How to Stand Out in a Bidding War—Part III
Escalation clauses
Most newbie realtors don't know what an escalation clause is, and only experienced realtors know how to use escalation clauses to help the buyers stand out. In fact, when this strategy is misused, it can hurt the buyer. I have helped many buyers stand out among multiple offer situations using this strategy and win their dream property.
What is an escalation clause?
An escalation clause allows you to automatically offer at a higher price only if someone else offers higher, so you originally start at a lower number and if another buyer bids higher, the escalation clause allows you to add to your price up to a certain point. Therefore, yo can set a limit for the highest amount you are willing to go. For example, if someone bids $570,000 and you bid $560,000 with an escalation clause up to $580,000 (with an increment of let's say $2000), then you automatically beat the other offer at $572,000. If you include an escalation clause in your offer, the seller's agent will have to show you the other offer to prove that it is indeed at that higher price, even though normally seller's agents don't show other offers. An escalation clause creates a legally binding situation where only a higher price makes the number in the escalation clause valid. So the seller and the seller's agent can't just make up a number and ask you to bid higher. If the seller's agent doesn't plan on having a second round of offers after the first round, an escalation clause will allow the buyer to stay in the race automatically. Not all sellers allow an escalation clause, so I usually check with the seller's agent about their policy before making an offer.
Why don't other buyers or other buyer's agents use escalation clause?
Many agents don't know about an escalation clause. It's actually a bit complicated to explain for newbie agents, and it takes a lot more time to negotiate when there are more than one escalation clauses. Not all agents want to do so much work.
My view is that escalation clauses usually work in the buyer's favor in a seller's market because it allows the buyer to not commit to a higher price initially. No one wants to be that person that pays substantially higher than what everyone else wants to offer. Everyone wants to win by a minimal margin. An escalation clause number must be chosen carefully after evaluating the potential competitions. You don't want the increment number and the maximum number to be too high or too low. An escalation clause strategy that is not done right is like not having an escalation clause, and can even hurt the buyer. That's why it's important to discuss each specific case with an experienced real estate agent.