Escalation Addenda Raise Questions and Prices
Understanding The Triggers and Technicalities of Form K 1306
Question: In this hot market, I am seeing more Escalation Addenda with purchase contracts. How do these work?
Answer: The Escalation Addendum (NVAR K 1306) is triggered if the "Seller receives one or more additional written bona fide offers to purchase the Property with terms acceptable to seller." These offers must have a higher “net” to the seller than the offer that includes the escalation addendum. Net is defined as the contract sales price minus any seller concessions to the buyer.
If the escalation addendum is triggered, the contract sales price is automatically increased by a certain dollar amount listed in the contract, above the offer with the second highest net to the seller. The addendum will include a maximum sales price. Here are two hypothetical examples:
Offer A has a sales price of $500,000 with an escalation addendum. The escalation addendum states that the contract sales price will be automatically increased by $1,000 over the next highest offer net to the seller up to a maximum sales price of $525,000. This offer contains no provisions for the seller to pay any concessions to the buyer.
Offer B has a sales price of $510,000 with no escalation addendum and a clause that says the seller will pay $10,200 (2 percent) towards the buyer's closing costs.
Offer C has a sales price of $508,000 with no escalation addendum and a clause that says the seller will pay a $2,000 concession to the buyer.
In this example, Offer B does not trigger the escalation addendum in Offer A, because the $10,200 that is paid towards the buyer's closing costs would only net the seller $499,800 ($510,000 minus $10,200). This is $200 lower than the net $500,000 that is contained in Offer A, because the first offer does not give any concessions to the buyer.
However, Offer C has a net price that would trigger the escalation clause in Offer A. In Offer C, the net $506,000 ($508,000 minus $2,000) is higher to the seller than the $500,000 in the contract price for Offer A before the escalation addendum is triggered. When the escalation clause is triggered in Offer A, it will increase the sales price to $507,000 ($506,000 plus the $1,000 stated in the escalation addendum).
Using the fact pattern described for Offer A in Example 1, if the seller receives a fourth offer, Offer D for $530,000 with a $4,000 concession from the seller to the buyer, then the escalation addendum for Offer A would not exceed the sales price in Offer D. The net to the seller in this new offer is $526,000 ($530,000 minus $4,000), which is greater than the maximum limit of $525,000 on the escalation clause in Offer A.
Question: The listing agent sent me the escalation addendum and the front page of the other offer. From that I cannot ascertain whether my offer would actually net more to the seller than the one my buyer is competing against.
Answer: The escalation addendum was modified in July 2013 to ensure that the listing agents know that they must provide a full copy of the offer if they wish to trigger the escalation clause. The new language is the first sentence of the text in the box in the middle of the page. It reads: “Seller shall provide to Purchaser a complete copy of Other Offer used to justify the escalated sales price with this Addendum”. A complete copy of the other offer includes, at a minimum, the Regional Sales Contract and the Virginia Jurisdictional Addendum. It will also include, as applicable, the Home Inspection Contingency, the Financing Contingencies, the Contingencies and Clauses Addendum and any other Addendum which were made part of the original offer.
Sarah Louppe Petcher is General Counsel for NVAR.