How an escalation clause may help your home offer
- 3 min read
As a homebuyer, waiting for news of whether your offer will be accepted can be nerve-wracking, especially if you're in the middle of a bidding war . Luckily, you have options, such as an escalation clause, that can help you stay competitive when multiple offers come in for the home you want.
Escalation clauses in real estate
An escalation clause is a provision in a real estate contract that automatically increases your offer amount on a home if the seller receives a higher competing offer. The clause states how much more you would be willing to pay when other hopeful buyers outbid you, protecting you from losing out on the home sale.
How does an escalation clause work?
An escalation clause tends to contain the following:
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Bona fide offer: A request that the seller must be able to provide proof of a legitimate and enforceable higher offer to purchase the property
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Escalation amount: The amount you’d like to outbid any other offers
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Price cap: The maximum price you’re willing to pay in the case of multiple offers, or how high you’re willing to allow your offer to go
You can speak with a real estate agent about any other terms you might want to include in an escalation clause.
As a buyer, including an escalation clause could help you avoid losing out on a home by giving your offer some room to grow.
Determining the escalation amount and the price cap
When you add an escalation clause to your offer, you’ll have to determine your maximum purchase price — so consider your existing budget and ideal monthly payment . Using an online home search tool like ComeHome can help you research homes and compare prices to put together your offer. Knowing the amount on your mortgage pre-approval can also help you decide on your price cap.
Does the seller have to accept the escalation clause?
Sellers don’t need to allow escalation clauses and may prefer to get buyers’ best, final offers right off the bat. A real estate agent can help you decide whether making an offer with an escalation clause is a good idea.
Tip: You can be connected with a real estate agent during Ally Home’s online pre-approval process.
What happens when there are multiple offers with escalation clauses?
When multiple offers with escalation clauses appear, the seller will evaluate the strength of each offer and the buyer’s commitment to the sale. Sellers often prefer buyers that appear most serious about committing the purchase and will consider things like:
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Amount of due diligence and earnest money
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Waiver of contingencies, like appraisal , inspection and financing
Benefits and drawbacks of an escalation clause
Here are some things to consider before rolling an escalation clause into your offer.
Pros of the escalation clause
As a buyer, including an escalation clause could help you avoid losing out on a home by giving your offer some room to grow. You could also avoid the tense, urgent negotiation process that may drive you to overspend on a home. The clause may also reduce back and forth because the next offer is already known.
And if your initial offer is the highest or only offer the seller considers, then the purchase price will not increase – which would allow you to secure the home at a price point lower than you were willing to pay.
Cons of the escalation clause
The seller will know what you’re planning to offer and the maximum cap price from the get-go, which impacts your ability to negotiate for a lower price. This can give the seller an upper hand in the negotiation process — and could mean you’ll pay more than if you negotiated the old-fashioned way.
Securing the home you want
When you make an offer on a home, an escalation clause may help you minimize homebuying stress and stay ahead of other offers. While an escalation clause isn’t a guarantee that the seller will accept your offer, you can rest easy knowing you set the offer terms in alignment with your budget.
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