Texas Escalation Clauses & Austin Real Estate
What is an Escalation Clause?
An escalation clause is a contract provision where the buyer offers one price (which is lower) but stipulates that they will increase this price by some amount if another, higher offer is received, typically with some price cap.
Sample Escalation Clause:
Buyer offers to pay $____ for the home, but if the seller receives a bona fide offer that is higher, buyer will increase the price to $____ above the amount of the other offer.
In most instances, we do not recommend adding an escalation clause to your contract. Why?
They are not the norm in our market
Escalation clauses are the norm in many markets, which means that listing agents & sellers in those markets understand and expect them. In Austin, escalation clauses are not the norm. This means that many listing agents & sellers are skeptical of this unfamiliar provision. Because of this, escalation clauses can actually work against you if you are competing with a comparable contract with standard terms.
The Texas Real Estate Commission (TREC) warns against them
TREC has instructed agents & brokers specifically not to enter escalation clauses into special provisions & instructs that any escalation clause must be written by an attorney. Many TREC licensed instructors warn against using an escalation clause under any circumstance. This can cause listing agents to be even more skeptical of these clauses, which can work against you in a competitive situation.
They are contractually ambiguous
Most escalation clauses require that a "higher bona fide offer" exist in order for the contract to escalate in price. The problem is that "bona fide" can be up to interpretation. Texas is unique that most contracts contain an option period and a seller or listing agent could ask a friend or relative to submit a higher-priced offer with an option period. At that point, a bona fide offer has been presented and the escalation clause increases the price of your offer to that amount.
They can communicate indecisiveness
Sellers & listing agents want the highest offer & best terms in a contract that is likely to close. By offering a lower amount that can escalate to a higher amount, some people interpret that you aren't decisive or sure of your offer price. You reluctantly will pay a higher amount, but you don't really want to. This can also make a seller or listing agent skeptical of your offer.
What Do We Recommend?
Sellers & listing agents want to work with the highest price offer, with the tightest terms, that will close. Unfortunately, a "magic bullet" (other than price & terms) doesn't exist. We recommend that you be very thoughtful about the price that you are willing to pay for any property. That price should be one that allows you to "sleep well". If you win the property, you'll be elated, but if you don't win the property, you won't have any regrets.