An escalation clause can be written into a buyers offer and allows them to increase their purchase price only on the condition that certain terms are met
The goal of an escalation clause is to allow the buyer to offer a buying price determined by the current situation of all other buyers.
Escalation clauses are more common during periods when the market is "hot" and sellers are in control.
For example, here is the best escalation clause I have seen done by a Realtor in my local area. Southern California:
A) PURCHASE PRICE. If the seller receives a competing oﬀer for the property prior to accepting this oﬀer, with a net price equal or greater than $X then the net price of this oﬀer shall be increased by $X more than the net price of the competing oﬀer. In no event, however, shall the new purchase price of this oﬀer exceed $X.
The term "net price" means the stated purchase price less any price adjustments such as credits to the buyer for closing costs.
B) COMPETING OFFER. A Competing offer must be a bona fide, arms-length offer on a C.A.R RPA (Residential Purchase Agreement) or similar forms, containing all material terms necessary for an enforceable agreement which (a) required the full purchase price to be paid at closing; (b) is not contingent on the sale of the buyer's property (IE C.A.R. Form C.O.P or equivalent)
C) SELLER ACCEPTANCE. Sellers acceptance and escalation of this offer shall not be effective unless it is accompanied by a complete copy of any competing offer used to escalate this purchase price, including any Escalation provision C.A.R. Forms: RPA, SMCO (Seller Multiple Counter Offer), and BCO (Buyer Counter Offer) is to be included with the complete copy of the competing offer.
By using an escalation clause like the one above a buyer can avoid paying a price higher than the market demands.
So a buyer could offer $500k on a home with an escalation clause that they would pay $600k only in the situation where a competing offer was made and then automatically bid above that offer up to a set limit.
An escalation clause also helps buyers avoid more back and forth on offers by automatically adjusting their bids above competitors.
Overall an escalation clause is a tactic for buyers to manage their bidding strategy on properties in a way that avoids overpaying while remaining competitive in a "hot" sellers controlled market.