Andrew Wetzel's Musings

July 22, 2017

Escalation Clauses: Let the debate begin!

Filed under: Uncategorized — awetzel @ 2:31 PM

Over ten years ago when the Real Estate market erupted, creative agents sought ways to promote and protect the interests of their clients. Listing agents advertised properties before exposing them to the MLS hoping to generate a quick sale and perhaps to increase the odds of their getting “both sides”. Many showings started at an “open house”. While much of what they did was in fact creative, some of it really ticked off buyers and their agents. Some listing agents actually over-stepped, assuming they had a “hot listing” on their hands. Many property listings EXPIRED with catchy comments like “Won’t Last!” or, even more humorous, the public remarks section specifying a long passed date and time when offers would be presented to the seller (many agents fail to remove such dated announcements). If the strategy worked the result was multiple offers. I personally know of one listing agent who got almost 30 offers on a house after starting showings at an open house. He told me that most of the offers were so similar that the seller got to the point where they said stop opening them!!! How do you truly evaluate more than a few offers? Doing so requires more than just looking at paperwork! I like to talk to lenders and buyer’s agents so that I can professionally inform my seller clients.

Buyer agents got creative as well. I received purchase offers with mid-day expirations. Typically a buyer will give a seller 2 or 3 days to respond to their offer. After the allotted  time passed the offer was no longer valid so a seller had to decide whether to accept an offer as presented or “counter” it, knowing that they could not just assume that the buyer would stand by their original offer if they refused to go higher or modify any of the terms. However, in the “feeding frenzy”, many buyers did not want to be tied up too long waiting for a seller to respond so they would have their agent present an offer that would expire at some point during the same day. I would see a 1pm or a 5pm expiration and wonder how they would really know what time I returned the hard copies (back then many offers were hand-delivered. Today most are emailed so there is a time-stamp). A typical buyer’s primary concern was getting in first and negating competition. Many negotiations started at the asking price rather than working their way up to it. From this “escalation clause” was born.

It essentially consisted of three aspects:  an initial offer, a stipulation that the buyer would beat any other offer by a specified amount not to exceed a specified total AND a requirement that, in order to exercise the escalation provision, a listing agent had to show any offers that the seller was asking the buyer to beat. Most people, agents and consumers, do NOT know that, absent a “confidentiality agreement”, no offer is inherently confidential. I can tell you what I have “in hand” and ask if you can and will “beat it”.

Aside from how anyone feels about using or receiving an offer with an “escalation clause” and ignoring any legal issues about how the contract and addenda may be written, it has been my experience that, as a listing agent and buyer agent as well as one who has been involved in numerous conversations about many Real Estate practices, there are those who swear by these, there are those who deplore the very idea (they may be uncomfortable “shopping offers” or dislike this form of negotiating) and perhaps many who are not sure what to do with them. They seemed to disappear for awhile but they are back!

Having multiple offers with escalation clauses can get interesting. Having only ONE OFFER in hand and having it include an escalation clause is also interesting since the buyer and their agent have no idea if there is really competition! PA rules say that a buyer agent may ask if there are other offers but it is the seller who decides whether to allow their listing agent to answer the question. The choices are to answer honestly (why would anyone say they have no other offers? On the other hand, saying that you do may scare away buyers who do not wish to compete) OR to say that you are not authorized to answer the question. Lying is NOT an option!

Unless the offer as written is acceptable to the seller, many agents will suggest that their seller client simply “counter” the offer by asking the buyer for a new specific price or asking for their “highest and best”. While the seller may forfeit the amount suggested by the escalation clause (the number is meaningless when there is no other offer to disclose), the buyer is under no obligation to modify their initial offer. I have heard agents make ridiculous statements like “the seller has to show me the other offer(s)“. REALLY??? A buyer has no leverage to compel a seller to do any such thing. In fact, the ONLY thing a seller is REQUIRED to do is provide a complete property disclosure statement. Of course, however a seller or buyer responds to anything will determine whether there is an executed contract.

I like the “highest and best” approach especially when there are multiple offers. If you “counter” with a specific price or terms, the buyer may accept which is fine unless you have done that with more than one buyer! In any Real Estate negotiation both sides MUST recognize that there are some basic risks. The buyer’s include not knowing whether there is competition, not knowing what the seller expects/ needs to achieve financially (which includes what they will actually accept), not knowing what aspects of an offer may be important other than just the financial, not knowing if a seller will even respond to/ consider their offer, etc. The seller does not know how high a buyer may go (they may see financial information but that might be based on what a buyer wants to do rather than what they are capable of really doing), whether the buyer is also interested in other houses (in PA we generally suggest that buyers do NOT bid on multiple houses at the same time but that does happen elsewhere), whether the buyer will remain interested after making their initial offer, etc. There is a lot in motion just getting to the point of actually signing an agreement.  After that is done, the REAL work begins and there are multiple opportunities for both parties to re-evaluate their interest in moving forward.

How the rest of the process plays out is largely dependent on the groundwork established getting to an executed contract. I firmly believe that at the time the agreement is fully executed one side or the other is “happier”:  did the seller get more than they expected or did they accept less?; does the buyer feel they got a bargain or that they overpaid? Typically the next major step is the inspection contingency and this may be the only phase where a buyer and seller may get to address their feelings about the selling price. Let the fun begin!

HIRE WISELY!

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