Escalation Clause To Win A Bidding War

I don’t accept these when I’m the listing agent because it’s not fair to the rest of the bidders.

Here’s what C.A.R. has to say:

Introduction

Q1. What is an escalation clause?

A1. An escalation clause (also called a relative bid or “sharp” bid) is a provision added to an offer or counter offer where the buyer offers “X dollars more” than the next highest offer.  For example, an offer that states, “The purchase price shall be $1,000 higher than any other offer,” contains an escalation clause.

Q2. Why make an offer with an escalation clause? 

A2. The escalation clause allows the buyer to make the highest offer but only by the minimal amount necessary to beat out other offers. At first blush, it seems to be a savvy strategy.

II. Enforceability

Q3. If accepted, do such offers create enforceable contracts? 

A3. Mostly likely, yes. Although no published case addresses escalation clauses in the context of a typical real estate offer/counter offer situation, the 1991 case of Carver v Teitsworth involved the enforcement of an escalation clause in the context of sealed bids for real property, one of which the seller was bound to accept when the bids were opened. The Court stated, “A relative bid may be valid, but only where a party expressly solicits relative bids or such bidding is objectively reasonable as being customary in a particular trade or industry.”

Based on this case, escalation clauses may create binding real estate contracts, depending upon custom in a particular trade or industry.  While sealed bidding is not common, in many areas of the state, particularly those experiencing a “hot” or competitive market, it is not unusual or unexpected to see an offer with an escalation clause.  Accordingly, there is a good chance if a seller accepts an offer with an escalation clause it would be considered objectively reasonable and will be enforceable.

Of course, unlike in the sealed bid situation present in the Carver case where the seller may have been surprised by the escalation clause, in a typical real estate offer/counter offer scenario, the seller is not bound to accept any particular offer and may accept, reject or counter any offer received.  Further, in the absence of a confidentiality agreement, the seller may disclose one buyer’s offer to another in an effort to generate a higher sales price.  These factors further favor the enforceability of an offer with an escalation clause voluntarily accepted by a seller in the typical context.

III. Contractual Considerations

Q4. Should there be a cap indicating the maximum price? For example, should the buyer offer “XXXX dollars more” than any other offer but “not to exceed” a certain maximum price?

A4. On the face of it, this seems like a good idea since it limits the buyer’s exposure to paying an exorbitant price in the event another buyer makes an outrageously high offer. But, on reflection, in the typical real estate scenario it has a fatal flaw. Once the buyer makes known the cap amount, the buyer has given away the maximum price at which they are willing to buy. If the seller has not received an offer as high as the maximum set by the escalation clause, the seller, armed with this information, can then simply counter at that maximum price or use it as leverage to get more from other prospective purchasers.

Either way there is a problem for buyers. Without the cap, they risk being bound to an outrageously high price. But with the cap, they’ve given away critical information to the seller about how much they are willing to pay.

Q5. Should there be a floor price establishing the minimum amount the buyer is offering to pay? For example, should the buyer offer “XXXX dollars or $1,000 higher than any other offer received, whichever is greater”?

A5. There are pros and cons to such a provision. On the plus side, in the event there is no competing offer, then the buyer’s offer, if accepted, would still create a binding contract. Thus, by including a floor price the buyer adds certainty to the offer that is the equivalent of an offer without an escalation clause. On the other hand, if no other offer matched the buyer’s floor price, the buyer will wind up paying more than if the buyer had only included an escalation clause.

There are different ways a buyer could make such an offer.  It is not recommended to say, “$XXXX or $1,000 higher than any other offer received” since it is unclear which is being offered, the fixed price or the escalation price? Such an offer could be interpreted as ambiguous and be unenforceable.  Instead, the offer might state, “$XXXX or $1,000 higher than any other offer received, whichever is greater.”  Or another way to say this is, “$1,000 higher than any other offer received, but no less than $XXXX.” With this type of wording the buyer is more clearly committing to a minimum price while at the same time more clearly indicating a willingness to pay more, but only if needed.

Q6. Should the buyer include a provision that allows for verification of the next highest competing offer?

A6. Yes. Since the buyer is making an offer dependent upon the offers of other buyers, it makes sense that the buyer should be able to verify that those other offers were in fact bona fide offers. The buyer may include language such as:  “Seller shall, upon acceptance, provide buyer with a copy of the highest offer received.  Buyer has a right to contact that prospective purchaser making that offer, or his or her agent, to verify the validity of that offer and that the other offer is in fact a bona fide offer.”

While the listing agent may be uncomfortable handing over another buyer’s offer to the accepted buyer with the escalation clause, the NAR Code of Ethics provides that, in  general, offers are not confidential, and both the price and terms may legally be disclosed to other buyers unless all parties and their agent have signed a written confidentiality agreement (such as C.A.R. form CND). Even a listing agent acting as a dual agent might be able to reveal details of an in-house buyer’s offer where the in-house buyer has consented to such by signing C.A.R. form PRBS (“Possible Representation of More Than One Buyer or Seller – Disclosure and Consent”) or form SBSA (“Statewide Buyer and Seller Advisory”).

