What Are Escalation Clauses and How to Deal With Them

When it comes to making an offer on a property, an escalation clause can help make the process smoother. 

An escalation clause is an agreement between the buyer and seller that allows the buyer to increase their bid if another buyer makes a higher offer. In this article, we’ll explore the basics of an escalation clause in real estate.

For informational purposes only. Always consult with an attorney or legal consultants before proceeding with any real estate transaction.

What is an Escalation Clause?

An escalation clause is a clause in a real estate agreement that allows the buyer to increase their offer if a competing offer is made. The clause is typically added to a purchase agreement, which is an offer from a buyer to purchase a property from a seller. The clause states that the buyer will increase their offer by a predetermined amount if a competing offer is made.

When a seller receives multiple offers for their home, they can choose to accept the best offer or accept an offer with an escalation clause. An escalation clause gives the buyer an edge over competing offers by setting the maximum price the buyer is willing to pay for the property. This allows the buyer to remain competitive and increases their chances of winning the bid.

What is Included in an Escalation Clause?

An escalation clause typically contains several key elements. First, it will include the maximum amount the buyer is willing to pay for the property. This can be expressed in terms of a dollar amount or a percentage increase above the current offer.

The clause will also include the amount the buyer is willing to increase their offer if a competing offer is made. This can be expressed in terms of a dollar amount or a percentage increase above the current offer.

Finally, the clause will include a time limit. This is the amount of time the buyer has to increase their offer after a competing offer has been made.

Examples of Escalation Clauses

An escalation clause typically contains several key elements. Here are some examples of escalation clauses you might encounter:

For informational purposes only. Always consult with an attorney or legal consultants before proceeding with any real estate transaction.

Example 1: “In the event that a competing offer is made, the buyer agrees to increase their offer by $5,000 within 24 hours.”

Example 2: “In the event that a competing offer is made, the buyer agrees to increase their offer by 5% within 48 hours.”

Example 3: “In the event that a competing offer is made, the buyer agrees to increase their offer by $10,000 or 5%, whichever is greater, within 36 hours.”

Can You Use Escalation Clauses in Texas?

The Texas Real Estate Commission (TREC) prohibits agents from writing escalation clauses. TREC Rule 537.11(b)(5) states that a license holder "cannot draft language defining or affecting the rights, obligations or remedies of the principals of a real estate transaction, including escalation, appraisal or other contingency clauses".

TREC considers this as an unauthorized practice of law. You cannot include language in a contract that permits or requires a party to do so. An escalation clause should be written by an attorney if the buyer requests one. A license holder who violates this may be subject to disciplinary action which could include an administrative penalty of $500-$3,000 per violation per day.

In several real estate markets, escalation clauses are rare in Texas due to TREC prohibiting agents from using them. However, should a buyer consider an escalation clause, they must have it written by an attorney. A real estate contract is a legal document, and any changes to the contract can impact the rights of both parties.

Escalation Clause in Real Estate

An escalation clause is a clause in a real estate agreement that allows the buyer to increase their offer if a competing offer is made. The clause is typically added to a purchase agreement and contains several key elements, such as the maximum amount the buyer is willing to pay and the amount the buyer is willing to increase their offer if a competing offer is made.

When using an escalation clause, it’s important to understand the implications and to work with an attorney to ensure the process goes smoothly.

For informational purposes only. Always consult with an attorney or legal consultants before proceeding with any real estate transaction.