What is an Escalation Clause?

August 18, 2020 by Paul Begich

You’d think that due to COVID-19 the Minneapolis real estate market would be in a tough spot – but contrary to popular belief, things are still flying off the shelf here in Minneapolis. This past July 2020 we saw an increase in Pending Sales of over 12% compared to July of 2019 – that’s a pretty darn big increase!

In hot real estate markets where properties are receiving multiple offers and properties are being sold over list price a popular technique used by savvy realtors (yours truly!) is the escalation clause.

Let’s talk about what the heck an escalation clause is and more importantly, when to use it!

Let’s use a real-world example of what an escalation clause is:

Property 123 Main Street is listed on the MLS for $100,000. This is a smoking hot deal in an IDEAL neighborhood. This is EXACTLY what you as a buyer have been looking for – it’s your dream home! You tour it, fall in love, and want to submit an offer ASAP! Your realtor (that’s me!) knows the property is priced to sell and there’s going to be multiple offers on the property.
We decide to submit a full price offer of $100,000 with an escalation clause up to $110,000 in increments of $1,000. What does this mean? This means if another offer comes in above our initial offer of $100,000 – say $105,000 – our offer instantly increases to $106,000 ($1,000 above the next best offer). Although, if no other offers are submitted we only have to pay our initial offer price of $100,000. Should another offer come in at $115,000 unfortunately, we’d be out of the running because our escalation clause only went up to $110,000.

Now, more importantly, when is it appropriate to use this escalation clause? This is important because there are certainly times when we DON’T want to use this clause.

There’re two instances – and they often coincide – when I think it’s very appropriate to use the escalation clause.

1) When there’s a multiple offer situation and

2) when the seller/selling agent is calling for highest and best offers at a very specific time (as in “all offers due by Thursday at 5:00 pm”).

In both of the above situations we KNOW we’re competing against other offers and if you absolutely love, love, love, the property we want to make sure we’re being as competitive as possible with our offer. There are many strings that we can pull to make our offer more competitive but at the end of the day sellers are looking for the highest purchase price possible – the escalation clause is an excellent tool to get there.

This is just one of the many tricks of the trade in real estate and something I bring to the table for ALL the buyers I work with – if you’re looking for your dream home and want to be absolutely sure you’re not going to lose out on it, let’s talk! I’m here to be your real estate guide to home ownership.

Reach me on instagram at @penthousepaul, by phone at 952-847-3406, and by email at Paul@DRGMpls.com. I respond to EVERYONE!

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