How Does An Escalation Addendum Work?
Lately, about 8% of homes are selling over list price with multiple offers, and even more are selling at full list price. When you’re in a multiple offer scenario, you have 2 options when writing an offer:
1. Give them your “highest and best” outright
2. Use an escalation addendum
An escalation addendum is only used if the seller receives an offer with a higher NET sales price AND acceptable terms. This includes any subsidies towards closing costs which impact the “net” offer. A buyer can use the escalation addendum to increase the sales price by a specified factor above the next highest offer.
Ex. A sales contract price of $500,000, with an escalating factor of $2,000 over the next highest offer UP TO $525,000.
Which means in order for you to pay $525,00 for a property, the agent/seller would have to give you proof of a net offer of $523,000. Otherwise, you could only pay $515,000 if the other offer was only $513,000.
The other portion of an escalation addendum addresses the appraisal:
Remember, the appraisal is a contingency in your contract which says your lender (or a chosen appraiser if the offer is cash financing) will obtain a 3rd party appraisal to verify market value for your loan. You have the option in an escalation addendum to RETAIN the appraisal contingency or waive it, which would put the risk on the buyer in the case of a low appraisal. NOTE: If you’re doing a VA or FHA loan, you can NOT waive the appraisal contingency.
Escalation addendums are not used in all states, but we do use them in VA, DC and MD.