Ask Eli: What is an Escalation Addendum?

This regularly-scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Rosslyn resident. Please submit your questions to him via email for response in future columns. Enjoy!

Hello neighbors! I’m excited for the opportunity to interact with my community and look forward to providing honest, informative answers to your real estate questions. Before I dive into my first Q&A, a bit about me – Rosslyn resident, husband, proud puppy owner, Maryland Terp, O’s/Ravens fan.

Some of my Arlington favorites:

• Restaurant: Mele Bistro
• View: Sunrise over D.C. from the Netherlands Carillon
• Dog Park: Towers Park
• Tennis Courts: Bluemont Park
• Place to take out-of-towners: Gravelly Point

Will Wiard left me with some great questions that I plan to answer over the coming weeks, but I went with one that I think is extra spicy and you all will enjoy.

Question: I made an offer on a competitive property for sale and really wanted it so we submitted the offer with an Escalation Addendum. Post-submission, we received an email from the Listing Agent saying, “you won” with the full escalation amount updated on the Sales Contract. After we signed and ratified the contract, we requested the competing offer(s) used to justify the price escalation and were told by the Listing Agent that they did not use the Escalation Addendum and it was just a counter offer. Is this allowed?

Answer: Great question! There are a lot of factors at play and I’ll do my best to address the key points without turning this into a book. Feel free to contact me with any follow-up questions or if I can help clarify something. Before I dive into the response, I’ll explain some basic terms.

What is a Sales Contract? A Sales Contract is the main contract between a Buyer and Seller that lays out the majority of the terms influencing a home sale. It includes the sales price, when the property will be sold, and which items convey/transfer with the sale (washer/dryer, hot tub, curtains, etc).

What is an Escalation Addendum (EA)? EAs should be used with great care and full understanding. It is an “advanced” strategy used by Buyer Agents to increase the chance of their offer being accepted on a competitive listing. When used correctly, it allows a Buyer to be aggressive up to their maximum offer price and protect them from over-paying relative to the other offers.

It is included with a Sales Contract and provides terms to the Seller that allow the offer price to be increased up to a maximum amount in specific dollar increments in the case of a competing offer. For example, a potential Buyer may submit an offer for $500,000 with an EA allowing an escalation to $550,000 in increments of $1,000. If the Seller receives another offer with comparable terms for $520,000, the Seller may use the EA to automatically increase the original offer from $500,000 to $521,000. If the competing offer is for $549,500, the original offer may be increased to $550,000.

I am going to base my answer on the assumption that this occurred in Arlington/NOVA and the Northern Virginia Association of Realtors (NVAR) standard form contracts were used (more on this later). Our EA is designed to be a binding agreement between the Buyer and Seller. When used by a Buyer, it constitutes a formal offer and when used and signed by the Seller, it becomes a fully enforceable contract at the stated price (at or below the full escalation amount). If used, the “Seller shall provide to Purchaser a complete copy of Other Offer used to justify the escalated sales price” which is what our reader requested before being informed the EA was not actually used.

This is where things get a bit complicated. The way I interpret the question is that instead of the Seller signing off on the new sales price on the EA, he/she submitted a new sales price via the Sales Contract and the parties agreed to the price there. In this case, what the reader signed was a counter offer because it was done through the Sales Contract. Had the Seller added the new price to the EA and signed it, the EA would have been enforceable and the Seller would have been required to present the entire competing offer. Unfortunately, the “you won” email holds no weight in this discussion because anything said outside of contract documents does not count.

Earlier, I mentioned that I based my response on the reader using NVAR forms. That’s important to note because DC and Maryland have very different escalation rules. An escalation in DC or Maryland cannot be signed by the Seller and therefore cannot be made into a binding/enforceable document. If the escalation is used, the changes are made to the Sales Contract and do not require the Seller to furnish an entire copy of the competing offer, just the terms used to justify an escalation. For these and many other reasons, I urge anybody considering using an escalation strategy to make sure they understand the contractual implications in their jurisdiction.

Key takeaways:

• Escalations are a risk/reward strategy and should only be used with full understanding.
• In NOVA, EAs become enforceable contracts once signed by both parties.
• When an EA is used, the Seller must provide a full copy of the competing offer, showing comparable terms, to justify the escalation.
• Anything written in an email, said by phone, or otherwise communicated outside of the contract is not binding.
• Virginia contracts differ greatly from DC and Maryland in certain areas so it’s important to work with a Realtor/Broker who understands your jurisdiction.

If you’d like a question answered in my weekly column, please send me an email at [email protected]. To quickly read any of my older posts, visit the blog section of my website at http://www.RealtyDCMetro.com.

The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of ARLnow.com.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, 202-518-8781.