Understanding Escalation Clauses and How to Protect Yourself
One of my readers recently reached out with a great question about an escalation clause. They are in the middle of buying a property in the Midwest, where the market is still very competitive. The seller set a multiple offer deadline, and the buyer was trying to figure out what kind of offer would give them the best chance to win the house.
They had heard about escalation clauses and wanted to know more. Interestingly, their buyer’s agent, though experienced, had never worked with escalation clauses before. That is not unusual. Every market is different, and some areas rarely use them. But in this case, the buyer wanted to understand exactly how escalation clauses work and how they could verify that they were not simply bidding against themselves.
What Is an Escalation Clause
An escalation clause is language you can add to your offer that says you are willing to pay more than other competing offers, up to a certain limit. For example, if a house is listed at $400,000, you could write that you are willing to pay $3,000 more than any other offer up to a maximum of $425,000.
So if another buyer offers $420,000, the seller can come back to you and ask if you are willing to move to $423,000. If you agree, you have an accepted contract. However, if another offer is higher than your cap or is stronger in other ways, such as cash or waived contingencies, the seller may choose to go with that instead.
The Key Word You Need
The main concern from my reader was this: how do you know if there really is another offer at that higher price? This is where wording in your escalation clause matters. You must include the word verifiable or sometimes bona fide in your offer. This means the seller has to provide proof of the competing offer.
In many cases, you can specify that you want to see at least the page of the contract that shows the price. Some buyers even request the full contract. The level of detail you require is up to you, but what matters most is that you have the right to verify that the other offer exists.
Protecting Yourself
In practice, I usually recommend that buyers trust but verify. Sellers and their agents should provide proof of the competing offer, and as the buyer, you can make it clear in your escalation clause exactly what kind of proof you expect. That way you are not competing against imaginary numbers or just bidding yourself higher without reason.
Final Thoughts
Escalation clauses can be powerful tools in a multiple offer situation, but they need to be written correctly to protect you. Always make sure the language includes the word verifiable so you can see proof of the competing offer. If you want to learn more about escalation clauses, I previously wrote a detailed blog on the topic that you can read here.
If you are looking to buy or sell real estate anywhere in the United States, I am happy to share my advice and connect you with a vetted professional real estate agent who can guide you through the process.
