Do I need an escalation clause with my contract to buy a home?

Real Estate Agent with Compass

In Northern Virginia, the answer is probably "yes."  Now everything must be considered on a case by case basis, but I can say that if you are buying a MLS listed, market value priced detached home in Arlington specifically, you will likely need one in order to get the property.   Escalation Clauses are largely misunderstood both by consumers and the real estate community at large, but here's a layman's explanation of how they work:

Say a house is listed at $500,000 and you know that there will be multiple offers on it because the listing agent has told your agent there will be (it is very rare in Northern VA for a listing agent to not disclose the presence of ofther offers or interested parties), so you offer to pay more in order to get the house.  Your escalation increment and cap is up to you.  You need to think carefully about these numbers.  I won't tell you how I advise my clients to do this, but know there is a lot of thinking and experience behind it and it's helped my buyers win homes without over paying for years.  

So say you write an escalation clause that says you will beat any offer by $1,000 up to $507,000.  You could end up paying list price, or anywhere between that and $507,000.  OR, there is nothing to stop the seller from countering you at your escalation cap.  You don't have to take it, but they can ask.  Or the seller can tell all buyers to come back with highest and best and toss out all escalation clauses.

The pro to the escalaction clause to the buyer is it can keep you from paying too much, while still getting the house.  For example, I had clients who recently were the first runner up in the bidding war.  The listing agent was kind enough to tell me how much they missed it by.  The winning offer had bid nearly $30K over what they ended up paying, because my buyer's cap was the 2nd highest yet much lower than the winner's cap.  

Some agents and sellers will, again, counter you at that price.  The thinking is "You said you'd pay it, so pay it!" You may think:  They can't do that!!?? And the truth is, they can do whatever they want.  There are no rules.  There are common practices, but in a market this big, you cannot expect anything.  Be prepared for a wild ride.

  • They can accept an offer within hours on the market (some great offer could have a time bomb built in and force the seller to move quickly).
  • They can ask everyone to bring highest and best.
  • They can wait until open house is over, or demand contracts by 10 am Saturday.
  • They can inisist on no contingencies.

You as the buyer, can choose to play the game the seller is directing, or not buy a house, in most cases.  There are opportunities where this is not happening, but they are usually homes that have been passed over by the droves of buyers out there for a reason (incurable defects, over priced, too much work needed).

As a home buyer you have to understand, and accept, the fact that you probably will not call the shots if buying a house right now in spring 2013.  If you want a house, there is some risk involved, but frankly, that's homeownership in a nutshell.   I know this might be disappointing, espeically if you have been casually looking for a long time and realize you missed out on the buyer's market we've been in for the past several years.

Comments (4)

Jay Markanich
Jay Markanich Real Estate Inspections, LLC - Bristow, VA
Home Inspector - servicing all Northern Virginia

Every now and then I see houses with elevators.  But I have never run into one with an escalator.

They are very rare.

That's what you mean, isn't it?





Apr 15, 2013 10:39 AM
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Coral, waiting for the response on my offer with escalation clause...hope it helps!

May 28, 2013 01:09 PM
Richard Weeks
Dallas, TX
REALTOR®, Broker

The Texas Real Estate Commission has advised us that esculation clauses are not to be used, and could be considered the practice of law.

Oct 15, 2013 12:30 AM
Coral Gundlach
Compass - Arlington, VA
Real Lives. Not Just Real Estate.

Richard, How is it practicing law? can you explain further?  They are very common in my market and an approved NVAR form.  

Oct 18, 2013 06:51 AM