The “Escalation Clause” Conundrum

multiple-bidMultiple offer situations have become so common this year, I knew that sooner or later I was going to have to deal with an offer that contained an “escalation clause.”

What’s an “Escalation Clause?”

When new listings bring in multiple bids, listing agents often create a time table and request that all offers be submitted by a certain time. Usually, the listing agent indicates that there will not be further bidding rounds, and that bidders should make their “best, last and final” offer by the deadline. When a buyer expects that he will not have an opportunity to raise his bid later, it is difficult to determine how much to bid to secure the property without bidding far more than may be necessary. Some agents have begun to put in language whereby the buyer will pay an amount exceeding the highest offer, usually up to a certain amount. This language is often referred to as an “escalation clause.” I recently received an offer with one as follows:

“Buyer agrees to top any offer on the table by $2,000 up to a total purchase price of $490,777 with proof of the other offer.”

Fortunately, another buyer made a bid over the amount indicated in this clause, so my seller-client never had to respond and negotiate with the escalation clause bidder. Escalation clauses are not popular with listing agents. As a listing agent you may likely have one or more offers with firm prices on them. Then you have this other offer with an escalation clause. What do you do? Do you go back to the bidder who made the offer to see if he is really willing to stand by the terms of the clause? What if the ceiling number is truly absurd and it is obvious that bidder is looking for an opportunity to beat the highest offer? Do you show him the other offer? Do you just refuse to play the game and ask him what his final firm number is? Are any of these scenarios really fair to the other bidders and does it matter? I think these issues can be navigated, but I am not sure it is really worth the risk that comes from putting the listing agent in this thorny situation. There is a clear risk that the listing agent may not cooperate with you, and you may never actually get a chance to make your best offer. I think this is a significant risk. The better strategy may be to do the hard work of figuring out how much you are really willing to pay, and then make a firm offer of that amount.