Q7. What happens if all buyers, or even two or more buyers, make offers with escalation clauses at the same time?

A7. In this situation,  there is a chance that the seller’s acceptance will not result in the creation of a binding contract. A contract can only be created where there is an objective way of arriving at a discernable price.  If more than one buyer includes an escalation clause, it is unclear which offer is used as the basis for calculating the escalation clause. It could be the next highest fixed price offer, or it could be the other escalation offer.  If the latter, then there is a never ending escalation (where neither escalation offer has a cap or maximum price).  Should this situation arise, rather than accept one of the multiple escalation offers, the seller would be well-advised to issue multiple counter offers.

IV. Risk Management Approach

Q8. Should the buyer be cautioned against making an offer with an escalation clause?

A8. Yes. Given that the enforceability of such a contract is not 100% assured, and given the potential pitfalls as discussed in the previous questions, the buyer should be advised to speak with their own legal counsel prior to making such an offer.

Q9. Can a broker adopt a policy discouraging the use of escalation clauses since such offers may lead to disputes, especially in light of the complications in drafting such a provision?

A9. Yes. State law requires brokers to adopt policies and procedures for their office. Certainly, there would be nothing improper for a broker to adopt a policy discouraging the use of escalation clauses in offers. Another possibility is that a broker could adopt a policy prohibiting their agents from writing such a provision thereby placing the onus upon the buyer directly, or more appropriately, on the buyer’s attorney to draft this type of offer.

Q10. Where can I obtain additional information?

A10. This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.’s legal products and services, please visit car.org/legal.

Readers who require specific advice should consult an attorney.

NSDCC 2Q Sales & Pricing

When the coronavirus broke out, I guessed that the second quarter sales would fall 60%, and the median sales price would drop 5%.

NSDCC 2Q Sales & Pricing

Year
# Sales
Median Sales Price
Average Sales Price
2017
988
$1,250,000
$1,581,847
2018
845
$1,325,000
$1,693,876
2019
844
$1,322,500
$1,676,090
2020
567
$1,390,000
$1,748,200

Sales dropped 33%, but the median sales price is 5% HIGHER than it was in 2Q19!

Happy Birthday Mom!

Prop 19 Explained

We heard from the C.A.R. president last Friday about realtors joining with the firefighters to push for more tax breaks for seniors.  Thanks to Liam who explained the newly-labeled Prop 19 on Twitter yesterday, and for providing the link to the actual calculations being made to justify the changes:


~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Here is the legislative analysis:

https://lao.ca.gov/ballot/2019/190479.pdf

NSDCC Actives & Pendings

We saw those fancy graphs yesterday that compared the San Diego region to others nearby, and it appeared that the markets have slowed slightly. But let’s isolate on the La Jolla-to-Carlsbad area.

The chart above is from May 15th – here are the same categories today:

No slowdown here, especially in the $1.0M to $2.0M range where we have 26 more pendings today than we had 2.5 weeks ago.  How about the additional 12 pendings in the $3.0M+ range?

Pendings Daily and YoY

The graph above shows the raw data – how the pendings started to increase as we got into April.  It seemed like the action began to slow down just recently, and, sure enough, the rolling averages have been in decline over the last week or two in San Diego – and elsewhere.

If you just need some covid relief, then the graph below will make you feel better.  For the last month, the pending sales in San Diego have been comfortably ahead of last year’s counts.

https://www.mikedp.com/

Total & Active Listings

The New Listings graph (above) shows how the raw number of homes listed for sale in the coronavirus era compares to the same time frame in 2019.

It shows that 40-50 days after the initial shock, sellers started feeling more comfortable putting their home on the market, and for the last twenty days, San Diego has only been 5% to 21% behind last year.

The graph below helps to demonstrate the supply vs. demand relationship year-over-year, and it’s helpful to call these Unsold Listings because they are the net outcome (Supply – Demand = Unsold Listings).

If we were running at the same pace as in 2019, and the demand percentage had dropped the same as supply, then our Unsold Listings would simply be the same 5% to 21% lower than last year.  But our number of Unsold Listings are now 37% below last year – the best in the southwest!

Lower inventory, record-low rates, and the insanity are causing demand to surge!

Thanks Mike!

Palomar Models For Sale

The production homes were selling for $1.9M to $3.5M, so those new residents have to be elated to see that all three models are priced in the $4-millions. And don’t be surprised if they sell quickly!

The Plan 2 is priced on the range $4,398,000 to $4,698,000 – here’s my tour from 2018:

P.S. The grand opening was September 22, 2018. They are going to sell 69 of these between $2 million and $5 million in less than two years, all while Pardee sold 100+ homes across the canyon for $1.5M to $3.0M!

