Whether a buyer should insert an escalation clause in an offer to purchase a home depends on how hot the market is and how much the buyer wants the home. Some buyers include a clause in their offer stating they will pay $1,000 more than the highest offer the seller receives. In a very hot market with lots of buyers and not much inventory, such an escalation clause can give a buyer an edge on a home.
But if you do use an escalation clause, be sure to set an upper limit on your offer. For example, you could offer up to $5,000 over asking or your original offer, or maybe $10,000 more. However high your upper limit, make sure you can afford to pay the extra amount. Also, be sure to include in your escalation clause a statement demanding proof of a higher counter offer.
If your offer increases as a result of an escalation clause, you can pay the extra amount in different ways. You can pay the escalation clause amount in cash, you can add the extra amount to your mortgage loan (provided your lender agrees), or you can do a hybrid — partially increase the loan amount and pay the rest in cash. Whichever method you choose, be sure you can afford to pay the higher amount, and that the escalation clause includes the safeguards above.