The Pros and Cons of Using an Escalation Clause in a Bidding War on a House

It doesn’t matter if it’s a sellers’ market or one that’s more in favor of buyers; if a house is desirable and priced appropriately, the chances are you’re going to find yourself in a bidding war.

Makes sense, right? If you love the house, most likely other buyers in the market will as well. So, not only do you have to act fast, but you need to pull out all the stops in order to get your offer accepted.

But that doesn’t mean you want to offer more than you have to in order to get the house! It’d be nice to be able to submit an aggressive offer that’ll beat out every other offer, yet not go more than a few bucks higher than the next highest offer, right? Well, you can pull that off with the use of what is known as an escalation clause.

Simply put, an escalation clause allows you to submit an initial lower offer, which will automatically bump up in specific increments above any other offer that comes in, up to a certain capped amount you set. This has been a popular practice recently in Mammoth Lakes.

For instance, if you made an offer of $500,000, and another offer came in at $510,000, if you had an escalation clause that said to offer $1,000 over any higher bid, your offer would go to $511,000. If nobody offered higher, your bid would effectively be the highest. But let’s say you capped it at $515,000. Your bid would continue to bump up until someone went over that amount, but wouldn’t go higher, protecting you from paying more than you wanted to.

That said, while escalation clauses can be useful in helping you win a bidding war, they can also cost you the house. We have used escalation clauses (when appropriate) for our buyer clients with about a 70% success rate. So, let’s look at the pros and cons to using one, so you can decide if it’s the right decision for you:

Pros

• It can give you the edge by showing the seller you’re serious and are willing to pay more than any other buyer.
• It can make negotiating easier. You don’t have to stress much going back and forth with counter-offers. It automatically happens if (and only if) another bona fide offer triggers the price bump.
• It can help you stay within the range you’re willing to pay rather than get caught up in the heat of the moment. If and when the price goes above your capped amount, your price will no longer continue to bump up.

Cons

• It may annoy sellers by showing that you’re willing to offer a higher amount and make them wonder why you wouldn’t just offer to pay that to begin with.
• It could invite sellers to counter higher than they may have, or simply counter at the highest price you indicated that you’re willing to pay.
• It’s not always just about price. Another lower offer could still be chosen over yours because of better terms or contingencies offered. Your REALTOR® should do their best to find out what is important to the sellers (ie. price, longer/shorter escrow).
• If not written properly, it could cost you if you don’t include a cap on your price or a requirement for the seller and their agent to verify the legitimacy of other offers.
• The listing agent may simply prefer buyers to make their best and final offer instead of invoking an escalation clause. Submitting one to an agent who dislikes them can turn them (and therefore their client) off. This has happened in our business in Mammoth Lakes – an agent did not like escalation clauses and passed on that dislike to her seller clients.

The Takeaway: