Questions about Escalation Clauses

With our market on fire, we have found that escalation clauses are beginning to appear in bidding wars over hot properties.

What is an escalation clause and is there a form to use? An escalation is when a buyer makes an offer with an agreement to increase their offer up to a set maximum, if another offer is received that is higher.  There are many legal factors to consider on both the sellers and buyers side.  (we wrote an article about it several years ago) We suggest looking at the ‘Escalation Provisions in Offers’ form in Ziplogix in the Massachusetts forms library if your client is interested in this concept.  Note: You should make an amendment to change the wording of “contract to purchase” to “purchase and sale” if you are going direct to contract.

Can a seller ask for a buyer to prove that they can cover the difference should the house not appraise at the final escalation price? In the call we had, a buyer with 100% financing made an offer with an escalation clause that ended $60,000 over the asking price. The seller sought their agent’s help in understanding how valid that offer would be if the offer was accepted and far exceeded the list price. Legal counsel reports that the seller may ask the buyer to demonstrate they can cover the difference if the house does not appraise, but cannot require it.  If the seller is not comfortable with the escalation clause or the terms of the contract, they can always not accept the offer or counter it.