I've been hearing a lot about this little idea called an escalation clause of late and wanted to offer a little insight into what it is and how it works.
What is an escalation clause?
An escalation clause, also known as an “escalator clause”, is a term that can be used in a buyer’s offer. The clause is designed to defeat competing offers by automatically increasing the buyer’s purchase price by a pre-set amount to trump a competing offer. The escalation clause should set a cap or upper limit on how much the purchase price will increase. Having a cap protects the buyer from going beyond their budget. Not including a cap could put a buyer in a precarious position.
From the buyer's perspective
Much like a bully offer, an escalation clause is an offer tactic that buyers can employ if they feel it might give them an advantage in the offer process.
However, before including an escalation clause it's imperative that you, the buyer fully understand that your offer cannot be revoked prior to the specified irrevocable deadline, and that you could be locked into a bidding war until your price cap has been reached.
The buyer and the buyer's Realtor will not be able to see the other offers to confirm their value. You have to trust that the seller and the seller’s representative will act honestly in managing the escalation clause.
From the Seller's perspective
Depending on how an offer with an escalation clause is crafted you will have two identical, or nearly identical offer amounts to consider. There are of course other factors to consider such as closing date, conditions, and deposit. One thing that is important to remember is that the seller is free to select the offer he/she/they wish to work with. The seller is at no time compelled to accept the offer with the highest price, or for that matter any offer at all.
Do I need one?
No, you do not need an escalation clause in your offer. Each situation is different and there may be cases where including this type of clause is a good idea, but it's never necessary and it's no guarantee that your offer will be selected by the seller.