What is an Escalation Clause?

Imagine you are a prospective home buyer in a “sellers market”, that is to say, a real estate market where there are more home buyers than there are houses for sale. You make a competitive offer on a home only to subsequently learn from your buyer’s agent there are three, four, six or 32 other offers made (Note: The listing agent/broker can only disclosure to a buyer’s agent/broker the existence of multiple offers if the seller authorizes that disclosure. For more on this side topic, see “What Happens When There are Multiple Offers Made on a Home” in the “FAQ’s” in the main navigation.). The seller has accepted another offer.

You might think to yourself or say out loud “Well, this one wasn’t meant to be” and you look at the next house and make an offer. Yet, again, you are faced with a circumstance of multiple offers. Once again, the seller has accepted another buyer’s offer.

What Can a Prospective Purchaser Do?

What can a prospective home buyer do to gain a competitive advantage in the instance in which there are multiple offers made on a home that is offered for sale? There are several things a prospective home buyer can employ to gain the coveted competitive advantage. For purposes of this article, we will confine our consideration to what is termed as an “escalation clause” which is sometimes referred to as an “accelerator clause”.

An escalation clause can either be language added to a purchase offer in the paragraph designated for “other terms” or can be an addendum that is attached to the purchase offer.

Simply stated, an escalation addendum states that a prospective home buyer, if found in a multiple offer circumstance and elects to employ an escalation clause or addendum, will pay “X” dollars above the highest competing offer up to a price ceiling of “Y” dollars.

What Would Happen...?

What would happen if more than one purchase offer presented to the seller contained an escalation clause? In that circumstance, there would be a “bread crumb trail” that naturally leads from one contract to the next until the logical conclusion has been reached.

Of course, the highest possible price may not be the seller’s sole focus of attention or principal element of concern. There are other terms and conditions found in a real estate purchase and sale offer which may affect the seller’s decision on which offer to accept or “work with” beyond the highest price.

Some of the terms and conditions include the proposed closing date, whether the prospective buyer has desire to have a structural, pest, radon or other inspections included as part of their purchase offer.

From the Seller's Point of View...

Another important consideration from the seller’s point of view is how the buyer intends to finance the purchase price of the property. Does the buyer intend to apply for a mortgage to finance the purchase price of the property or does the buyer plan to pay cash? By accepting a “cash” offer, the seller avoids the having to deal with a bank appraisal and/or the possibility of repair items which the seller might be responsible, which the mortgage lender may insist upon prior to granting the buyer approval for the mortgage loan.

As mentioned previously, the proposed date of the closing is another term of the purchase offer that is carefully considered by the seller. Prior to writing a purchase offer, an astute buyer’s agent should ask the listing agent what the ideal closing date would be for the seller and discuss this with the prospective purchaser to determine if that date may be accommodated by the prospective purchaser.

There have been instances where a listing agent/broker has communicated to buyer’s agents/brokers who show property listed for sale with them “No escalation clauses/addendums will be considered by the seller”. A listing agent/broker cannot impose this upon a buyer or buyer’s agents/brokers for the reason they cannot limit or influence how a buyer’s agent represents their client nor can a listing agent/broker impose upon a buyer or buyer’s agent/broker how to structure an offer. The listing agent/broker is required to timely submit all offers presented to the seller for their consideration.

Is Using an Escalation Clause a Guarantee?

Using an acceleration clause/addendum does not guarantee that a prospective home buyer will prevail when found in a multiple offer circumstance. However, this tool, when correctly and judiciously used, may well provide a prospective home buyer with a competitive advantage in certain circumstances.

You may have realized that the process of making a purchase offer in the role of a buyer and, considering several purchase offers in the role of a seller can be a dense and intricate process.

Seeking the guidance and counsel of a competent real estate broker will provide you with the prudent options available when faced with a multiple offer circumstance.

If you would like additional information on this or any other real estate related matter, please click the “Contact Me” button below.