It’s the Perfect Home. Should I Include an Escalator in My Purchase Offer?

When you make an offer on that dream home, your agent might suggest using an escalator, also known as an escalation clause.

When your written purchase offer has an escalation clause, it raises your purchase price by a certain amount above competing offers, until the offer reaches the highest you’re willing to pay. Through the language of the clause, the home buyer sends a firm message: “I will beat any offer.”

You might have heard that escalators are potentially harmful to a buyer, and wonder whether your agent is right to suggest one. Let’s take a look at the pros and cons.

Escalators Have Their Ups and Downs

Usually, the reasons for avoiding escalation clauses are:

• An escalator can easily lead you to pay above market value for the home.

• Using an escalator means competing with any price offered by someone else, although the other price could come with significant contingencies.

• Escalators can make a seller hesitant to take your offer. The seller might try to get others to offer more, just to make you offer more.

• The use of escalation clauses could also make an offer take longer to be accepted, as the seller goes back and forth proving bids have come in.

• The seller knows what the buyer is willing to pay. This might close off opportunities to negotiate over other things, not just price.

• Sellers may find the whole idea too complicated. Just give me your best offer in the first place, they might insist.  

But on the upside, when an escalator works as intended…

• If homes are selling fast, you’ll need something to help make your offer stand out in a competitive market.

• The buyer who uses it has a very good chance of getting the home.

• An agent can craft an offer that caps the number of raises, letting the buyer off the hook if the clause leads to a purchase price that’s unacceptable to the buyer. (Otherwise, if two or more buyers were to include escalation clauses in their offers, a bidding war may follow without a ceiling.)

But a buyer’s agent or attorney is not always comfortable suggesting an escalator. And there are reasons to be uncomfortable. Let’s examine them.

Stepping Up: Your Offer Could Shoot Above a Home’s Appraised Value

An escalation clause can propel your offered price well above the home’s value. Of course, your lender won’t be happy about financing more than the appraised value. In this case, your mortgage loan doesn’t fully fit the offer. So, the buyer needs to bring more cash into the deal. In the industry’s words, you’ll be covering the “appraisal gap.”

Perhaps you are OK with this. You write into your offer that you’ll cover any gap with cash. But if you don’t have the cash to cover it, the sale could fall through.

An escalator may come with an appraisal contingency, meaning your highest purchase offer will be capped by the amount of the lender’s appraisal. You can also cap the amount you’ll pay into the gap: $10K or whatever you determine is OK.

Now for the Legalese: What’s in the Clause?  

Here’s what’s normally in the escalation addendum to a purchase offer:

• The buyer’s original offer price (often based on comparable properties).

• Escalation amount. This shows how much your offer will rise if a competing offer shows up. Increments should be meaningful. An increase of $1K to $5K per step is usually effective.

• Proof of another buyer’s “bona fide offer.” That is, the seller is expected to show that they’re not just making up the existence of a higher offer. The higher offer triggers the escalator and creates a new bid to beat it.

The buyer’s agent delivers the offer and addendum to the seller’s agent. Both sides must understand the implications of what they’re signing. A consultation with a real estate lawyer is helpful support here—for each party. Each has interests to protect.  

And what about the whole idea of showing one buyer what other buyers are doing? Is that always feasible or fair?

Note the North Carolina Real Estate Commission’s rule stating:

A broker shall not disclose the price or other material terms contained in a party’s offer to purchase…real property to a competing party without the express authority of the offering party.

With an escalator in play, other potential buyers would have to give express permission to share information that their “bona fide offers” were made and for how much.

How likely are other potential buyers to freely share what they say and do? How would proof of any competing offer that triggers an escalation be available? Would a North Carolina brokerage want its agents suggesting escalators, given the industry’s rule? No brokerage wants to deal with disciplinary action by their state commission.

And that’s not all. Real estate brokerages that issue escalation clauses could face challenges for the unauthorized practice of law. So, North Carolina buyers are urged to hire attorneys if they want to make offers with escalation clauses. Most buyers pursuing ordinary home purchases won’t do this.

Policy varies across the states. In some areas, escalation clauses are not unusual. But no matter where a buyer is looking to acquire a deed, the policy in North Carolina is a cautionary message.

The Key Takeaway

An escalation clause doesn’t automatically win in every home sale. It creates a high bid. But sellers don’t always decide to sell to the highest bidder. They may have other priorities. These could include contingencies in the various offers, timelines, how much is offered in cash, and so forth.

In any case, if you and your agent expect competition for the home you want, the escalator is one tool to help beat it. It’s a way of automatically topping all other bids for the home. On the other hand, it can encourage bidding wars, and cause you to pay more than you should.  

Generally, an escalation clause makes a buyer stand out as motivated and committed. But there are other ways to make an impression with less risk. You could submit a preapproval letter with your offer. You could come in with a large cash down payment. And so forth. So, while it’s good to be familiar with the escalation clause, treat a recommendation to use it very carefully.