Escalation Clauses in Real Estate
- Adam Garrett
- Dec 21, 2023
- 6 min read
Updated: May 2, 2025
What is an escalation clause?
With an escalation clause, a buyer could make an offer for $400k on a home listed for $450k, with an escalation clause up to $500k. Escalation clauses are good typically when you suspect that there will be other offers or when you know that there are other offers. In a sense you are giving away how far you are willing to go up, and the seller may counter with $500k even without another offer, although that would be very unusual, especially if you aren’t requesting closing cost assistance. One of the reasons to present an escalation clause is that you don’t know if the seller will only look at the initial offers without asking for “highest and best” between buyers or doing a bidding war. While it’s wise for the seller to do either of the 2, some sellers just go with what they are first offered. Often sellers won’t disclose which way they will go in that regard & you will only know after they have responded to you by their response.
Escalation clauses typically have a cap.
Escalation clauses typically have a cap, whether based on the offer price or based on the buyer’s preapproved amount. The escalation clause has a provision that allows for you to request that the seller provide the next highest offer that activates the escalation clause. Some buyers have uncapped escalation clauses. I do not recommend these.
It's generally best with the cap to go slightly over a $10k increment, and that can look differently, depending on the circumstances. Generally speaking, the higher the volume of offers, and the less that the listing agent is willing to say about those other offers, the safer you are to go high with an escalation clause if you really want the house.
Rather than $850k for a house listed for $800k, you could offer $851k.
If a home is listed for $499k, rather than an escalation clause for $530k, it would be better to make the offer for $531k.
Escalation clauses specify an amount to go over the next highest offer.
With an escalation clause, not only is there typically a cap, but there is also an amount that buyers can insert to go over the next highest offer. Some buyers try to get away with small amounts, like $100, but the problem with that is that there are non-numerical factors involved in a sale. For instance, a standard sale buyer only offering $100 more than an as-is buyer, would be an easy reason for the seller to pick the lower offer where a typical home inspection request would exceed $100. 1% is a better # to go by with escalation clauses because of the non-numerical factors. A cash buyer with no inspection & no appraisal can sometimes beat a buyer with a loan & inspection that is at a price of thousands more, so sometimes more than 1% is even better, especially if you have more than the usual volume of contingencies, i.e. a home sale contingency.
What an escalation clause often looks like in Hampton Roads (52-line form)
What an escalation clause looks like really varies depending on the location. If I'm in Hampton Roads, there's a whole 52 line, 2 page form on the subject of escalation clause, with the below opening 15 lines with the key elements:
It also includes the following provisions
If the buyer wants to do something like having a very high cap, or no cap (which I don't recommend), but still some measure of protection, here's a clause you will sometimes see in other provisions:
Here are the final elements:
What an escalation clause looks like (much more brief) typically in SE VA outside of Hampton Roads (& which could be used in some other states, though be sure to confirm with the contract & with local law before use)
If I'm using a VAR contract (popular around Richmond and in much of SE VA excluding Hampton Roads), I simply insert a relatively small clause:
"If seller receives one or more bona fide written offers to purchase the property prior to acceptance of this contract, then the purchase price shall be increased by $__________ over the highest bona fide offer, net of concessions, received by seller, not to exceed $_________. The parties intend this contract to be a binding contract, and not an offer to enter into a contract at a later date. The price determination will take place as set forth herein, but the fact that the price is not determined as of the time this contract is fully executed by both parties shall not defeat the existence of this contract. Listing firm shall provide selling firm with a copy of the highest bona fide purchase offer."
I pulled this clause directly from the Virginia REALTORS Standard Clauses at some point prior to 2023, but it remains the same on 12/21/23 in section 4.1 (Escalation Clause).
If I'm using a conventional loan & a VAR offer, whether I use an escalation clause or not, I also typically insert the following important clause (whereas VA & FHA offers typically have this information built-in for VAR contracts), which is a modified version originally taken from one of the options in section 2.2 (Appraisal Contingency) in the Virginia REALTORS Standard Clauses, similar to their 2023 version:
"This contract is contingent upon the property appraising at or above contract price minus $_______A________ in an appraisal ordered by the lender, paid by the purchaser. In the event appraisal does not support the contract price, buyer shall pay up to $_______A________ above the appraisal, cash at closing, not to exceed the contract price. If said appraised value is not equal to or greater than $_______A________ below contract price, purchaser reserves the right to either: a) waive this contingency and proceed to settlement, or b) renegotiate the terms of this contract, or c) terminate this contract & receive a full refund of earnest money deposit."
The section in red is an optional way to sweeten the deal in a hot market &/or multiple offer scenario.
Proof of funds &/or preapprovals
Proof of funds &/or a preapproval, when using an escalation clause, should show the amount up to the cap of the escalation clause. If an appraisal guarantee is made in the event that the appraisal is below the contract price, the amount of the guarantee should be demonstrated as available via proof of funds, i.e. a bank account statement showing the name of the purchaser, the date, and the amount in the account, which should be sufficient both for the gap and for any other funds needed (i.e. closing costs/prepaids if the seller isn't covering them in full, any down payment, etc.).
Virginia Association of Realtors info on escalation clauses
Escalation clause special inclusions to consider depending on circumstances
Often escalation clauses include default language that buyers and buyer's agents don't change. That's sometimes a mistake.
There is a way to make the escalation one that is uncapped, or have a cap that you are not that comfortable with, while retaining a measure of control where you are not locked into going to unlimited heights. You could add in a phrase like "Buyer shall have the right to approve the final escalated price prior to contract ratification." That said, make sure that if doing so, you've either redacted other language accordingly, or verified that the escalation clause form used for an escalation clause (or, to a lower degree of liability protection, the primary contract you are using if not specified directly in the escalation clause form) stipulates that written in language supersedes default contractual language when the two conflict.
If you are making an offer that doesn't require items like the following, you might want to add in a provision that the escalation is only triggered by other offers with a certain strong provision(s) that your offer includes, or possible alternative strong provisions that your offer doesn't or does include, i.e.:
a home inspection contingency
an appraisal contingency
Payment of the seller's closing costs of ___% or more
Appraisal guarantees in excess of $_____
A termite &/or moisture inspection
A mold inspection
A foundation inspection
Another high-concern inspection
When not to use an escalation clause
The lower the # of other offers, and the stronger the terms of your offer, the more it makes sense not to use one.
If you're making a below-asking price offer, and you're the only known offer, it's typically best not to use an escalation clause.
See the section above on special inclusions that in some cases will make an escalation clause go from not best to include to best to include.
Related for Buyers:
Related for Sellers:
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