Q: What Is an Escalation Addendum?

Here’s everything you need to know about the escalation addendum.

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In Rhode Island, an escalation addendum is a form that was drafted by the Rhode Island Association of Realtors, and it is available to all licensed Realtors on our MLS. This addendum allows you, the buyer, to automatically increase your offer to try to outbid other buyers in a multiple-offer situation. It’s a buyer’s secret weapon in a multiple-offer situation.

As the buyer, you include a sales price in the Purchase and Sales Agreement (which we use here in Newport) or in an offer as usual (other places in Rhode Island and Massachusetts use basic offer sheets). If the seller signs the agreement, this is the price that you will pay unless the seller receives “a higher, bona fide or legitimate offer from another buyer.”

If the seller receives an offer in writing that’s higher than yours and the seller can prove it to you, your escalation addendum is then triggered; your offer automatically increases to beat out that other offer by X amount of dollars (the specific amount will be stated in the document itself). The key here is that, if you have attached an escalation addendum to your offer, the seller must give you a copy of a higher, bona fide offer.

For example, if you offered $300,000 for a seller’s home with an escalation clause, the seller will have to come back to you with proof that they were just offered $305,000. By handing you that other offer, they’ve triggered your clause. Depending on how you structure your clause, your offer may then automatically increase from $300,000 to $306,000 (you could choose to top the next highest offer by a minimum of, say, $2,000, or $4,000).

 

 

 

Here’s the important thing to think about with your escalation addendum: Do you want to cap it at a certain amount so that your offer doesn’t just keep continually increasing? You can either use your addendum to say, “I will offer $300,000, plus I’ll beat your next highest offer by $1,000,” and you can leave it at that, which means your offer will increase as much as it needs to for you to win the bid. Or, you could cap your offer and say something like, “I will offer $300,000, plus I’ll beat your next highest offer by $1,000 up until you receive a bona fide offer at or beyond $320,000.”

The pro to capping your offer is that it’s a more financially sound move; you probably don’t want to have an ever-evolving offer because who knows how many competitive buyers you’ll face in a bidding war? The con, of course, is that the seller will be able to see your cap amount on the addendum and may interpret it as your de facto offer price—there are no illusions about how much you’re willing to pay for their home with a cap.

As you can see, escalation addendums, and multiple-offer situations in general, are pretty tricky to navigate, so make sure you’re working with a savvy agent who’s been there before. Remember: Make sure all of this information is in writing, and avoid self-drafted documents when possible; you now know there is already a drafted document on the Rhode Island MLS that has been vetted by attorneys, so advise your agent to use this instead of creating a new document.

Feel free to check out the escalation addendum for yourself, and as always, reach out to the experienced agents here at the Warner Realty Group if you have any questions on this or other real estate topics. Give us a call or send an email, and we’d be happy to help!