08.18.2025 PropStream
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Key Takeaways:
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During intense bidding wars, every minute counts. Imagine you’ve just submitted a competitive offer on a house for your client, only to find out someone has outbid you. You call and text your client multiple times with no response. By the time they call back, the seller has already chosen the competing offer.
It’s a frustrating outcome—one that could have been avoided with a well-crafted escalation clause.
What exactly is an escalation clause? How does it work in real estate? And what are the pros and cons? Find answers to these questions, plus best practices, below.
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What Is an Escalation Clause in Real Estate?
An escalation clause—or “escalator clause”—is a provision in a buyer’s contract that automatically increases the offer by increments up to a maximum amount if other buyers outbid them. The clause includes three key components:
- The initial offer amount
- The increment amount
- The maximum offer amount
Buyers are more likely to use this strategy to gain a competitive edge during bidding wars, especially in a hot seller’s market.
How Does an Escalation Clause Work?
Let’s say Buyer A offers $450,000 on a home, with an escalation clause that increases her bid by $2,000 up to a maximum of $475,000 if necessary.
Buyer B then makes a bid of $455,000. Buyer A’s offer automatically rises to $457,000, keeping her in the lead.
However, if Buyer C comes along and offers $476,000—exceeding Buyer A’s maximum offer—then Buyer A will no longer have the highest bid.
Pros and Cons of Escalation Clauses
Escalation clauses can be a smart choice in the right circumstances, such as for properties that will quickly garner multiple bids.
Here are some pros and cons to consider before adding one to a contract:
Pros and Cons of an Escalation Clause |
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Pros |
Cons |
| You don’t need your client’s express permission to increase the offer each time someone outbids them. This can save time and, in some cases, mean the difference between losing and winning a bidding war. | It shows sellers up front how much your client is willing to pay for the property. Some sellers may use this to try to get a buyer to increase their initial offer. |
| The price increases only if a verified buyer outbids the initial offer. | When multiple buyers use escalation clauses, it can sometimes create confusion. If a seller feels overwhelmed trying to track all the bid escalations, they may decide only to entertain traditional offers. |
| It can make your client’s offer more compelling by showing they’re serious about purchasing the property. | If not capped carefully, your client could overpay for the home. If the appraisal is lower than the final sale price, overpaying can make it hard to obtain a loan. |
| It can help speed up the negotiation process by weeding out lower offers. | You run the risk of increasing the bid even if a higher competing offer wouldn’t otherwise be accepted (for example, if another buyer offers a few thousand more than you but includes contingencies the seller won’t accept). |
Using an Escalation Clause: Tips for Real Estate Professionals
Whether you’re a real estate agent, broker, or consultant, there are several things you can do when considering an escalation clause to ensure your clients achieve the best outcome possible.
1. Coach Your Clients on When to Use One
Some buyers may want to use an escalation clause if they have their hearts set on a particular house. However, doing so might not be a good idea unless there are clear signs of a potential bidding war. Using an escalation clause when it’s not necessary can weaken your client’s negotiation power.
2. Look Through Competing Offers Carefully
Before including an escalation clause in your client’s contract, be sure to thoroughly review any existing offers. Take note of their contingencies, financing, and other offer terms that could impact your client’s bid.
3. Consider Legal Expertise
Make sure the escalation clause is clear, legal, and protects your client’s best interests. You may want to hire a real estate attorney to write or look over the clause before finalizing the contract.
4. Use PropStream to Assess Fair Market Value
When crafting an escalator clause, it’s essential to consider fair market value to avoid offering above the home's value, particularly if the buyer is leaning on financing (the lender typically will not overpay for a property).
Be sure to use reliable real estate data software like PropStream to help your client determine a maximum offer amount. On PropStream, simply search for the specific property to view its estimated value, or use our comparative market analysis tool to dig deeper.
While escalation clauses can be a strategic tool in a seller’s market, you must know when and how to use them to get the best results. With careful planning and thorough market research, you can protect your client’s best interests while still making their offer as competitive as possible.
