The escalation clause increases a buyer’s offer to a stated dollar figure above the highest competing bid. Let’s say you receive two offers on your home. The first buyer offers $250,000. The second buyer offers $220,000, along with an escalation clause. The clause stipulates that the buyer increases their bid by $5,000 above the highest competing offer. In effect, the second offer would become the higher of the two at $255,000.<\/p>\n
An escalation clause typically benefits sellers since it automatically increases a buyer’s offer without negotiation between the parties. But even in a strong seller’s market, mishandling offers with escalation clauses can backfire.<\/p>\n
For advice on how to navigate this potentially tricky offer situation, we spoke with Scottsdale real estate pro Lisa Roberts<\/a>, who was recognized by the Scottsdale Association of Realtors\u00ae as a Top 40 Under 40 agent. Here are her five tips for handling escalation clauses:<\/p>\n Before evaluating the offer, you’ll want to identify the different sections of the escalation provision to weigh the offer against other bids. Escalation clauses generally contain three common elements:<\/p>\n An escalation amount is the incremental dollar amount the buyer is willing to pay above the highest competing offer. For example, the escalation clause could state that the buyer is willing to pay $2,000 more than the highest competing offer. If the seller receives a competing offer of $300,000, the escalation clause would increase the first offer to $302,000.<\/p>\n Offers with an escalation provision generally establish a floor, or minimum offer price. A higher competing offer then triggers the escalation clause, increasing the original offer.<\/p>\n What exactly constitutes a “bona fide offer?” According to the Cape Cod & Islands Association of Realtors\u00ae, a bona fide offer is an offer that is made in good faith that’s also legitimate and enforceable<\/a>. An offer your friend submits to escalate the purchase price doesn’t qualify. Your buyer may even require you to send documentation of the competing offer.<\/p>\n The buyer will generally specify a maximum purchase price. Without a cap, the buyer could end up bidding a much higher purchase price than they’re willing or able to pay.<\/p>\n While Roberts says the net purchase price is often the primary factor when selecting an offer, sellers should evaluate the overall strength of the offer, along with the buyer’s commitment to completing the sale.<\/p>\n A major pitfall to be aware of is buyer remorse. In a competitive market<\/a>, buyers can get caught up in the bidding process, offering more money than the home is worth. “Buyers sometimes just want to win,” says Roberts. But when a seller eventually accepts their offer, some buyers have second thoughts.<\/p>\n This could be the case when a buyer’s escalation clause reaches its cap, and the buyer is paying the top of their budget.<\/p>\n “You’ve got to really figure out, ‘Who is the most serious to get to the finish line?'” Roberts advises.<\/p>\n “You don’t want to lose the first buyer \u2026 and then lose momentum with the other buyer later.”<\/p><\/blockquote>\n Here are some signs that a buyer is committed to following through with their offer:<\/p>\n If your top offer happens to be a cash buyer, skip this tip. Cash buyers can request an appraisal<\/a>, but it isn’t required.<\/p>\n On the other hand, when a buyer finances a purchase, the lender generally requires an appraisal to determine the property’s market value. This valuation protects the lender’s interests, assuring the lender that it can recoup its investment if the borrower defaults on the loan<\/a>.<\/p>\n So if you accept an escalated offer well above your asking price, just know that your home will need to appraise for the offer price. The appraisal can be a sticking point in intensely competitive markets where buyers offer more than a home’s present value.<\/p>\n If the home appraises for lower than the offer price, the lender may not approve the buyer’s requested loan amount. To go through with the purchase<\/a>, the buyer would need to either:<\/p>\n Roberts points out that when reviewing multiple offers<\/a> and escalation clauses, sellers often opt for the highest net price, “as long as [the buyer is] putting a substantial amount of down payment.” A buyer with the financial resources for a large down payment is more likely able to bridge the gap between the escalated purchase price and appraised value if the value comes in low.<\/p>\n If you receive multiple offers<\/a>, including offers with escalation clauses, you don’t necessarily have to accept one outright. Roberts advises negotiating terms with all of your serious offers before choosing the best one.<\/p>\n The price cap on an escalation clause reveals the maximum amount a buyer is willing to pay for your home. Roberts encourages sellers to use this information to leverage higher offers from competing buyers.<\/p>\n For a more straightforward negotiation process<\/a>, you can simply reveal that there are multiple offers and request that buyers submit their “highest and best” offers<\/a> for final consideration.<\/p>\n Negotiations can happen quickly in multiple offer situations<\/a>. When accepting an offer at an escalated price, you’ll want to ensure that all clauses and revisions are clearly worded, particularly if changes occurred during the negotiation process.<\/p>\n “You definitely don’t want any gray verbiage,” says Roberts. Lean on your real estate agent for guidance, and reach out to your attorney<\/a> if you need legal advice about the language in your contract. Doing so can help prevent confusion and potential legal battles down the road.<\/p>\n![\"Documentation](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/06\/escalation-clause-2-666x381.png\")
<\/a>1. Understand the three major components of an escalation clause<\/h2>\n
An escalation amount<\/h3>\n
A bona fide competing offer to trigger the escalation<\/h3>\n
An escalation cap<\/h3>\n
![\"Cash,](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/06\/escalation-clause-3-666x381.png\")
<\/a>2. Weigh the overall strength of the offer \u2014 and the buyer’s commitment<\/h2>\n
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3. Keep the appraisal top of mind<\/h2>\n
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![\"Two](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/06\/escalation-clause-666x381.png\")
<\/a>4. Request buyers bring their highest and best<\/h2>\n
5. Ensure final offer terms are clear \u2014 and in writing<\/h2>\n