- Escalation clauses automatically increase a buyer’s offer by a specified amount to outbid others.
- Some homebuyers said they’ve helped them land their dream homes in a tight market.
- Others warn against using them, arguing they take away your negotiating power.
With people around the US competing in a tight housing market, many are turning to a unique strategy: escalation clauses.
Escalation clauses are meant to help buyers beat the competition for an in-demand property. When would-be buyers put an offer on a home that they anticipate will have other offers, it automatically increases the buyer’s original offer by a specified amount in an effort to outbid everyone else.
Whether the buyer is notified before a seller applies an escalation clause depends on the particular contract terms, according to David Reiss, a law professor at Brooklyn Law School specializing in real estate. Some real-estate agents encourage clients to use escalation clauses, though not every state or seller allows them.
These clauses can give you a fighting chance by allowing you to skip some of the negotiation and back-and-forth, but can be harmful in that they show sellers how much buyers are willing to spend.
Insider spoke with several home buyers who used escalation clauses to understand the risks and rewards they come with.
An easier way to seal the deal
Greta Miller and her husband have been looking since March for a house to accommodate their baby and a growing family in Washington, Pennsylvania, outside of Pittsburgh.
In May, they put a cash offer of $150,000 on a century-old house in Cokeburg, Pennsylvania. They also included a $20,000 escalation clause, which went up in increments of $500. Miller didn’t end up getting the house, but she’s remained open to escalation clauses.
“It left us open to the possibility that maybe somebody else only said they’d go up to $160,000, and then we wouldn’t end up paying the full price that we were willing to,” she said.
After that, Miller and her husband put down an offer on another house in Washington that didn’t allow escalation clauses. They ended up increasing their offer by $2,500 after the seller asked for more. They also waived the house inspection and agreed to a leaseback.
Miller got the house, closing at the end of July, but wishes it had permitted escalation clauses.
“As a buyer, if these people would’ve allowed escalation clauses, we might not have ended up paying as much as we are for this house because we don’t know what the other offers were,” she said. “Our offer might have been the best, or we might have only had to go up $500. But we felt going up $2,500 was the safe thing to do. That was the max of what we’d want to pay.”
A necessary step to land your dream house
Some buyers credit their escalation clause for helping land their home.
After searching for nearly 10 months, Peter Dang and his wife bought a three-bedroom home in Orange County, California. They knew it was the one when they toured the house, so they offered 20% over the listing price to be competitive.
Another buyer offered just $2,000 over Dang’s offer, but Dang and his wife included an escalation clause of $5,000, so they ended up getting their dream home for $7,000 over their original bid. (Dang, a dentist, also offered 10 years of free teeth whitening to the seller. That didn’t end up in the final agreement.)
“I wish I didn’t have to. It’s kind of a necessary evil. But I am glad that it’s there because if it was best and final offers and we got outbid by $2,000, I’d be really upset,” he said of the escalation clause. “I wish we could have very open dialogue about housing prices and stuff, but that’s just not the nature of the beast. And I don’t blame the sellers for trying to squeeze every dime that they could out of me because I would do the same thing if I were in their position.”
Giving up the power to negotiate
Mary Kate Bishop and her husband have been looking for their first house since March in the South Bend, Indiana, area. She told Insider she uses Zillow on her phone, and whenever a house in the right price range comes on the market, she gets a notification. The couple then scrambles to be one of the first people to view the house, which usually already has multiple offers on it.
“We’re so scared that we’re going to end up buying something and then end up underwater within five years,” Bishop said. “We’re just trying to be as careful as possible, but strategic at the same time to try to find something.”
In May, as they stood in the kitchen of a house they were interested in, their real-estate agent recommended they try an escalation clause. Bishop and her husband offered $240,000 for that house — which was listed for $232,000 — with an escalation clause that raised the offer up to $10,000, increasing in $500 increments. That would be a maximum offer of $250,000 on the house, or $18,000 above asking price.
“I told my mom right after that we had decided to do that, and she was not very happy with me. She was like, ‘You shouldn’t have done that,'” Bishop said. “She was right.”
Bishop was glad when she and her husband ended up losing the bid on the house. She said the process felt unethical because the offer includes how much more buyers are willing to pay, which gives up the buyer’s power to negotiate and pushes their budget higher.
“We would end up paying way more not knowing if there really was another offer. It’s crazy,” she said. “In this market, when you have to go in $10,000 over asking just to even get them to look at your agreement, I just don’t want to be tricked into spending way, way over value.”
Knowing when to play the waiting game
In June, a month after the house offer with the escalation clause, Bishop and her husband lost another bid. They decided not to use an escalation clause this time because she said it feels like opening up their wallet to the seller and inviting them in.
They’re thinking about waiting to find a house in Indiana until spring 2022. Homes seem overvalued right now and escalation clauses don’t help the situation, she said. They don’t want to be stuck paying more than they’re comfortable with.
“This market’s not going to stay like this forever,” Bishop said. “It might burst pretty soon. So then we’re in a house paying a lot more than its value.”