How do escalation clauses work?

An escalation clause allows the buyer to specify the price in terms of a minimum price, an escalation increment, and a maximum price. Without an escalation clause, the buyer must specify the exact price they are willing pay for a home.

There are two types of escalations: net-based escalation and price-based escalation. The first type is more common, although the latter type can still be found or be allowed by the seller.

With net-based escalation, the buyer specifies the starting or minimum price, an increment that will yield seller net proceeds $X higher than the next-best offer, but only up to a maximum offer price.

With price-based escalation, the buyer specifies the starting or minimum price, an increment that will yield a sales price $X higher than the next-best offer, but only up to a maximum offer price.

From a buyer perspective, escalation clauses allow buyers to increase their offer price automatically without bidding against themselves. From a seller perspective, escalation clauses can lead to higher prices because escalation clauses often trigger aggressive offers. Both buyers and sellers can avoid time-consuming price negotiation with escalation clauses.