An escalation clause, also known as the escalator clause, is a language that is commonly used in a purchase offer for a home that is intended to make sure that the buyer is the highest bidder. An escalation clause should answer the following questions:
✔ What was the original buying price?
✔ How much will that price be escalated above other competitive bids?
✔ What is the maximum purchase price in case of multiple offers? (price cap)
Escalation clauses are unnecessary to use, but the buyers might consider using an escalation clause to buy a home under the right circumstances described below.
● There are multiple offers on the subject property
It is used when the buyer is confident that the property will receive various offers, which means more competition. Therefore, an escalation clause would be necessary to beat the offers and win the bid. It is the primary consideration before opting to use an escalation clause.
● The buyer does not want to overpay
The escalation clause protects the buyer financially because it prevents the buyer from paying more than they were willing to pay for the property. The escalation clause will keep bumping up the buyer's price only when competition for the property exists. Then, once the offers have stopped, the buyer's final price would be the amount he was willing to pay for the property.
● Increase the chances of owning a home
It is also an important point to consider before writing an escalation clause. It gives the buyer a competitive advantage over the other bidders. The buyer will only lose the bid when a higher amount is offered that exceeds the price cap. However, some risks are accompanied by using the escalation clause here; you are laying your cards on the table right from the outset as a buyer. You are letting the seller know the amount you are willing to pay, and that is risky as nothing will stop them from presenting you with a counteroffer at your ceiling price and ending up losing the bid.
Conclusion
The buyer does not necessarily need an escalation clause to own a home. However, under the given circumstances, the buyer might consider writing an escalation clause to increase the chances of owning the house at a price that does not strain them financially.
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