(This is an updated post from one originally published in June 2020.)
In a housing market like ours, buyers need to have as many tactics as possible when seeking to purchase a home. We have talked about the importance of having a real estate professional with strong negotiation skills, for example, and a critical aspect of that is to ensure offers are as competitive as possible.
We have seen a near-sold-out market for years in many parts of our region – particularly for single-family homes with close access to freeways. The competitive nature of home buying has caused some shoppers to include an escalation addendum with their offer. These buyers have possibly lost out on a couple of bids for a home and do not want it to happen again.
An escalation addendum, or escalator, informs the seller that the buyer is agreeing to immediately raise his/her offer in specific price increments if a competing overture would meet or beat their bid. The practice appears straight forward but it can be quite tricky.
Take for example, “Buyer A” offers $650,000 for a 3-bedroom home in Seattle. The bid includes an escalation addendum that, in the case of a higher competing offer, will boost Buyer A’s bid by increments of $5000, with a maximum offer price of $700,000. If no other offers arrive, the original bid of $650,000 stands. But if “Buyer B” submits a bid that’s equal or higher, the Buyer A escalator kicks in until one bid exceeds the other.
An escalation clause can be a risky proposition, so much so that the Northwest Multiple Listing Service (MLS) does not recommend using it but still provides the addendum to brokers “merely as a courtesy” to provide a “standard form for consistency.”
As you can imagine, buyers relinquish some negotiating power – not to mention potentially paying more than necessary – when using an escalation addendum, even when it is unmet by a competitor. Sellers generally welcome this method, because it can motivate buyers to take a more assertive approach to the offer in hopes of wiping away the competition.
It is also worth noting that sellers and their agents can – and often do – share escalation details with other buyer brokers to not waste their time unless they are willing to beat the escalation ceiling. This puts the buyer submitting the first offer at a disadvantage and allows other buyers to see the “competitor’s cards.” If buyers wait too long, however, the seller may grab another offer with or without an escalator.
To help protect the buyer’s interests, the MLS has addressed another potential pitfall to using an escalator – a “competing” offer from an imposter. Under guidelines strengthened in 2021, the MLS requires the listing agent share the full competing offer with the winning bidder as part of the formal counteroffer from the seller. Details of the other bona fide, arms-length offer are there in black and white that can be verified by the buyer broker before accepting the escalated price from the seller.
If the seller fails to deliver the offer that triggered the escalation addendum (usually within three business days of mutual acceptance), the buyer is entitled to purchase the home at the original bid price – a new development in 2021 for our state. The same is true when the seller delivers the competing offer but the bid fails to meet the definition of “competing offer.” For example, the non-qualifying competing bid may be longer than the closing date of the buyer’s offer. The buyer, after taking steps to notify the seller, may either terminate the deal in this instance and seek the return of earnest money or, in some cases, move forward with the purchase at the buyers’ original offer price.
This should do it, right? No.
There are still potential issues if a competing offer includes a request to purchase some of the seller’s personal property or is seeking help from the seller to pay closing costs. The Buyer A offer is more straightforward. To make an apples-to-apples comparison, the MLS offers a worksheet within the same escalation addendum to determine how two offers match up without the other items thrown in.
And we’ve only covered what happens between two offers. Buyers could still face more complexity should there be multiple offers with differing escalation clauses and contingencies.
Sellers also have the right to deliver a counteroffer that ignores the escalation and merely inserts a higher price on the purchase and sale agreement, eliminating the potentially confusing details about incremental increases and ceiling prices.
As you see, there are a lot of risks – and math, heaven forbid! – to jumping head-first into a possible competitive offer situation. It’s not possible to remove all risk but these scenarios certainly help paint a clearer picture.
Bottom line: Buyers should be especially careful when using an escalation addendum, speak with a real estate attorney, financial advisor and mortgage lender before taking the leap, and only move forward when confident of their decision.
Thank goodness there is a strong real estate professional and Realtor® to keep everything in order.
Note: I am a licensed real estate broker in Washington and do not wish to characterize this blog post as legal advice. The post is strictly informational in nature to anyone wishing to understand the risks of making an offer on a home. I highly recommend that all individuals seek legal counsel – particularly from an attorney trained in real estate matters – to address questions and concerns related to this topic.