Definition
An escalation clause is a contract provision that allows a buyer to automatically increase their offer if competing bids are received on a property. It is commonly used in competitive real estate markets where multiple buyers are bidding for the same home.
Explanation
An escalation clause helps buyers remain competitive without overpaying upfront. The clause typically includes:
- Initial Offer Price – The starting bid from the buyer.
- Increment Amount – The amount the buyer is willing to increase their offer over the highest competing bid (e.g., $5,000 above the highest offer).
- Maximum Price Cap – The highest price the buyer is willing to pay.
If no other offers are received, the buyer’s original offer remains in place. If multiple offers exist, the escalation clause ensures the buyer remains competitive up to their maximum limit.
Example
A buyer submits an offer of $450,000 on a home and includes an escalation clause stating:
- If another offer is received, they will increase their bid by $5,000 over the highest offer.
- Their maximum offer limit is $475,000.
If another buyer offers $460,000, the clause automatically increases the bid to $465,000. However, if a competing bid reaches $480,000, the buyer’s max cap of $475,000 prevents further increases, and they lose the bid.