Escalation Clauses Stink…Big Time
If you are actively searching for a home in a tough market, someone may have advised you to include an “escalation clause” in your offer.
Don’t do it.
In this post, we’re going to explain what an escalation clause is, why you shouldn’t use one, and the type of offer we recommend submitting instead.
What is an escalation clause, anyway?
An escalation clause is a term you include in your offer. It automatically increases your offer price by a specific dollar amount over the other offers—up to a maximum, pre-established amount.
If you’ve ever bid on anything on eBay, you’re familiar with the concept: You let eBay know the max you’re willing to spend on an item, and eBay will escalate your bid to beat your competition up to that amount.
So, when buying a house, you might submit your offer at $300,000, but include an escalation clause that will increase that offer $5,000 above any other offer, up to $350,000.
Buyers may feel like an escalation clause offers security against a perceived “overpayment.” But while this may sound like a good strategy, there are some compelling reasons to skip the escalation clause in favor of a simple, clean offer.
Why you shouldn’t use an escalation clause
Here are three reasons we encourage our buyers NOT to submit an offer with an escalation clause:
- Escalation clauses are confusing. There’s no denying that it’s a seller’s market. To improve your chances of getting the house, make the process as simple as possible for the seller. Escalation clauses aren’t simple—in fact, they are often counter-productive. There are many ways to submit an escalation, which can be incredibly confusing for sellers and their agents. And if the sellers receive multiple offers that all include an escalator, it can be nearly impossible to work out who is offering what price. In this market, a seller is much more inclined to accept an offer that is clean and easy to understand.
- You are showing all of your cards anyway. Even if the other offers don’t push your offer all the way up to its maximum price, the seller knows how much you are willing to pay and could just counter at that price. Don’t make them play that game.
- Awkward, post-offer interaction. After accepting a buyer’s offer, the seller must share the other offer(s) that caused the buyer’s offer to escalate. Since real estate agents are not allowed to share offer terms with another party, this means the communication has to occur directly between buyer and seller. This can make people feel uncomfortable and can cause additional friction.
For all these reasons, our real estate team thinks escalation clauses are a very bad idea. In fact, we have never suggested including one in an offer.
What you should do instead
So what’s our strategy? In the current market, we suggest that our buyers submit an offer at the highest price and with the strongest terms they would feel comfortable losing the home at.
So in the example above, if you’re willing to go as high as $350,000, we recommend submitting your offer at that price instead.
We believe in keeping offers clean, strong and easy to understand. Our goal is to minimize all friction points to make our buyers’ offers stand out in the crowd and ultimately increase their chances of acceptance. Want to learn more about how to make your offer competitive in today’s market? Or what to look for as a seller reviewing of