What Happens If Two Offers Have Escalation Clauses?

In competitive real estate markets, buyers often use strategies like an escalation clause to make their offers more attractive. This contractual tool automatically increases a buyer’s offer if a higher bid comes in, aiming to secure the property. The situation becomes more intricate when a seller receives multiple offers, and at least two of these offers incorporate escalation clauses.

How Escalation Clauses Function

An escalation clause is a provision within a real estate purchase offer designed to automatically increase a buyer’s bid if the seller receives a higher competing offer. This mechanism helps a buyer remain competitive in a bidding war. The clause typically specifies three core components: an initial offer price, an escalation increment, and a maximum offer price, also known as a cap.

The initial offer price is the starting point, the amount the buyer will pay if no higher offers materialize. The escalation increment dictates how much the offer will increase above a competing bid, such as $1,000 or $2,000. The maximum offer price sets a ceiling on how high the buyer’s bid can go, ensuring they do not exceed their financial limits.

For an escalation clause to be triggered, the seller must receive a bona fide offer from another buyer that surpasses the initial offer price. Without a verifiable competing offer, the escalation clause remains inactive. Real estate agents typically communicate these offers and clauses between parties.

Seller’s Evaluation of Competing Escalated Offers

When a seller receives multiple offers, some with escalation clauses, evaluation extends beyond identifying the highest stated price. The seller, with their real estate agent, analyzes each offer’s components to determine the true highest net offer. This involves calculating the potential escalated price for each, considering initial bids, escalation increments, and maximum caps.

The seller’s agent typically verifies the bona fide nature of all competing offers, as this proof is often required to trigger an escalation clause. For instance, if Offer A is $400,000 with a $2,000 escalation up to $420,000, and Offer B is $405,000 with a $1,500 escalation up to $425,000, the seller’s agent determines how each clause interacts. Offer A would escalate to $407,000 to beat Offer B, if within its $420,000 cap. Offer B would then escalate to $408,500 to beat Offer A, if within its $425,000 cap. This process continues until one offer’s cap is reached or an offer becomes the highest.

Sellers are not obligated to accept the highest escalated offer, even if it appears financially superior. They retain the right to accept, reject, or counter any offer based on a multitude of factors, not solely price. For example, a seller might receive an offer with a higher escalated price but less favorable terms, such as extensive contingencies or a longer closing period. Conversely, an offer with a lower escalated price but stronger terms, like a larger earnest money deposit or fewer contingencies, might be more appealing.

Buyer’s Experience with Competing Escalated Offers

For a buyer who submits an offer with an escalation clause, the period following submission involves anticipation. Once their offer is presented, the buyer awaits notification from their agent regarding its status. If a higher, bona fide offer comes in, the buyer’s escalation clause is triggered.

The buyer’s agent typically informs them that their escalation clause has been activated. This notification often includes redacted details of the competing offer, providing the buyer with necessary proof. The buyer’s offer then automatically adjusts upwards by the specified increment, moving closer to their maximum price.

If the buyer’s escalation clause successfully outbids all other offers within their set cap, their offer becomes the leading contender. If another offer’s escalated price or initial bid surpasses the buyer’s maximum cap, the buyer is outbid. The buyer’s agent communicates this outcome, indicating their offer reached its limit.

Other Considerations in Multiple Escalation Scenarios

Beyond the fluctuating price points driven by escalation clauses, numerous other factors significantly influence a seller’s decision in a multiple-offer situation. These non-price terms can often be the deciding elements when competing offers escalate to similar price levels.

Contingencies are conditions that must be met for the sale to proceed, and their presence or absence can heavily sway a seller. Common contingencies include financing, inspection, and appraisal. A financing contingency allows a buyer to withdraw if they cannot secure a loan. An appraisal contingency permits withdrawal or renegotiation if the home appraises for less than the offer price. An inspection contingency provides an escape if significant issues are found. Offers with fewer or waived contingencies are more attractive to sellers, signaling a smoother path to closing.

Other terms, such as earnest money deposit, closing dates, and seller concessions, also play a substantial role. An earnest money deposit, typically 1% to 3% of the offer price, demonstrates serious intent. A higher earnest money deposit makes an offer more appealing. Preferred closing dates, usually 30 to 45 days for financed purchases, can also be a factor, with sellers often favoring quicker closes or those aligning with their relocation plans. Offers that minimize seller concessions, such as requests for closing cost assistance or inclusion of personal property, further enhance their attractiveness.