The Escalation Clause

It seems a bit ironic.  Although home prices in many areas of Fairfield County are stable at best, multiple offers continue to be prevalent.  One tactic used by some buyers in a multiple offer situation is that of the escalation clause.

An escalation clause contains language that includes the potential buyer’s highest offering price and a certain dollar amount above the highest offering price of any other buyer.

Pitfalls

There are a number of pitfalls for a seller accepting this type of offer.  The first rule of thumb in a multiple offer situation is to create a “level playing field.”  The escalation clause does anything but that.  It basically impedes anyone else from purchasing the home.

Secondly, if a higher offer is procurred, the seller is then obligated to show that offer to the buyer with the escalation clause.  It is seldom in the seller’s best interest to disclose the terms of another offer to anyone, let alone a potential buyer.  The ramifications are too great.

Finally, if the buyer with the escalation clause is willing to pay more than anyone else, isn’t it in the selller’s best interest to decline it, with the likelihood of recieving a higher offer from that potential buyer who no longer has a built in “safety valve?”

Whose Best Interest?

A multiple offer situation involves at minimum of three parties with a vested interest in the sale.  The seller, and at least two buyers.  The existence of an escalation clause protects that one buyer and that one buyer only, to the disadvantage of all other parties involved.

Have you ever been involved with an escalation clause either on the list or buy side?

How did you handle it?

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