The Escalation Clause

I was looking at my weekly list of transactions in Fairfield County recently. In Darien alone eleven properties had closed. Eight of them were at or above full price. To state the obvious, multiple offers continue to be prevalent. 

The Escalation Clause

One tactic used by some buyers in a multiple offer situation is that of the escalation clause. An escalation clause usually contains language that includes the potential buyer's highest offering price and a certain dollar amount above the highest offering price of any other buyer.

Pitfalls

There are a number of pitfalls for a seller accepting this type of offer. The first rule of thumb in a multiple offer situation is to create a "level playing field." The escalation clause does anything but that. It's basically designed as a form of blockade to anyone else attempting to purchase the home.

Secondly, if a higher offer is procured from someone else, the seller is then obligated to show that offer to the buyer with the escalation clause. It is seldom in the seller's best interest to disclose the terms of another offer to anyone, let alone a potential buyer. The ramifications are too great.

Finally, if the buyer with the escalation clause is willing to pay more than anyone else, isn't it in the seller's best interest to decline it, with the likelihood of receiving a higher offer from that potential buyer who no longer has a built-in "safety valve?"

Whose Best Interest?

A multiple offer situation involves at minimum of three parties with a vested interest in the sale. The seller, and at least two buyers. The existence of an escalation clause protects that one buyer and that one buyer only, to the disadvantage of all other parties involved. Think twice before agreeing to an offer that contains an escalation clause. In any case, be sure that it's reviewed by your attorney.

Written by Al N. Filippone. For more information about the local real estate market, contact our Southport office at 203.256.3264 or visit our website at afahomes.com.