This might sound a bit counterintuitive to suggest in the current market, but I believe an escalation clause can (amidst other appropriate offer terms) be an effective way to make sure you are not paying more than you need to pay for a house.

Here’s the scenario…

A lovely house comes on the market… it is **exactly** what you have been looking for… and you manage to snag a showing slot on the first day the house is available for showings.  We discover that there are a **lot** of showings on the first two days of showing and we’re already feeling anxious before we get to the house for our showing.  We haven’t been inside for more than a few minutes before you realize this is **definitely** the house that you would do anything to be able to purchase.  

The house is listed for $400,000.  You would happily pay $400,000 for the house… or even $405,000 or $410,000… maybe even $420,000 or $425,000.  It is, indeed, that perfect.

It isn’t until day two that you have an updated lender letter showing you are pre-approved up to $425,000 and you are relieved to find out that the house is still available.  

We start talking through potential offer terms and then find out that after 48 hours there aren’t any offers on the house.  We get the sense that there have been about 20 showings and about 10 of those buyers still haven’t decided whether to make an offer… but at the moment, there aren’t any offers.

What to do, what to do.  

Do we offer $400,000 and ask to be notified if there are other offers… with the plan of revising the offer if we find out that we are in competition with other buyers tomorrow?  This is a reasonable plan, but some seller won’t slow down and wait for your revised offer if they get a stronger, acceptable offer after they receive your offer.

Do we just offer $415,000 or $420,000 to try to proactively put our offer above any other offers that might come in?  This is also a reasonable plan, but you might then be paying $15,000 or $20,000 more than you need to pay if no other offers are made.

One strategy for this situation (among many, for sure) is to make an offer at or just above the asking price with an escalation clause to automatically keep your offer a set increment above any other competing offers that come in later.  This might be an offer of $402,500 with an escalation clause to automatically make your offer $5,000 higher than any other offer up to $425,000.  

Doing so (as described above) would give you the advantage of only paying $402,500 if no other offers came in, or if the other offers were right at the list price of $400,000 -- while also allowing your offer to be automatically be higher than any other offer unless they offered $425,000 or higher.

So… if you are making an offer… and there aren’t any offers in play yet… consider an offering price at or just above the list price… with an escalation clause to hopefully keep you in first position if or when other competing offers do start rolling in.

You will be giving yourself the best chance of actually buying the house, while also doing a decent job of making sure you don’t pay any more than you need to pay based on competing demand.