Question: Are you seeing people use Escalation Addendums in their offers now that the supply of homes has dropped?
Answer: The use of Escalation Addendums in multiple offer situations is not new, but the frequency with which they are being used is. In the last three months over 25% of sales have been for over the asking price (another 24% have been for full ask). All-time low inventory levels + strong demand = price increases and a lot of competition from well-qualified buyers.
In the last 24 hours our team has submitted three offers on properties with multiple offers that will no doubt sell for over the asking price. In many cases, using an Escalation Addendum is the best strategy for buyers and sellers so let’s take a look at what that means.
What Is An Escalation Addendum?
An Escalation Addendum provides the maximum value a buyer will pay and an escalation factor, the amount their offer is to increase over the next highest offer. Sellers may use the escalation without further approval from the buyer, but they must deliver to the buyer the entirety of the contract used to escalate the accepted offer. Escalations are based on “Net Price” meaning purchase price less any seller credits.
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.
I can think of a recent example where a seller left 2% on the table by failing to communicate appropriately which compromised the trust of our client leading them to hold back on their offer terms. A lack of trust kept 2% out of the seller’s pocket and kept our client out of a home they loved.
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’re thinking about buying or selling a home and would like to discuss the right strategies in today’s market feel free to email me at Eli@EliResidential.com to set-up a meeting.
If you’d like a question answered in my weekly column, please send an email to Eli@EliResidential.com.