Find Your Next Real Estate Deal
Search Now

Escalation Clause Template: When and When Not to Use One

Jerry Norton

Apr 24, 2024

black and silver padlock on white door

Real estate investing can be highly competitive.

When it comes to buying a property, with other investors putting in offers and creating a bidding war, what can you do to improve your chances? 

There is a strategy you can utilize that automatically increases your initial offer if a higher competing offer is made. Plus, you can put a cap on your offer so that you don't overpay for the property.

It’s called an escalation clause, a powerful tool for real estate investors looking to buy property in a highly competitive market.  

In this article, we’ll break down:

  • What an escalation clause is
  • The advantages and disadvantages that come with an escalation clause
  • When it's best to use one
  • and more

If you’re ready to learn more about an escalation clause, let’s get started! 

What is an Escalation Clause? 

An escalation clause tells the seller you are willing to pay a certain amount, but if they receive a higher offer from a competing party, you will increase, or escalate, your offer. 

In the event of a bidding war, the escalation clause is designed to help buyers stay in the game — and save time — by automatically increasing your offer without the need for constant negotiations or counteroffers.

Picture this: a property with advantageous ROI potential hits the market. Maybe it’s a simple fix and flip in a growing neighborhood, or a property with several rental units. Either way, real estate investors pounce. 

By putting in an escalation clause along with your initial offer, you give yourself a leg up on the competition. If another buyer offers a higher price, your offer will automatically increase too, eliminating the need for back and forth negotiations. 

Not only does this save time — it reduces your risk of losing out on the property. 

For example, you as a buyer may offer $500,000 with an escalation increment of $5,000. If a competing offer is submitted for $510,000, the escalation clause would automatically increase your offer to $515,000 to remain competitive.

Advantages of Using an Escalation Clause

There are several advantages of using an escalation clause. These include:

Win a Bidding War

One of the primary benefits of an escalation clause is the increased likelihood of winning a competitive bidding war. 

By automatically adjusting your offer, you can stay ahead of competing offers without constantly renegotiating. 

Ensuring a Fair Purchase Price

By setting a maximum offer limit and carefully considering the escalation increment, an escalation clause can help you pay a fair purchase price for the investment property without getting caught up in the heat of the moment. 

Reduces Stress

After putting in an offer, you may be on pins and needles waiting for the response. You might also question your offer: "Did I bid enough?"

An escalation clause takes that worry away because it will automatically increase if someone offers a higher amount, saving you peace of mind.

Disadvantages of Escalation Clause

Like any real estate investing strategy, there are disadvantages that come with an escalation clause. This includes:

Price Increases Beyond Value of Property 

One risk to keep in mind with an escalation clause is the possibility of triggering a bidding war that may drive up the price of the property beyond its actual value. 

This is why it’s critical to determine the fair market value of the property before setting both your initial offer and maximum offer limit — and sticking to the latter.

Not All Sellers Accept an Escalation Clause

Keep in mind that some sellers may prefer traditional negotiation and may not accept an escalation clause. 

Components of an Escalation Clause

An escalation clause typically contains three key components: the starting offer, the escalation increment, and the maximum offer. 

We’ll take a look at each one next. 

Starting Offer

The starting offer is the initial price the buyer is willing to pay for the property. 

Escalation Amount

The escalation increment represents the amount by which you are willing to increase your offer. 

This can range from $1,000 increments to $5,000 or more, depending upon the type and condition of the property. 

Maximum Offer

The maximum offer is the highest price you as the buyer are willing to pay for the property.

With this amount there are no more escalations — it’s the final and maximum amount. 

By setting a maximum offer that aligns with the property's worth, you can ensure that you’re not caught up in a bidding war and over pay for a property based on emotional decisions. 

When to Use an Escalation Clause

Like any tools within a real estate transaction, an escalation clause may not be right for every deal. 

That being said, it is most useful when:

If You Believe the Property Will Receive Many Offers.

