In this seller’s world of competition, one strategy we’ve come across increasingly is the Escalation Clause. Let’s go over what this means, and what it could mean for you as a buyer.
When a house is getting multiple offers, to benefit the seller and simultaneously give buyers the best fighting chance, the Listing Agent may ask for Highest and Best. This avoids having to counter or Multiple Counter. If you’d like to learn more about this second option, please read our blog Multiple Counter Offers, Explained.
When competing, an Escalation Clause ensures a buyer will beat any other offer by a specified amount. Often, this clause will also have a cap to ensure the buyer does not go over what they’d like to pay for the home. For example, on a $250,000 home, an Escalation Clause offer may state that the buyer will beat any competing offer by $1000, up to $265,000. The only way this offer will be beaten is if someone writes an offer above $265,000, or also writes an escalation clause with a higher, or no, cap. An Escalation Clause with no cap is very risky, however, especially if the buyers have a limit on what they qualify for. It may also end so high that the home does not appraise.
One last thing to keep in mind is that two offers, although unlikely, may offer the same Escalation Clause, possibly with the same cap. This would probably end with a Seller asking for absolute Highest and Best. Or choosing whomever offers the most amenable closing dates and Contingencies. An all cash buyer may also edge out the competition here.
Escalation Clauses are not without risk in any scenario, as there is no perfect mechanism to verify what the other offers are that trigger the final sales price. In Montana, an agent can not disclose the terms and conditions of an offer to anyone not involved in that specific offer, so simply sharing a copy of the next best offer to verify the price does not work. There is an element of trust and unknown that makes these less than desirable. Other states have a form for this situation, but currently Montana does not.
I hope this helps you understand your options, and as always: the more you know the better off you’ll be!