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Buyers Week: The Escalation Clause

by UrbanTurf Staff

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A unit that went under contract after receiving 18 offers.

The start of spring is just a few days away, which means that the housing market will soon be in full swing. To get prospective homer buyers ready, UrbanTurf is running a series of articles to help educate readers on the process.

From the offer to the down payment to the mortgage, we’ll touch on every facet of the home buying process and more. And if there is another topic that you want covered, just shoot us an email at .(JavaScript must be enabled to view this email address).


The heat of DC’s real estate market means that bidding wars are becoming a common occurrence. In order to compete in this climate, potential homebuyers are adding escalation clauses so that their offers are as competitive as possible.

What is it, and how does it work?

An escalation clause is an optional part of an offer stating the buyer will increase their offer by X amount over a higher bid — but usually no higher than a stated amount. The clause is only triggered by a competing offer. Here’s an example: If Buyer 1 puts in an offer of $500,000 on a home priced at $499,000, and Buyer 2 offers $501,000, Buyer 2 should get the house, right? Well, not if Buyer 1 has an escalation clause increasing her offer to $1,000 above the highest bidder up to a cap of $510,000. In the aforementioned case, Buyer 1 would get the house for $502,000. An escalation clause can move up in various increments, usually ranging from $1,000 to $3,500.

How does this work with loans?

So how does an escalation clause work with financing? Let’s say you put in an offer with a 25 percent down payment, so you are getting a loan of 75 percent of the purchase price from the bank. If an offer with an escalation clause ends up being the winning offer, that loan can be dealt with in one of three ways:

  1. No changes are made to the loan, and the buyer makes up the difference in cash.
  2. The loan automatically applies to the new amount, assuming that the borrower is approved for 75 percent of the final sales price.
  3. The loan covers some of the difference between the asking price and final sales price, and the buyer will pay the difference between the loan and the purchase price at settlement.

Other tips to remember

  • Get proof that there’s a higher offer. This would generally be a copy of the other offer with names and personal details redacted for privacy.
  • Don’t let your money get away from you. As always, make sure that the maximum price in your escalation clause is really something you’re able to pay.

Related Buyer Week Articles:

This article originally published at http://dc.urbanturf.com/articles/blog/first-timer_primer_escalation_clauses/8195

8 Comments

  1. Nat said at 3:29 pm on Tuesday March 4, 2014:

    This is great—I lost out on my dream first home because we both had escalation clauses and I didn’t understand at the time that it may have been worth it to set my increase amount higher (like $1500 instead of $500) since our top bids were very close together.

    Keep in mind that this doesn’t offer a guarantee. I was actually $500 more than the other bidder, but a 15 day shorter closing window and more cash onhand for negotiating potential necessary reparis ended up being the deciding factors.

  1. Michael said at 6:18 pm on Tuesday March 4, 2014:

    After I explain this to my clients, I usually get a “huh?” look.  Then I ask them if they’ve ever bid on something on Ebay and then it all makes sense. 

    Also,  if you’re going to use this, make sure your escalation amount is “worth it” to the buyer.  The more expensive the house, the more that escalation needs to be.  For example, if you’re trying to purchase a $800,000 property, you don’t want your escalation to be only $1,000. 

    You’ll get proof that your clause was invoked too.  The listing agent should provide the next-best contract page 1 as well as the financing addendum (with the names redacted).  You’ll also need to modify your own contract by increasing your purchase price to the escalated amount so if something seems fishy (such as the listing agent’s refusal to provide proof), you can still walk away because you don’t have a ratified contract.

  1. DCBuyer said at 11:53 pm on Tuesday March 4, 2014:

    How easily can a selling agent fake a counter offer, especially if the names are redacted?

  1. Michael said at 9:46 am on Wednesday March 5, 2014:

    Nothing is impossible. But it is unethical and highly illegal.

  1. anon_1 said at 11:22 am on Wednesday March 5, 2014:

    agree with @Michael.  bought house with escalation clause some time ago, and even then the amount was more like $5K - $4999 is not a huge amount to overpay if it exceeds a competing offer by $1 (somewhere between $1 and $4999 most likely)

    What I don’t like about the escalation clause is that it takes price above other considerations.  As a seller, I may prefer one buyer who brings more cash or faster closing than another willing to match price but needs to financially extend to get to closing.  If I’m making good bank on a sale, I might forego a few grand to ensure a speedy and hassle free sale.

  1. DCBuyer said at 11:33 am on Wednesday March 5, 2014:

    @Michael:  Certainly it is unethical and highly illegal.  But so is falsely claiming an escalation without documented proof, and you seem to worry that selling agents might do that.  I just wonder if there is any reason to think they would do the first but not the second. 

    There is a lot of money at stake, so I wouldn’t be surprised to find out that people falsify documents.  It would be hard for anybody to catch them.

  1. Michael said at 11:10 am on Thursday March 6, 2014:

    @DCBuyer

    I don’t worry that a listing agent would do that, I just wanted to point out that it’s not impossible to do.  I’ve never come across that as a buyer’s agent and as a seller’s agent I’ve never hesitated to provide all the proof that’s required.

    But, if you don’t get the documentation you require then you don’t change the price you offer.  The clause just says you’d pay “this much more than the next person”, it doesn’t change the contract.  You still have to change the offer price on the contract and financing addendum.  So, there IS a safety net if something smells fishy and you don’t get the proof you require.

    @Anon_1
    Price isn’t the only thing that a listing agent looks at.  Granted, it IS important (and the “bottom line” is what most sellers honestly care about), but just last week I wrote an offer with an escalation clause on a property just off U Street.  We didn’t have the highest escalation, but since we were putting so much down we were willing to forgo the appraisal contingency.  That made us stand out even though we didn’t offer the most amount of money.

  1. Chet said at 1:29 pm on Thursday March 20, 2014:

    The bidding war is on in Bethesda. Two houses we considered (but did not offer on) have evoked escalation clauses causing the price on one home to go $125,000 over ask.

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