What is an Escalation Clause in Real Estate?

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Is accepting an offer with an escalation clause going to endanger your house sale falling through?  Is including an escalation clause in your offer going to cause your dream home to slip through your fingers? Is an escalation clause in real estate REALLY a good idea or is your agent just trying to find ways to improve their paycheck?


Best Escalation Clause Example

Let’s start with an example of an escalation clause.  The most relatable way I like to explain it is the similarity to eBay.  Let's say you have an item you're selling or bidding on (which would be your house in this example) the buyer is making an offer on this item for sale.  The bid, or offer, has already reach $30  (or $300,000 if we’re talking about a house) and then the buyer says, “Okay, I’m going to make a bid and I’ll pay up to $50 for this item in five dollar increments”.  So basically, this is the buyer’s escalation clause.  The buyer will offer a maximum amount and will also detail what increment they're willing to beat the next closest offer on the table.  So, it offers them a bit of wiggle room and gives them an opportunity to work within their budget.  Also, of course the buyers are hoping to be the one to have the winning bid.

Is an Escalation Clause a Good Idea? – 3 Considerations

#1 Is Your Agent Being Transparent and Walking WITH You

First and foremost, like with any real estate transaction you want to make sure you know and trust your realtor when you sit down with them make sure you feel like you connect with them.  You want to try and build rapport early on and have them be somebody you feel like is in your corner and is not constantly using terms over your head but is going to be willing to break things down for you and just keep it simple.  Now, give them a little grace, occasionally an industry term will slip here and there that might not be part of commonly used conversation.  They should be more than happy to break it down with you and walk you through the possible problems which can arise in various scenarios and not just expecting you to know everything already.

#2 Whose Side is Your Agent On?

Along those same lines, making sure this is somebody who is looking after your wants and needs and your best interests and not their most important concern is what is an escalation clause going to do for me as a realtor?  Yes, it sounds wonderful and it can be a trendy term which CAN work to your favor and can work in your benefit but obviously it can also cloud the judgment of some people who maybe are placing higher priority on their bottom line.  So, going back to the main point you want to make sure it's somebody you can tell has your best interests at heart, somebody who's maybe been referred to you by friends or family, or somebody you've done a thorough job vetting via reviews, interviews, social channels or thorough searching. 

#3 Brace Yourself for the Appraisal

The thing you want to be most aware of when considering an escalation clause is the appraisal process.  As we talked about in the example defining an escalation clause, the offer can come up quite a bit depending on how much of an escalation clause is attached to an offer.  So be aware, if the appraiser comes back and says the value of the home is less than what the offer has accumulated to by that point, then the buyer is in a place where they’re going to want to make sure they have those expendable assets or cash on hand essentially to be able to cover the difference between the two.  Otherwise, the deal is going to fall apart for all involved.

In summary, if an escalation clause is on the table, whether you are the buyer or the seller, make sure you prepare for any possible hurdles and that your agent is keeping you informed and has your best interests at heart.  I would love to hear your questions or concerns surrounding escalation clauses down in the comments!


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