Do you even know what an escalation clause is, and its' Implications for the buyer or seller?

escalation clauses

There is a clause that can be used if your Buyer wants to really really make sure that they get their offer accepted on that hot new listing, or a listing that you know has multiple offers on it. (usually this would be a sellers' market).

OREA has recently written a letter to RECO to look into this escalation clause as it's so controvertial !

The escalation clause automatically adjusts your buyers' offer till it goes above the best offer, up to your clients Cap, or Maximum Bid !

In an ordinary situation this clause could secure the house for your client, but it could also get crazy if there is even One other buyer who also included an escalation clause into their competing offer.

Now you have 2 Buyers who are willing to automatically battle it out until One of them reaches their absolute maximum price. This can be great for the seller, as they just sit back and let it happen, knowing the contents of both offers.

Here is a scenario, taken from a recent explanation of this clause by RECO:

There is a new listing that came on the market, and it has 4 offers.

Let's say the house was listed at $500,000 for this example.

 

Escalation
Clause

Initial
Offer
Price
Increases
Price
Cap
Final
Price
Buyer 1 Yes  450,000 2000 600,000 600,000
Buyer 2 Yes 500,000 5000 650,000 640,000
Buyer 3 No 525,000 0 525,000 525,000
Buyer 4 No 635,000 0 635,000 635,000

The winner in this scenario is Buyer # 2

Explanation:

  • Buyer 4 had the highest initial offer of $ and stands at that price
  • Buyer # 3 had no escalation clause, so their offer stays at $
  • Buyer # 1 has an offer lower that Buyer 4s' Cap, so it stays at
  • Buyer # 2 increased by increments of $5000 until it exceeded Buyer 4s' offer

Buyer # 2 was the winner of this situation, but paid $140,000 over the asking price for this property. Hopefully his agent explained exactly how this was going to happen and there were no surprises at the conclusion !

We, at AgentInOttawa.com have never used this escalation clause and likely never will. You could explain this to your buyer client and they can say they understand it, but do they really understand it ? !

RECO does not endose this clause, Not sure how long they will allow this clause to be used.