An escalation clause (also called a relative bid, or a sharp bid) is a provision written into the purchase contract that increases your purchase price incrementally above competing offers, to a set amount. An escalation clause is only triggered when there are competing bona fide offers.
For example, if you are writing a purchase offer on a home, you may be inclined to include an escalation clause. This means that you are planning on paying a specific amount unless the seller receives a higher offer. Under the escalation clause, your initial purchase offer will increase in price by a specified amount so you can be the winning bidder.
An escalation clause typically includes the following:
- Proof of a competing bona fide offer that was higher than the offer you submitted
- An escalation amount that outlines how much your purchase price will incrementally increase
- The maximum price you are willing to pay
Our thoughts on escalation clauses
Alicia and I dislike the escalation clause. If you find a home that you really want to own and you are in a competitive market, offer your best and final right off the bat. In order to ensure you are not over or underpaying, we will run detailed comps on every property we submit a purchase offer on.
Why we do not care to use an escalation clause
By utilizing an escalation clause, you are giving up your poker face, and exposing what you are willing to do under certain circumstances. If no other bids come in, the sellers know you are willing to go higher and could respond with a counteroffer.
Instead of an escalation clause, consider making your purchase offer as strong as possible, right off the bat. Here are some ways to do that.
- Offer a competitive price
- Offer a quick close. For example, work with a lender who can close a transaction in as little as 10-14 days, as opposed to the standard 30 days. Alicia and I have great lender partners we can recommend.
- Remove as many contingencies as possible. For instance, if the sellers have already obtained inspections from a reputable inspection company and no further research is required, you likely do not need extra inspections.
- Consider offering a rent back if the sellers would benefit.
- If work needs to be done to the home, avoid asking for a repair credit.
Keep in mind that an escalation clause is not a guarantee, and the highest-priced bid on a home does not always win. Sellers take into account multiple factors, including but not limited to closing timelines, contingencies, and who they are going to be working with through the length of the contract.
Torben Yjord-Jackson – Realtor
License # 02050831
Alicia Magdaleno – Realtor
License # 02065283
EXP Realty of California, Inc.