Escalation Clauses

If you want to buy a house in a very competitive market, an escalation clause might be something to consider. An escalation clause automatically raises your offer on a house if there will definitely be competing offers.

In a competitive market, an escalation clause could raise the bidders offer in increments, say $2,000, every time a higher competitive bid is received, until it reaches a maximum offer.

This can be good or bad.

On the good side, your offer is automatically raised above a competitor's authenticated offer. On the bad side, the buyer loses negotiating power. Now the seller knows exactly how much the buyer is willing to pay. The seller could just make a counter-offer at the buyer's top price.

In some situations, the seller may ask for all offers and then make a decision on a specified day. In this situation, an escalation clause can be helpful.

For the seller, it could be better to just make counteroffers rather than accept a bid with an escalation clause.

Even if a bid is the highest with an escalation clause, there is no guarantee that the seller will accept it. Other factors could well make another offer attractive.

It's important to be realistic on purchase price and what you are willing to pay. In some hot markets, it may be useful to look for homes priced under what you are able to pay. This way you can bid higher.

Also remember that if your offer exceeds the home's appraised value, the lender won't lend above this amount. You could end up winning a bidding war, but not getting the mortgage.