The Price Escalation Addendum (Form PEA) allows buyers to essentially “pre-negotiate” increases to their offer by telling sellers that they are willing to beat competing offers by a certain amount in order to win the property.
For example, a traditional offer from a buyer might say, “I will pay you $XX,XXX for your property,” even if the buyer knows they could go as high as $ZZ,ZZZ because they want to have room to negotiate if necessary. But a prospective buyer using the PEA might be saying, “I will pay you a certain amount over the next highest offer, but no higher than $ZZ,ZZZ.”
Of course, like any PAR form, it’s more complicated than that when you read the actual words on the page, and Form PEA is one of the forms that tends to generate calls to the PAR Legal Hotline in spurts depending on the market. Recently, we have had an increase in calls and wanted to cover some of our frequently asked questions.
What is a bona fide offer?
Form PEA says that the buyer will escalate above the next highest “bona fide offer to purchase the property” (“competing offer”), with terms acceptable to the seller. But what does that mean?
For starters, it means there has to be a legitimate offer. A seller cannot go to a family member or close friend and have them draft a “competing offer” merely so the seller can use it to escalate another offer. In addition, a seller can’t use an offer that has expired (because it’s past the reply date included in the offer) or has been withdrawn, nor could they use an offer that had been signed and fallen through for some reason. It has to be a legitimate offer that is active and valid at the time the escalation clause is exercised.
How do you decide if the offer has “terms acceptable to seller”?
The key here is whether the seller would arguably be willing to accept a competing offer in the right circumstances, not whether the competing offer has other non-price terms that are “better” or “worse” than the offer with the escalation clause. For example, if a seller would be willing to accept a cash offer or a financed offer then either could be a “competing offer” for this purpose. On the other hand, if a seller has said they would not be willing to accept an offer that would close prior to their preferred move-out date then an offer that asks to close 60 days in advance would clearly not have terms “acceptable to the seller” and could not be used to escalate another offer.
Do buyer financial concessions get calculated into the net purchase price for comparison purposes?
The terms of Form PEA say that the buyer will escalate their offer a certain amount over the “net purchase price” of the next highest competing offer. So how does that get calculated, and can buyers who offer concessions like paying both sides of the transfer tax use these concessions to calculate the net purchase price?
No. As is clearly stated in the form, the net purchase price is calculated as the purchase price from the original Agreement of Sale minus any seller financial concessions, like seller assist. You do not add additional financial incentives offered by the buyer. Why? Because that’s what the form says.
The winning agent is asking for the other offer. Do I have to provide it?
This answer is right in paragraph 5 of the form. Yes, the listing agent has to provide a copy of the offer that invoked the escalation addendum – the “competing offer” that came in second. Sellers can redact any identifying information, but they need to include all financial aspects of the offer. This would include the competing offer’s Form PEA, if applicable.
Though one might hope that no seller or listing broker would misunderstand/misapply the language in the form, this provision helps buyer agents “trust, but verify” the transactional information before getting much further in the transaction. Suffice it to say that we’ve seen a number of scenarios where the final purchase price was not correct, either because the final price was inadvertently miscalculated or, in at least one instance, because the listing agent appeared to have deliberately changed information on the offer to make it look higher than it really was.
I’m sure my buyer had the highest escalation clause but we didn’t win! How could the seller refuse to accept our offer?
No seller is required to accept the highest offer, the first offer, the least contingent offer, etc. – sellers are free to make whatever decisions they want about which offers to accept, so long as they’re not accepting or rejecting offers for illegal reasons (such as discriminating against someone in a protected class). To be blunt, buyers who “know” they have the highest escalation addendum may be offering such enormous amounts that sellers don’t believe the buyers are really willing or able to purchase at that price. Or in other instances, buyers with the highest dollar amount may be offering other terms that are less attractive for the sellers. In fact, the seller’s best option is sometimes to simply ignore the escalation clause(s) received during the offer process and straight-up negotiate with whichever buyer they think will provide the most appealing combination of price and terms. Or to put it another way, the seller is free to delete or modify any other term of an offer and there’s no reason why this specific term is immune from that and somehow must be accepted by a seller no matter what.