The real estate market is notoriously capricious. When the market is sluggish, a home may languish on the market for weeks without an offer. But when the market is vigorous, multiple offers can result in a bidding war on a property – an enviable position for a seller, but less than ideal for a buyer.

A motivated buyer with a strong desire to purchase a property can consider adding an escalation clause when making an offer on a house. An escalation clause might strengthen an offer under certain circumstances, but there can also be disadvantages to including such a clause.

What is an escalation clause? 

Let's say that a buyer and his or her agent are fairly certain that a property will see multiple offers. When crafting an offer, the buyer can offer a certain amount, but include the proviso that if the seller receives a higher offer from a competing buyer, he or she will pay a set amount more than that competing buyer's offer.  This is an escalation clause. Often, the buyer will also include a maximum amount that he or she is willing to pay.

How does it work in practice?

Let's imagine a scenario in which Buyer A makes an original offer of $250,000 on a home, with an escalation clause stating that he or she will increase that offer in $5,000 increments over any competing, higher offer, with a maximum offer of $265,000. If no other offers are submitted, Buyer A's offer would remain static at $250,000. If Buyer B comes along and submits an offer for $255,000, Buyer A's offer would rise by $5,000 to $260,000. If Buyer C comes along and offers $270,000, however, Buyer A's maximum offer would be exceeded and Buyer C would then have the top offer.

What are the pros and cons?

For a buyer who has the means to go higher than his or her original offer, including an escalation clause can ensure that he or she ends up with the highest offer on the table, which is likely to result in the seller's acceptance of the offer. But the inclusion of an escalation clause can also backfire. If the buyer includes a maximum offer price, it tips his or her hand to the seller, who now knows just how high the buyer is actually willing to go – and if there are no competing offers, that seller will now be able to counteroffer to the buyer, being aware that the buyer is willing to go higher. And escalation clause or not, if a competing buyer is willing to pay more than the original buyer's maximum offer, a buyer can still be outbid. It's also important to note that some sellers (and some sellers' agents) simply won't accept offers containing escalation clauses because they would rather see exactly what all buyers are willing to pay up front.

In cases in which a property is likely to see multiple offers and even a bidding war, an escalation clause can give a buyer a leg up on competing offers. But when multiple offers may not be forthcoming, it can actually jeopardize the buyer's original offer by opening up the possibility of counteroffers.

When considering how to craft the best possible offer on the house that you want, it's important to have a savvy real estate agent on your side. An understanding of current market conditions is vital, and your agent should be experienced in leveraging escalation clauses if you intend to include one in your offer. If you're unsure an your agent has the expertise to craft the most competitive offer you can make, get a solid referral for an experienced agent before you start your home search.

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