Beware the Escalation Clause

    Beware the Escalation Clause

    Mar 02, 2021

    In this market where multiple offers are common, buyers are pulling out all the stops to try and successfully compete. Some buyers are resorting to the use of an escalation clause. This works by offering the seller $1000 (for example) more than the highest bid the seller receives from other buyers. The clause may contain a cap to limit the buyer’s price exposure.  Below are just some of the reasons why this is not a good idea.

    • An accepted offer with an escalation clause may not be an enforceable contract since it does not contain definite terms. Potentially either buyer or seller could later change their mind and claim no legal contract was formed.

    • If the escalation clause contains a cap, it basically tells the seller the top price this buyer is willing to pay. A smart seller could reject all offers and counter back to every buyer with a request for new offers not less than the cap.  

    • Escalation clauses create exposure for buyers since they don’t know what they will actually be paying for the property. Will they qualify? Will the house appraise? 

    • What if several offers come in with an escalation clause? Who wins the bid? 

    • If a legal escalation clause were to be written by an attorney, it would probably be a page long of legalese in order to protect the buyers. Not exactly enticing to a seller.

    There are many ways to write a compelling offer without an escalation clause. Whether selling or buying, contact me if you want to effectively navigate this complex market.