What Is an Escalation Clause in Real Estate? When to Use It?

You’ve found your perfect home with a big yard, an open floor plan, a good number of bedrooms, and a newly remodeled kitchen. Now it’s time to make an offer. But, there might be other interested buyers. So, what should you do? You can include an escalation clause to make your offer stand out. You might be wondering what is an escalation clause in real estate.

Well, an escalation clause lets you set a starting offer price and a maximum price, automatically raising your offer if someone else bids higher, up to your set limit. This way, you have a better chance of getting the home without constantly renegotiating.

We’ll try to understand what is an escalation clause in real estate in more detail, here. You can decide whether to use it in your purchase contract or not.

What is an escalation clause in real estate?

An escalation clause, aka escalator, is part of a real estate contract. It tells that a potential home buyer is willing to raise their offer if the seller gets a higher one. And, it sets the highest price the buyer is willing to pay over the top offer. Truth be told, in a hot real estate market, sellers often get multiple offers. And sometimes, to buy your dream home, you may need an escalation clause to help you win a bidding war. This type of clause automatically increases your offer if someone else bids higher.

How does an escalation clause work?

Keep in mind that this escalation clause kicks in only if there is a higher competing offer. It keeps raising the offer on a home until it hits the buyer’s maximum limit. If another buyer also has an escalation clause, the price will keep going up until one buyer’s cap is reached. This clause shows sellers how serious a buyer is and how much they’re willing to pay. For example, if you offer $300,000 for a house, your real estate agent can add an escalation clause increasing your offer by $2,000 over any higher offer, up to a maximum amount of $310,000. If no other offers come in, their offer stays the highest offer at $300,000.

What does an escalation clause include?

An escalation clause is a special part of a purchase offer that automatically increases your bid by a set amount above other offers until it hits your maximum limit.

The clause usually includes:

Your initial offer or purchase price.
A request to see some kind of proof of a bona fide offer (that is higher) the seller receives.
The escalation amount. That is, how much your offer will increase above competing multiple offers.
The number of escalations or the number of times you’re willing to raise your offer.

When should I use an escalation clause?

Escalation clauses are especially useful in a seller’s market where homes are selling quickly. They help make your offer stand out and show sellers you’re serious, which is crucial in a competitive market and potential bidding war scenarios.

However, escalation clauses aren’t perfect and may not always be the best choice for your situation. That’s why it’s important to discuss this strategy with your real estate attorney or agent. They can help you understand if it’s the right move for you or not. And, if you decide to submit an offer with an escalation clause, they can help you determine your maximum spending limit to avoid buyer’s remorse.

Your real estate agent can add an escalation clause to your offer. Just let them know your maximum budget and how much you want to increase your offer each time.

An experienced agent is helpful because they understand local laws and can guide you in writing an escalation clause. A real estate attorney can also help review the clause.

What are the pros and cons of the escalation clause in real estate?

Pros	Cons
An escalation clause can give you confidence and peace of mind when buying a home	The clause reveals your maximum offer, which can eliminate the chance to negotiate
It allows you to stay competitive in a hot market while ensuring you stay within your budget	The home seller might reject the clause and counter with your highest revealed offer
It shows the seller that you’re serious about buying the home, which may be favorable when choosing your offer	Seller might reject offers with escalation clauses if they feel limited in their ability to counter other buyers
Your offer increases only when another buyer makes a higher offer. This protects you from paying more than necessary.	The escalated price might exceed the home’s appraised value. Your lenders may not finance above this value. The buyer may need to cover the difference in cash.

Key takeaway

Real estate escalation clauses help keep your offer competitive. While they don’t guarantee you’ll get the property, they can give you an edge over other buyers. You never know when it might help you secure the perfect property. Keep in mind that the legality of escalation clauses varies by state and local laws, so make sure they are used correctly and transparently.

FAQs

Why do sellers not like escalation clauses?

Sellers might dislike escalation clauses because they reveal the buyer’s maximum offer, eliminating room for negotiation. Additionally, sellers may prefer straightforward offers without conditions, and escalation clauses can complicate the decision-making process.

Why do home buyers dislike using escalation clauses?

Home buyers might dislike using escalation clauses because they reveal their maximum budget to the seller. This may result in overpaying for a property if the maximum purchase price is set too high. If the final price is higher, it could lead to potential issues with home appraisals and home financing.

How do you beat an escalation clause?

To beat an offer including an escalation clause, you can make an offer that’s not only competitive but also more attractive overall. You could include fewer contingencies, offer a quicker closing timeline, or put down a higher earnest money deposit to stand out.

Does a home seller have to accept an escalation clause?

No, accepting or rejecting an offer with an escalation clause depends completely on the home seller. They can choose to reject it, counter with a different offer, or accept another offer without an escalation clause.

What is an escalation clause in real estate? was last modified: January 31st, 2025 by Ramona Sinha

Written by Ramona Sinha. November 8, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.