What Is an Escalation Clause and Should I Use One on My First Home?

Freddie Mac describes it simply. The clause raises your price by a set increment over a competing offer until you reach your maximum. It only matters when there are competing bids. Fannie Mae describes it as agreeing to automatically raise your offer to a predetermined amount if another buyer bids higher.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. First-time buyers often ask me about escalation clauses after losing out on a home. It's a fair question, and the answer depends on the details.

Most escalation clauses have three parts:

1. Your starting price. What you offer before any competition is considered.
2. The increment. How much you'll go above a competing offer.
3. Your cap. The most you're willing to pay.

Here is Freddie Mac's example: with a $3,000 increment and a competing offer of $300,000, your price would become $303,000, as long as that's at or under your cap.

• You don't overbid blindly. You only go up if there's a real competing offer, and only as far as needed.
• It shows the seller you're serious. It tells them you're ready to compete.
• It can save you from losing by a small amount. Being outbid by a few thousand dollars on a home you love is painful.

You reveal your top number. Freddie Mac notes that the seller learns your maximum up front, which can take away room to negotiate.

The appraisal may not keep up. If your price escalates above what the home appraises for, your lender bases the loan on the appraised value. Freddie Mac explains that when an appraisal comes in below the offer price, buyers may need to renegotiate, bring more cash or walk away, depending on the contract. The CFPB explains that you're entitled to see a copy of your appraisal before closing, so you'll know where you stand.

The highest price doesn't always win. Freddie Mac points out that sellers also weigh timing and contingencies. A clean, well-prepared offer can matter as much as the number.

Not every seller accepts them. Some sellers and listing agents prefer each buyer's best and final number instead. Others respond with a counter offer to everyone.

Ask yourself these questions:

• Is there likely to be competition? If the home is getting little interest, an escalation clause may only push your price up.
• Does the seller accept them? We can ask the listing agent how offers will be reviewed.
• What is my true maximum? Set your cap at a monthly payment you're comfortable with, not the most a lender will approve. My article on how to avoid being house poor can help.
• Do I have cash for an appraisal gap? If not, your cap should stay close to what you expect the home to appraise for.

If you'd rather not use one, there are other ways to strengthen an offer. My article on deciding how much to offer walks through them, and my article on competing with cash buyers covers more.

The wording matters. Freddie Mac recommends involving a real estate agent or attorney to write the language. A clear clause usually covers:

• The increment and the cap
• That the competing offer must be a real, written offer
• Whether the seller must show you a copy of that offer
• How the escalation works with your financing and appraisal terms

This is general information, not legal advice. For questions about contract language, talk with a real estate attorney.

If you're getting ready to write your first offer and want to talk through your options, I'd love to help you build a plan you feel good about. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.