Escalation Clauses Losing Appeal as Bidding Wars Cool

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Escalation clauses may be giving away too much information in a bidding war, and more real estate agents are advising their clients not to use them. Apartment Therapy recently called escalation clauses one of the “shortest-lived real estate trends of 2021.”

The housing market remains competitive, but home buyers are realizing that escalation clauses are revealing to sellers exactly how much they’re willing to pay above asking price for a house. As a result, in some cases, they are costing buyers their ability to negotiate.

An escalation clause lets sellers know that buyers are willing to increase their offer if other, higher offers come in. They are added to contracts to offer immediate counteroffers.

For example, buyers may offer to purchase a home for $300,000 with an escalation clause that says they are willing to increase their amount to $325,000 if competing bids come in. Or the contract may state “the purchase price shall be $1,000 higher than any other offer,” within a stated limit.

The pandemic has made escalation clauses more popular as competition has sharpened. Some REALTOR® associations have cautioned their members about using the clauses. For example, the California Association of REALTORS®, in a 2018 document to its members, advised them to inform buyers to speak with their own legal counsel before making an offer with an escalation clause, and suggested brokers consider adopting a policy discouraging their use.