation clause, consider other factors that the seller may prioritize over the sale price.

If you want to make an offer with confidence, a real estate agent can help you understand your local market conditions and options. Clever can match you with a top agent in your area and you'll get 0.5% cash back in eligible states after closing!

👋 Next steps: Talk to an expert

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Give us a call at 1-833-2-CLEVER or enter your info below. Our concierge team will be in touch shortly to help.

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FAQ about escalation clauses

When should I use an escalation clause?

An escalation clause can be helpful if there will be multiple competitive offers on a home and you want your bid to stand out.

How do I write an escalation clause?

Every escalation clause will contain the following components: a cap price, the escalating factor, and clear requirements for documenting other offers on the home. Your agent or real estate attorney will likely draft it for you in your purchase offer. Learn more about escalation clause components here.

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