How an Escalation Clause May Win Over a Home Seller

Since 2020, the real estate market went crazy. We saw prices and demand spike to levels not seen in a very long time. Homes sold well over asking in less than a day on the market. Higher interest rates, inflation, and rising prices have tempered that feeding frenzy a bit. However, while those crazy times may have passed, sellers sometimes still receive multiple offers for their homes…especially in highly desirable neighborhoods. In that case, a buyer’s secret weapon may be an escalation clause. What’s that and when/how should you include it in your offer?

How an Escalation Clause May Win Over a Home Seller

What is an Escalation Clause?

As a potential home buyer, you offer a specific amount for a home. An escalation clause (aka “escalator”) says that you also offer to increase your price in certain increments up to a set limit. For example, let’s say the list price is $400,000. You offer $400,000 but then include an escalator of $5000 over the highest offered price up to $425,000. So, if the seller receives another offer at $415,000, your offer bumps up to $420,000.

When Should a Home Buyer Include It?

If you find yourself in a bidding war with other buyers, you might want to include an escalation clause as part of your offer. This especially rings true if you really believe this to be the home for you. First, it keeps you competitive with other buyers. Second, it keeps you levelheaded enough not to go above what you budget for the home. It’s very easy to get caught up in the “competition” of wanting to be the winning bid. An escalator automatically includes a limit. Third, it shows the seller how serious you are about buying the home.

On the downside, though, if you end up being the only offer on the table, an escalation clause puts all your cards on the table. It shows the seller how high you are willing to go to buy the house. Therefore, they may end up countering your initial offer with the escalated price. Then, you end up paying more for the home.

Talk over your options with your Southern California REALTOR® before deciding on what to offer the seller. They know the market. They can help you determine when an escalation clause is necessary and when you can go without one.

Muna Dionne, your Inland Empire specialist with Coldwell Banker Realty