More than 53% of properties in our area closed for more than their asking price since the beginning of February*. Low inventory, more accepted mortgage rates, and pent-up demand have created a frenzy of activity in Chester County this spring. With a market that’s heating up faster than the weather, how can a prepared buyer shine above the rest?
That’s where a Price Escalation Addendum to the Agreement of Sale can come into play. In its simplest form, this addendum lets buyers show sellers they’re willing to outbid competing offers… to a point. It falls into the category of being prepared and clearly communicating expectations ahead of time.
Most things in real estate aren’t as simple as they sound, and this addendum is a great example. The Pennsylvania Association of Realtors guidelines for filling out this single page includes 6 pages of instruction. In this article, I’ll go into some of the ins and outs of what a Price Escalation Addendum is, when they’re used, and some of the common pitfalls a professional agent can help you avoid.
Let’s get going!
What is a Price Escalation Addendum?
A Price Escalation Addendum is one of many additions that buyers can add to their Agreement of Sale. By adding this addendum, particularly well-prepared buyers can try to convey how serious they are about buying a property. It shows a buyer is prepared ahead of time to outbid competitors.
The addendum outlines how much higher than the next competing offer a buyer is willing to go, what their maximum is before dropping out of bidding, and even outlines what will happen regarding financing should the addendum come into effect.
Importantly, a Price Escalation Addendum uses a metric known as the “Net Purchase Price” as a basis of comparison. By following a formula, a seller’s agent can compare different offers in an apples-to-apples way. While this makes it easier to see the price of competing bids, it doesn’t factor in timing, terms, or anything else the seller values.
When would a Price Escalation Addendum be used?
The short answer is that this addendum could be used any time there could be multiple competing offers. Whether a competitive market or a highly sought after property, any number of factors could lead to a multiple bid scenario.
The market we’re seeing today, and have seen these past few years, is very much a sellers’ market. There are lots of buyers out there, few new homes being built, and not enough sellers to meet demand. Buyers who include a Price Escalation Addendum are trying to show how dedicated they are to the transaction and at least make it to the negotiating table. With so much competition, every little bit counts.
Buyers who care more about the property than the price, yet are concerned about overpaying, might also want to use a Price Escalation Addendum. It’s an easy way to show just how serious they are, and how far they’re willing to go to secure a property.
In these cases, the buyers are using an addendum to the standard Agreement of Sale to communicate, from the outset, their willingness and capability to pay more to get the property. This addendum creates inroads for good-faith communications between a seller’s agent and buyers’ agents.
What complications might be involved with Price Escalation Addenda?
As with most parts of the real estate process, there are a few common, and some less-common, complications that can arise when using a Price Escalation Addendum to the Agreement of Sale. Some arise from misunderstanding the limits of this addendum. Then there are all the ways changing an offer price can affect mortgage and financing conditions.
First and foremost, this addendum does not choose between competing bids. That is, it does not lock a seller into accepting one bid over another. A seller maintains the right to choose which offer they think is best, and no amount of buyer justification can change that. As we pointed out earlier, there are any number of other negotiations that could make one offer more appealing to a seller over another.
Additionally, this addendum does not mean a buyer has to spend all their money if their offer wins. There is a maximum sale price built into the Price Escalation Addendum in real estate, at least here in Pennsylvania.
Furthermore, bids that include this addendum often lead to negotiations. This is generally a good thing, as an offer being negotiated is one that’s still being considered.
There are a slew of complications that can come up on the financing side of the deal. Changing the offer price could change the loan-to-value ratio of a mortgage, or how much cash needs to come to the table at settlement. Then there are all the potential interactions with an Appraisal Contingency Addendum, which brings up mortgage qualification questions again. Plus, all the variations in between.
While there are enough potential financing complications to scare off many sellers, a well-prepared buyer with a knowledgeable and responsive mortgage professional will be ready for these concerns. Together with the help of a professional agent, they’ll have all the mortgage and appraisal interactions accounted for before submitting the offer in the first place. While an unprepared buyer using a Price Escalation Addendum without professional advice could turn into a huge disappointment, a well-prepared buyer should be welcomed.
Conclusion
In the world of real estate, a Price Escalation Addendum to the Agreement of Sale lets buyers show sellers how serious they are about making a transaction happen. In today’s sellers’ market, this is a great way for prepared buyers to demonstrate how willing and able they are to make a transaction happen. For sellers, these addenda make it easier to compare competing offers in an apples-to-apples way. For everyone involved, they open the door to possibility.
Thank you for joining me on this exploration into the Price Escalation Addendum to the Agreement of Sale in real estate! I hope you’ve found this article interesting, and maybe learned something along the way. If this left you with a headache, give me a call! What elements of the real estate process are you interested in? Please let me know, I’d love to hear from you!
*Statistics provided by BRIGHT MLS, from 2/1/24-4/10/24. All data deemed reliable but not guaranteed.
