Ask Val: When to Use an Escalation Clause

This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!

Question: What is an Escalation Addendum and when should I use it?

Answer:  With so much competition for hard-to-find homes that have just come to market, it’s critical for buyers to understand the purpose and risk/reward of using Escalation Addendums (EA) in their offer.

An EA allows you to make an offer at a starting price while agreeing to increase your offer to a higher price if another offer is higher than yours. It includes a maximum escalation value and an escalation factor, the amount your offer will increase by, over the next highest offer.

The contract allows for the seller to execute a purchase contract (ratify) at an escalated value, without the buyer having to agree to the new price. However, to protect buyers, the seller is required to deliver the next highest contract that was used to escalate your offer.

That other offer must also be materially similar, meaning the other offer cannot include seller credits or a material difference in contingencies (e.g. the other buyer has to sell a home before buying this one).

EAs carry a lot of risk and reward, so be sure to understand them before including one in your offer.

Understand The Risks

The obvious risk in using an Escalation is that buyers are exposing their maximum purchase price and some sellers may ask for that max, regardless of whether or not another offer allows them to get there contractually. There are strategies buyers can use to prevent a seller from doing this and, in my experience, most sellers use Escalations as they’re meant to be used.

The other not-so-obvious problem is with non-financial differences between two contracts. The Escalation Addendum says nothing about differences in settlement date, contingencies and other non-financial terms that make a material difference between contracts (e.g. no Home Inspection Contingency vs full Inspection Contingency is treated equally in the Escalation Addendum).

When To Use An Escalation Addendum

Escalations are best used when there are multiple confirmed offers and the seller has set a deadline for “best-and-final” offers. It’s important for buyers to establish expectations with the seller before they include an Escalation Addendum to maximize the benefit and reduce the risks.

This is where having an experienced agent working for you can be the difference between making a smart decision and irresponsible one or securing a home and helping somebody else secure it.

Proper Communication Is A Win-Win

I strongly believe that with proper communication between sellers and buyers, Escalation Addendums benefit both parties by allowing the seller to draw out the highest available price for their home and allowing buyers to confidently maximize their chance of securing a home. Improper communication leads to a lack of trust and a lack of trust will almost always earn sellers less and may keep the most motivated buyer out of the home of their dreams.

It’s Not Always About Price

Being the winning offer amongst multiple offers isn’t always about price. Buyers need to focus on non-financial terms as well to set themselves apart and it’s important to understand how you can increase the strength of your offer without taking on excessive risk, but that’s a topic for another day.

If you’d like more information, or would like a question answered in my weekly column, please reach out to [email protected]. I hope to hear from you soon.

Val Sotillo is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, 703-390-9460.