SHOULD YOU "ESCALATE" YOUR PURCHASE OFFER?
You May Have To Go Over The Top To Buy In An Active Market

Buyers in the hottest markets sometimes need to get clever to win the bidding wars. An escalation clause (also "trump clause," "relative bid") is a tool buyers can use to make sure another buyer won't out-bid them. Be careful, however, if you're considering this strategy.

Beat The Competition
Simply put, an escalation clause says you will increase any other offer by a certain amount, say, $500 or $1,000, up to a set ceiling, such as $20,000 over the asking price. The clause should also include a termination date. Of course, if your first offer is accepted by the seller, then the escalation clause is doesn't come into play.

If you simply must have the house in your sights, and you can afford to pay that extra $20,000 if you have to, an escalation clause might enable you to fend off competing buyers. It allows you to offer the highest price possible to win the home. Of course, another buyer may set a higher escalation ceiling. And remember, the seller can select the "best" offer based upon factors other than price.

Prepare To Win
A potential disadvantage of an escalation clause is that a seller may accept a contract for well over the home's market value. The problem with that is, the buyer's lender won't loan him more than the home's appraised value. So if the appraisal comes in below the sales price, the buyer must make up the difference by increasing the down payment.

From a negotiation perspective, it may not be prudent to place an escalation clause in your original offer, because it could tip off the sellers that you're already willing to pay more for the property than you have offered. Still, some markets are so competitive that this is the best option available for committed buyers.