NVAR form K1306, the Escalation Addendum, is occasionally used by buyers hoping to make their offers more competitive. However, when a seller wants to compare multiple offers using escalation addendums, the math can feel overwhelming and complicated. Thankfully, calculating the best net proceeds for your seller is easier than you think!
Note: Sellers often consider many factors when evaluating the strength of an offer, such as contingencies, days to close, and other adjustments. For simplicity, this guide was written with the assumption that the seller’s only priority is accepting an offer with the largest net proceeds for them, and all other remaining terms of the competing offers are identical. However, this may not always be the case.
PRACTICE TIP: Don’t forget that your seller does not have to entertain escalation addendums at all! If you’re comparing offers with maximum prices that are more appealing to your seller, you are free to counteroffer to request a best and final price and avoid doing the math entirely.
Understanding the Language of the Escalation Addendum:
“If, prior to ratification of this Contract, Seller receives one or more additional written bona fide offers to purchase the Property with terms acceptable to Seller (“Other Offer(s)”), and from which Seller would receive an equal or higher Net than the Net reflected in this offer, then this Contract’s Sales Price shall automatically increase…”
The Escalation Addendum only kicks in if you’re comparing offers where the Nets would be equal or higher than the other. If the resulting Net of one offer is less than the other, then the seller could either apply the Escalation Addendum to the second-highest offer in order to escalate the price OR they could reject the second-highest offer and simply accept the offer that has the higher Net (without including the addendum).
Here is a cheat sheet to understand when the Escalation Addendum is triggered:
Step 1: You have an offer with an Escalation Addendum (Offer A). You receive a second bona fide written offer (Offer
Step 2: The Net of Offer B is equal or higher than Offer A.
Step 3: The Escalation Addendum of Offer A is triggered. Automatically escalate the offered Sales Price of Offer A to the max Net of Offer B.
“If Other Offers include escalation terms, this automatic increase will be applied to the maximum escalated Net of the highest competing escalation addendum.”
This sentence explains the formula for comparing competing offers which also contain escalation addenda. When the Nets of competing offers are equal or higher than the other, look at the maximum escalated Net of the losing offer. Then, add the increments of the winning offer to get the new, final Net.
For example, your seller receives two offers which both have a Net of $100,000, and both are using the Escalation Addendum. Offer A has offered to automatically increase their Net by increments of $1,000 above any other buyer’s offer, for a maximum Sales Price of $105,000. Offer B has offered to automatically increase their Net by increments of $2,000 above any other buyer’s offer, for a maximum Sales Price of $110,000. In this scenario, there are no deductions from the Net, so the maximum Sales Price mirrors the maximum Net. Your seller might think that by selecting Offer B that they would be getting a final price of $110,000; however, the formula would be: maximum escalated Net of Offer A ($105,000) + increments of winning Offer B ($2,000) = new, final Net ($107,000). If the Seller ratifies the Escalation Addendum for Offer B, they would be agreeing to a new, final Sales Price of $107,000.
“In this Addendum the term ‘Net’ is defined as the Sales Price less all Seller concessions and/or payments towards Buyer’s Brokerage Compensation.”
When calculating the Net in an offer using an Escalation Addendum, look at the first page of the sales contract the buyer has submitted in their offer. In the NVAR contract, the Sales Price can be found in Paragraph 2A. Concessions and/or seller-paid buyer’s broker compensation should be located in Paragraphs 2D and 2E. If there are no amounts in these lines, great! The Net will just be the Sales Price, and you do not need to do any math.
But what if there are amounts in 2D and 2E? What if there is a percentage? If you are comparing Offer A, which contains an Escalation Addendum, to Offer B, which DOES NOT contain an Escalation Addendum, you are calculating the Nets based off the Offered Sales Prices. You then compare the Nets of the offers to each other. If the Net of Offer B is lower than Offer A, then the Escalation Addendum is not triggered, and the Offered Sales Price of Offer A does not escalate. However, in cases where you have competing offers that both contain Escalation Addenda, you are calculating the Nets based off the Maximum Escalated Sales Prices and comparing from there.
Here’s a refresher on how to calculate a Net: Offer A comes in with an Offered Sales Price of $100,000 and the buyer is requesting 1% as a subsidy. The formula to determine the dollar amount for the subsidy would be: $100,000 (Offered Sales Price) x 0.01 (percentage) = $1,000 (dollar amount for subsidy). Then, to calculate the Net, you would subtract the dollar amount for the subsidy from the Offered Sales Price. Thus, $100,000 (Offered Sales Price) - $1,000 (subsidy) = $99,000 (Net).
Now, let’s say that Offer A has an Escalation Addendum with a Maximum Sales Price of $120,000, with increments of $2,000 above any other offer. We’ve already calculated a Net of $99,000 based on the Offered Sales Price. A second written bona fide offer (Offer B) comes in with an Offered Sales Price of $105,000. Offer B does not have an Escalation Addendum nor is it requesting any deductions from the Offered Sales Price, so the Net is the same as the Offered Sales Price ($105,000). The Escalation Addendum of Offer A is triggered because the Net of Offer B is higher than the Net of Offer A. Thus, we use the Net of the losing Offer B ($105,000) and add in increments of the winning Offer A ($2,000) for a final escalated Net of $107,000.
Are we done? Not quite! The final escalated Net will not be the final Sales Price. To convert the final escalated Net into a final Sales Price will require you to factor back in the percentage deduction for the subsidy. Use the following formula:
100% - % of any subsidy and/or Buyer’s Brokerage Compensation = X%
Final Escalated Net ÷ X% = New Final Sales Price
This is how it would look in our example:
$107,000 (Final Escalated Net) ÷ 99% = $108,081
$108,081 would be the new, final Sales Price.
