Escalation clauses can make the difference when bidding wars arise

Even though much of the District is in what we would consider a fairly normal market, with moderate price increases and a climate that favors neither buyers nor sellers, there are some pockets that remain hot sellers’ markets. Whether it’s the most sought-after neighborhood or a hard-to-find price-point, the end result is often the same – a bidding war breaks out.

While bidding wars are thrilling for sellers, they can be extremely frustrating and even heartbreaking for buyers. Some buyers bid on multiple properties without ever winning and eventually give up. That doesn’t have to happen, though. Here in Washington, D.C., there is a form that can be added to a purchase contract to help ensure the buyer has the winning bid. It’s called an escalation clause.

An escalation clause is just that – a clause that escalates the offer price, as needed, to win the deal. For example: a buyer is interested in a property and their agent reaches out to the seller’s agent to let them know an offer is coming. The seller’s agent indicates that they have interest from several buyers, and this will most likely be a multiple-offer situation. The buyer’s agent would then recommend to the clients that their offer include an escalation clause.

Here’s how it works. The buyer would submit an offer for a certain price, but the escalation clause increases the offer price by pre-set increments up to a predetermined maximium in order to beat out any competing bids.

So, say the offer on the house is $500,000. The escalation clause might allow for the price to go up in increments of $5,000 up to a maximum of $550,000 to beat any other offers. That means that if another contract comes in at $515,000, the contract with the escalation clause will automatically go to $520,000 in order to beat it.

For the buyer’s protection, the seller must provide a copy of the competing offer (with personal information redacted) as proof of the offer being escalated against.

It’s important, though, that the escalation amount is meaningful to the seller. It’s not The Price is Right – you’re not going to win a home by outbidding other offers by $1. Sellers look at terms as much as price, and if a competing offer is cleaner – all cash, no contingencies, preferred closing date, etc. – the seller will choose it over a slightly higher dollar offer.

Another potential negative is that escalation clauses can be frustrating for a seller when the other offers received aren’t high enough to activate the escalation. But even though the seller might look at the escalation clause’s maximum and think they’re losing out on that money, the reality is that escalation clause is ensuring they’re receiving -- and the buyers are paying -- true fair market value for their home.

And, of course, escalation clauses aren’t right for every buyer. If a buyer is struggling to come up with a downpayment or having a tough time securing a mortgage, staying within a set budget is essential. And no buyer should ever offer or pay more for a home than they’re comfortable with.

Any home buyer, seller or agent operating in a competitive market environment should take a moment to learn about escalation clauses. The form and the process are very straightforward, and they can transform a stressful, frustrating situation into a win-win for all involved.

Dean Cottrill is president of the Coldwell Banker Residential Brokerage Mid-Atlantic region.

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