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What To Know About Escalation Clauses When Purchasing Real Estate

18 December 2019

Jeffery Wright

If you have found a home that you love, but there are other interested buyers, you might be considering an alternative method to get the winning offer. Escalation clauses are a way to avoid listing the price of a home, but still come out on top by offering to pay a fixed amount of money over the highest bidder. Here is what to know about escalation clauses when purchasing real estate.

You Risk Paying More Than You Want

The concept of escalation clauses may make perfect sense to you at first, because you will have peace of mind knowing exactly how much you paid for a home to beat out the highest bidder. You won't be kicking yourself later wondering if you could have paid $10,000 less and still got the house. But escalation clauses always run the risk of another buyer making a very generous offer because they really want the house as well. Unless your realtor ensures that there is a clause for right of last refusal, you could end up with a purchase price that is higher than what you anticipated.

You Need Proof Of Other Offers

When using an escalation clause, you should only move forward with the home purchase if the seller is able to prove to you what the highest bid was. The seller can black out the name of the buyer and other identifying information, but having a copy of that offer is crucial to ensure that they are not making it up. If you discover that they made up a higher offer to take advantage of the escalation clause, that would be considered a form of fraud. But it's usually unlikely that a seller would go that far to get an extra couple thousand dollars from you.

You May Not Automatically Win The Bidding War

While escalation clauses seem like a perfect way to get a home that you want, know that they are not an automatic win in a bidding war. A seller can reject escalation clauses and ask that you resubmit an offer with an exact amount, or take a lower offer because they feel that the buyer has more secure financing in place.

Be sure to work closely with your real estate broker when making an offer on a home. They'll offer the best strategy possible so that you can come out on top when bidding against multiple offers in a competitive real estate market.

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