The Confounding Price Escalation Addendum
|I thought “confounding” would sound a tad more generous than “confusing”, however one definition says “confounding is to throw into confusion.” So much for my generosity. |
I believe that confusion or whatever you care to call it, especially in a form, can be eliminated by careful study and reading (and rereading and rereading). Trust me, you can learn how to use this form effectively though it may not be as intuitive as other forms.
Many experienced practitioners have told me this is a form they can live without. One broker notes in her comments in the MLS that she will not accept offers subject to Price Escalation Addenda. While I can appreciate that approach, here’s a word of caution, “don’t.” RELRA and the Rules and Regulations of the State Real Estate Commission require that licensees transmit all offers as soon as reasonably practicable. Brokers and sales persons may not choose what their clients can see. So, if you receive an offer subject to the Price Escalation Addendum (PEA) provide it to the seller. By all means, share your opinion as to the form with your seller and guide your seller accordingly, but don’t invite trouble by pocketing an offer that you think your seller should not see.
Those who like the form have told me that, in a market crowded with buyers, the PEA gets the seller’s attention. That’s a good thing but you might also get the seller’s attention by calling the listing agent to advise of your client’s forthcoming offer and to tell that agent that your buyer is not only financially capable, but willing to go higher if there is competition. Of course, reaching the listing agent is one thing, let alone impressing the listing agent that you really do have a buyer that should not be overlooked.
While the PEA has been used often in recent years, few get signed. A seller would only sign the PEA if the seller has a better offer that has not been accepted but that is still viable (it hasn’t expired by virtue of the passage of time; See paragraph 5 (A) of the ASR). I supposed we could invent a PEA that says “if, after Seller’s acceptance of Buyer’s offer to purchase subject to a PEA, Seller receives from another prospective purchaser a bona fide offer to purchase with terms acceptable to Seller and a Net Purchase Price equal to or higher…Buyer’s offer is increased…” But, there are problems with increasing the purchase price some period of time after acceptance that are probably obvious to you.
To be clear, our PEA, in order to escalate the purchase price, means that the seller has an offer in hand that is both viable and at a higher net sales price than offered by the buyer with the PEA. I’m guessing this doesn’t happen all that often, but I invite you to let me know whether you have received an offer subject to a PEA where you were also holding an unaccepted/unrejected offer that was better.
To my thinking, the benefit of the PEA is that it clearly signals that your buyer does not want to be defeated and will pay more, if necessary, to get the property. Once that signal is given, the fun begins! A seller is right to ask if a buyer willing to go that much higher in the face of competition, wouldn’t simply accept a higher counter offer. The buyer might blink and pay more; then again the buyer might just say “show me that better offer before I make an increase.” Doesn’t it come down to the art of negotiating?
As for the language in the PEA, it may be wordy but it can be deciphered. If you’re unsure how it works or what it means, log in to PAR’s website and find the Guidelines for using the PEA. It may take several readings, but if you are going to entertain the form as a listing or buyer agent, you better know how to use it and what it means.
From the calls I’ve received on the subject, the biggest problem seems to be figuring out who has the higher offer. If there are two offers, both with escalation clauses, who has the better offer and what is the amount of that offer? When there are competing offers subject to escalation clauses, you look to the upper limit for each and the one willing to go higher is the winner but at what amount? The buyer with the higher limit pays only that incremental amount that he/she agreed to pay over a competitor’s upper limit. Believe it or not, I’ve had agents tell me that the buyer with the higher limit wins, but the purchase price goes back that buyer’s original offer plus one incremental amount that buyer agreed to pay! Such an interpretation would defeat the purpose of the PEA.
If your eyes cross or glaze over at the mention of this addendum, or for that matter by this article, I am sympathetic. I’m suggesting also that you do yourself a favor by rereading the Guidelines and by seeking the help of your broker or mentor when you use the form or when you receive one as a listing agent. If you proceed while confused, it is very likely that there is a problem.
Mr. Goldsmith is an attorney with Mette, Evans & Woodside and serves as outside legal counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends Realtors® in disciplinary hearings conducted by the Real Estate Commission. Jim was one of the voices of the PAR Legal Hotline for the first 27 years following its inception in 1992.