Escalation Clauses in Texas

Dec 08, 2021

Escalation clauses are technically allowed in Texas if drafted by an attorney (but TREC advises against them.) That said, we almost always advise against using an escalation clause in Texas. Here's our company policy regarding escalation clauses.

Problem 1 - contractually worthless
"Buyer to pay $1000 above highest received offer up to $501,000." Great, I (listing agent or seller) will ask my BFF Greg (who's fully qualified) to submit a contract for $500k. Done. $501k from buyer and contractually compliant. Just silly and worthless.

Problem 2 (Big problem) - Not the norm in the Austin market
Escalation clauses are the exception, not the norm in the Austin market. Because of this, you're introducing something into the transaction that's not easily understood, which is hard to explain, and which can certainly be misinterpreted. When you present an offer, you want to present it as clearly as possible. You don't want to run the risk that the listing agent will misunderstand and/or explain your offer poorly to their clients.

Problem 3 - shows that the buyer (or agent) likes contract loopholes
Escalation clauses broadcast that the buyer (or agent) thinks they're smarter than everyone else. They think they can put this magic clause in and they'll beat out all of the other buyers. (But no more than they have to pay. Man, they're smart!!!) This is the same personality type that will be a PITA during inspection, who will try to wiggle out of the contract when it doesn't appraise (even though they signed a waiver), or any number of BS-ey things that are just a pain to deal with. We're looking for the best deal for our clients that will close so we generally stay away from shady buyers.

Problem 4 - shows that the buyer doesn't really want to pay this much
"Offer is $475k but buyer will pay $1000 over the the highest offer up to $501k." How much do you think the buyer really wants to pay? Do you think there's a higher likelihood that this buyer will terminate than someone who gives a clean $500k offer? Do you think the escalation clause buyer will be a bigger pain during option? Again, we're looking for the best deal for our clients that that will close, so we generally recommend against escalation clauses.

When should you use an escalation clause?
You should only use an escalation clause when you've talked with a listing agent and that agent thinks they're a great idea. If the listing agent loves them, then give the listing agent what he/she wants. Otherwise, always advise your client to put their best foot forward with a clean offer.