Let's say you really, really want to buy a certain house. You've fallen in love with it. But it's located in an area where the real estate market is hot, and other buyers will be eagerly vying for the same property. Perhaps by now you've been outbid more than once, and want this whole homebuying process to be over, even if you have to go to the top of your budgeted amount. If so, an escalation clause—which would match and exceed all other bids—is something you might consider adding to your purchase offer. But it's not an ideal solution, and this practice is not considered acceptable in some parts of the United States, as discussed below.
Let's back up and remember that a home's "list price" is simply a number the seller puts on the property to guide buyers as to how much to offer. If the real estate market is hot, sellers are typically hoping to receive much higher amounts, after lots of people get excited about the property and a bidding war ensues.
The trouble for buyers is, they can't know for sure how many other people will be putting in bids. And they can't know what price (and other terms) those buyers will be offering.
An escalation clause (also sometimes called an "escalator clause") is a way to turn this into a bit of an auction. It essentially says within the real estate purchase offer, "I will bid $x, but if any other buyer's offer is equal to or greater than this amount, I will raise my offer beyond theirs by an additional $x [typically an increment such as $3,000, $5,000, or $10,000], with an upper cap of $x."
How could a home seller possibly resist?
An escalation clause will definitely make your offer stand out in a multiple-offer situation. The seller will see that you're highly motivated to complete the purchase, and that you apparently have the financial capacity to do so. What's more, the terms of your escalation clause should automatically take your offer over the one that would otherwise be highest.
Then again, some home sellers simply refuse to accept offers with escalation clauses. They know it gives buyers a chance to set the base price relatively low, and put more money on the table only if higher offers come in. So, if everyone were to submit a base price on the low end (with or without escalation clauses), the seller could be out of luck. Flat-out refusing to entertain such clauses increases the possibility that eager buyers will offer sky-high amounts as a flat or base amount.
Or, the seller could sidestep the escalation clause, but come back to all interested buyers with a counteroffer requesting that they match or exceed the cap amount stated in your offer. Your maximum would become the minimum!
Also, some home sellers (or their realtors, if they're inexperienced) don't understand how escalation clauses work. You risk confusing them. And if multiple offers with escalation clauses come in, it really can get confusing; but in any case will likely take your offer up to or near its maximum amount.
In the worst-case scenario, you could end up with an unethical seller who pretends to have other offers that don't exist—or who says in a counteroffer, "You know, we have other offers with some tempting terms, so if you could sweeten yours to $x amount, we'll take it." The seller knows how high you're willing to go, and could choose a counteroffer amount that's far higher than any of the bids that came in.
This is something to discuss with your real estate agent, who will know what's traditional and accepted in your area, and the reputation of the real estate agent representing the seller.
Here are some sources of puzzlement for prospective buyers considering putting an escalation clause into their purchase offer.
For confidentiality reasons, the property seller can't be entirely open about offers coming in, and might not even know who else will be bidding until the last minute. Or, some offers might come with expiration dates, in which case it's sort of a moving target. But it might be possible for your agent to gauge the level of buzz by talking to the seller's agent, so that you can structure your offer accordingly.
This is the biggest concern with escalation clauses. In some, but not all states, the buyer can ask for proof of a competing offer and its terms. But most of the information in other buyers' offers is confidential. You'll have to hope that the seller's agent is trustworthy in such a situation.
Fortunately, the escalation clause kicks in only if another offer is higher than yours. On the other hand, the seller knows you have cash to spare, and might look for a way to counteroffer at a higher price (such as "to compensate for the long closing time" or some such thing).
Before you consider adding an escalation clause, make sure your agent has done as much as possible to ensure that other offers are truly coming in, and feels confident in the honesty of the seller's agent. Choose a maximum amount that you would feel comfortable paying, if it came to that.
Also add an expiration date to your offer, so that it doesn't remain open while multiple other ones come in. If and when your offer is accepted, move quickly to get an actual contract signed, so that the seller can no longer come back with counteroffers.
The decision to include an escalation clause in a home purchase contract is one to carefully consider with your real estate agent.