Remember to include the new final Sales Price and any subsidy or Buyer’s Brokerage Compensation amounts in the box on the Escalation Addendum.
It may help to consider a few examples to see how the Escalation Addendum works in practice.
REMEMBER: THESE NUMBERS ARE EXAMPLES ONLY, CHOSEN FOR SIMPLICITY. THEY ARE NOT RECOMMENDED AMOUNTS BY NVAR, NOR DO THEY REPRESENT ANY STANDARD OR TYPICAL RATES IN THE REAL ESTATE MARKET.
Formula for the Net:
Offered Sales Price ($205,000) x 0.07 (SPBBC) = $14,350
Offered Sales Price ($205,000) - $14,350 = $190,650 (Net)
Formula for the Net:
Offered Sales Price ($210,000) – Subsidy ($20,000) = $190,000 (Net)
On its face, the Offered Sales Price for Offer B appears higher than Offer A. However, the savvy listing agent recognizes that after accounting for the deductions (the subsidy and payments towards buyer’s brokerage compensation) from the Offered Sales Price, the Net for Offer A is higher. Because of this, the Escalation Addendum is not triggered, as the Net for Offer B is not equal to or higher than Offer A’s Net. Thus, the Final Sales Price for Offer A will be the same as the Offered Sales Price: $205,000.
The seller may wish to counter-offer with the Maximum Escalated Sales Price.
Formula for the Max Net:
Max Escalated Price ($220,000) – SPBBC ($10,000) = $210,000 (Max Escalated Net)
Formula for the Max Net:
Max Escalated Price ($225,000) – Subsidy ($10,000) – SPBBC ($5,000) = $210,000 (Max Escalated Net)
This example demonstrates how Net calculation differs when you receive two bona fide offers with Escalation Addenda. You compare the Max Escalated Nets instead of the Net on the Offer Price because of the language in the Escalation Addendum which dictates: “this automatic increase will be applied to the maximum escalated Net of the highest competing escalation addendum.”
Here, the Max Escalated Nets for Offer A and Offer B are equal. The seller selects Offer B due to its higher max Sales Price and applies the increments.
Determining Final Sales Price:
Max Net of Losing Offer A ($210,000)
+ Increments of Winning Offer B ($2,000)
= $212,000 (Final Escalated Net)
Because this example does not have percentage deductions, the math to obtain the Final Sales Price is a little easier. You simply add the deductions back to the Final Escalated Net. Therefore:
Final Escalated Net ($212,000) + Subsidy ($10,000) + SPBBC ($5,000) = $227,000 (Final Sales Price)
PRACTICE TIP: The listing agent recognizes that the “Final” Sales Price of $227,000 is higher than the maximum Sales Price in the Offer B Escalation Addendum. Thus, the actual Final Sales Price will need to be adjusted to $225,000, the maximum Sales Price which Offer B promised to pay.
Formula for the Net:
Offered Sales Price ($500,000) x 0.08 (SPBBC) = $40,000
Offered Sales Price ($500,000) - $40,000 = $460,000 (Net)
Formula for the Maximum Net:
Maximum Sales Price ($520,000) x 0.08 (SPBBC) = $41,600
Maximum Sales Price ($520,000) - $41,600 = $478,400 (Max Escalated Net)
Offer B:
Offer B does not require any calculations because there are no deductions from the sales price.
Offer C:
Formula for the Net:
Offered Sales Price ($500,000) x 0.05 (Subsidy) = $25,000
Offered Sales Price ($500,000) - $25,000 = $475,000 (Net)
Offer C has no Escalation Addendum attached. Therefore, there is no Maximum Escalated Net.
Triggering the Escalation Addendum:
This is a tricky scenario where two offers have Escalation Addenda, and one does not. First, compare the Nets of the offers with Escalation Addenda to the offer without, to see if the Escalation Addendum for that offer will be triggered at all.
Offer A Net: $460,000 (has EA)
Offer B Net: $450,000 (has EA)
Offer C Net: $475,000 (no EA)
You can see that the Net for Offer C, the one without an Escalation Addendum, is equal to or higher than to the Nets for Offers A and B, respectively. Thus, the Escalation Addenda for Offers A and B will be triggered, and then you can compare the Max Escalated Nets to determine the winning offer.
Offer A Maximum Escalated Net: $478,400 (has EA)
Offer B Maximum Escalated Net: $475,000 (has EA)
Offer C (Maximum) Net: $475,000 (no EA)
Offer A has escalated to become the winning offer.
Determining Final Sales Price:
Maximum Net of Losing Offer B ($475,000)
+ Increments of Winning Offer A ($1,000)
= $476,000 (Final Escalated Net)
Final Escalated Net ($476,000) ÷ 92% = $517,391 (Final Escalated Sales Price)
PRACTICE TIP: Remember that you must provide a complete copy of the losing offer to the winning offer to justify the Final Escalated Sales Price. The seller here would have the option of providing either Offer B or Offer C to the buyer of Offer A.
Update Paragraph 2 of the sales contract with the new, final escalated price so that everyone can keep track throughout the transaction.
Your seller can opt not to use the Escalation Addendum and simply counter offer with the Maximum Sales Price.
Finally, remember to provide complete copies of the losing offer to the winning buyer if you do end up escalating the Sales Price, as required by the Escalation Addendum.