Buyers often include escalation clauses in their offers in an attempt to ensure that the offer will have the best purchase price. When sellers receive multiple offers, they will consider many factors in determining which one is best, but of course the purchase price is the primary consideration. Thus, in a hot housing market, buyers often must compete with other buyers for a particular house, and the easiest way (but not only way) to win that competition is by offering the highest price. An escalation clause helps a buyer to put forth the best purchase price possible.

So what's the downside? By including an escalation clause, buyers tip their hands as to the highest price they are willing to pay for the home. Sellers can use this knowledge to their advantage -- and to the disadvantage of the buyers. For example, assume that a seller indicates she will entertain all offers on a particular date. Two buyers, Buyer A and Buyer B, each put in an offer at the asking price of $400k. Recognizing the likelihood that there would be multiple offers, both buyers included an escalation clause. Buyer A's clause escalates the price in $1k increments up to a cap of $405k; Buyer B's clause escalates in $2k increments up to $420k.

When considering these offers, the seller could simply sign and return Buyer B's offer with a contract price of $407k. However, Seller could also return the offer as a counteroffer with a sale price of $420k. Admittedly, this gives Buyer B the option of accepting or rejecting the price, versus binding Buyer B to a price of $407k. Nonetheless, the seller may be willing to take this risk given an extra gain of $13k -- after all, Buyer B has already indicated a willingness to pay that amount. Thus, by tipping the seller off to his maximum price, Buyer B may end up paying it.