The primary reason for using an escalation clause is if you believe a bidding war will commence for the property. 

If it’s full of fix and flip or rental potential, it can be wise to use an escalation clause to improve your chances of getting the property and saving you time in the process. 

Escalation Clause Template

_______ Date ___________

This Addendum is attached to and made a part of Purchase Agreement dated _____________ On property known as __________________________________________________________ (the “Property”).

The following provisions are incorporated into the referenced Purchase Agreement and shall supersede any provisions to the contrary contained in said Purchase Agreement.

1. ESCALATION TERMS: The following terms will apply to increase the purchase price in this Purchase Agreement.

A. ESCALATING FACTOR: In the event that Seller receives one or more additional bona fide offers to purchase the Property with terms acceptable to Seller (“Other Offers”), but which result in net proceeds of sale payable to the Seller equal to or greater than the net proceeds of sale payable to the Seller under this Purchase Agreement, then the sale price stated in this Purchase Agreement shall automatically increase to an amount which generates net proceeds of sale to Seller equal to $ _____________, in US Dollars, (“Escalating Factor”) in excess of the highest net proceeds of sale generated in such Other Offers.

B. CAP: The purchase price under this Purchase Agreement shall not exceed $ ___________, in US Dollars (“Cap”).

C. DOCUMENTATION: In the event that Other Offers cause the escalation of the purchase price in this Purchase Agreement the Seller will provide the Buyer with sufficient documentation to justify the purchase price increase.

D. MULTIPLE ESCALATIONS: The Buyer acknowledges that the Escalating Factor of this Purchase Agreement and the Escalating Factors of Other Offers may result in multiple escalations, and in some cases, escalation to the Cap.

2. ESCALATION INCREASE PROCEDURE: If the Buyer will be financing a portion of the purchase price and this Escalation Clause causes an increase in the purchase price under this Purchase Agreement, (check one): _____ The loan amount provided for in this Purchase Agreement shall remain the same, and Buyer shall pay any increase in cash at the time of closing _____ The Down Payment amount provided for in this Purchase Agreement shall remain the same, and any increase shall be added to the loan amount _____ The loan amount provided for in this Purchase Agreement shall automatically increase to be _______ % of the new purchase price of the Property _____ The loan amount shall not exceed $ ________ in US Dollars and Buyer shall pay any amount of the increase in purchase price which is not included in the loan amount in cash at the time of closing

3. TERMINATION: The terms contained herein are for the use and purpose of obtaining a mutually agreeable purchase price and shall be deemed satisfied and will terminate upon ratification of the modified terms of this Purchase Agreement for the above captioned property.

4. DISCLAIMER: Buyer acknowledges and affirms this Purchase Agreement and Escalation Clause has been made of his/her own volition and at his/her own discretion and Buyer agrees to hold Brokers harmless with regard to negotiation of the purchase price.

5. ACCEPTANCE OF COUNTER OFFER: In the event that Seller agrees to accept a purchase price within the terms of this Purchase Agreement and pursuant to this Escalation Clause, Seller will submit to Buyer a Counter Offer and a copy of this Addendum, with the purchase price adjusted according to the escalation provisions contained herein.

Acceptance of the Counter Offer will occur upon counter signature of the modified terms of this Purchase Agreement, by Buyer, and delivery to Seller of the fully executed Counter Offer.

All other terms and conditions of the Purchase Agreement to which this is attached remain unchanged.

By signature below, the parties acknowledge receipt of a signed copy of this Addendum.

Buyer’s Signature Date

Seller’s Signature & Date

The Bottom Line: Escalation Clause

In the right scenario, an escalation clause can not only improve your chances of winning a bidding war for a property; it can save you time and money in the process. 

An escalation clause is one tool to obtain funding for your real estate investments. If you’re looking for other tools and resources, learn how you can use a blanket mortgages to invest in real estate. Also, discover how many mortgages you can have. 

By investing in real estate education with these resources, you can maximize your profits — and reduce your risks in the process.