P.S.S. The Plan 3 model was nicer but my video wasn’t as good: https://youtu.be/LJEPllQNiA4

Where To Move in California

Tips on the best towns in California:

Link to Article

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

A comprehensive assessment of the housing and community of an area. This grade takes into account key factors of a location’s housing market, including home values, taxes, crime rates, and quality of local schools, in an attempt to measure the quality and stability of an area’s real estate market:

https://www.niche.com/places-to-live/search/best-suburbs-to-buy-a-house/s/california/

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

A list of the more affluent towns – Mill Valley is #1, and Solana Beach is #10:

https://www.areavibes.com/best-places/california/

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

My favorite list – San Diego is ranked #1:

https://www.thecrazytourist.com/15-best-places-live-california/

San Diego Case Shiller Index, April

The local Case-Shiller Index for April rose again, which makes you wonder how big the 2020 selling season could have been without the ‘rona – though if more sellers would have listed their home for sale, and rates were higher, the price increases probably wouldn’t have been so pronounced. Buyers can’t get a break!

San Diego Non-Seasonally-Adjusted CSI changes:

Observation Month
SD CSI
M-o-M chg
Y-o-Y chg
January ’18
248.16
+0.8%
+7.3%
Feb
250.91
+1.1%
+7.5%
Mar
253.41
+1.0%
+7.6%
April
255.63
+0.9%
+7.7%
May
257.07
+0.6%
+7.3%
Jun
258.44
+0.6%
+6.9%
Jul
258.49
0.0%
+6.2%
Aug
257.32
-0.5%
+4.7%
Sept
256.13
-0.4%
+3.9%
Oct
255.26
-0.1%
+3.7%
Nov
253.37
-0.6%
+3.3%
Dec
251.68
-0.7%
+2.3%
January ’19
251.30
-0.2%
+1.3%
Feb
253.69
+0.9%
+1.1%
Mar
256.40
+1.1%
+1.2%
Apr
257.63
+0.5%
+0.8%
May
260.08
+1.0%
+1.1%
June
261.90
+0.7%
+1.3%
July
263.66
+0.7%
+2.0%
Aug
263.23
-0.2%
+2.3%
Sep
263.26
0%
+2.8%
Oct
262.56
-0.2%
+2.7%
Nov
263.18
+0.2%
+3.9%
Dec
263.51
+0.1%
+4.7%
Jan ’20
264.04
+0.2%
+5.1%
Feb
265.34
+0.5%
+4.6%
Mar
269.63
+1.6%
+5.2%
Apr
272.48
+1.1%
+5.8%

From cnbc.com:

Home prices strengthened in April, despite a national economic shutdown and a sharp drop in home sales due to the coronavirus.

Prices for existing homes rose 4.7% compared with April 2019, and up from 4.6% in the previous month, according to the S&P CoreLogic Case-Shiller National Home Price Index. Price gains have been accelerating since autumn.

The 10-City Composite rose 3.4% annually, which was unchanged from March. The 20-City Composite increased 4% year over year, up from 3.9% in the previous month. Detroit continues to be excluded from 20-City Composite due to price reporting issues caused by the pandemic.

Cities with the strongest annual price gains were Phoenix, Seattle and Minneapolis. They reported increases of  8.8%, 7.3% and 6.4% respectively. Twelve of the 19 cities reported higher price increases in the year ending April 2020 versus the year ending March 2020.

“April’s housing price data continue to be remarkably stable,” said Craig J. Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices. “The price trend that was in place pre-pandemic seems so far to be undisturbed, at least at the national level.”

Record low mortgage rates have been giving buyers more purchasing power, thereby helping to keep prices strong. The average rate on the popular 30-year fixed mortgage, however, did jump briefly in March, which would have factored into April closed sales. Rates have since pulled back.

Sales of existing homes dropped to the slowest pace in a decade in April, according to the National Association of Realtors, as open houses were shuttered and the entire house hunting process went online. Not only did buyers pull back, but sellers either waited to list their homes or those already on the market pulled their listings.

But home sales have rebounded quickly and dramatically, with signed contracts on existing homes in May making the strongest monthly jump since the Realtors began tracking the metric in 2001. The supply of homes for sale continues drop, even as new listings now come on the market. Demand is incredibly strong, suggesting that prices will only get hotter in the coming months.

“As states and businesses continue expanding activity, homebuyers are showing increasing interest in purchasing homes, particularly those looking to take advantage of enticingly low mortgage rates,” said George Ratiu, senior economist at realtor.com. “However, extremely scarce inventory, tight mortgage underwriting and high unemployment continue to be the main challenges for many buyers. The latest weekly housing data shows national inventory is on a steep downward trend.”

Pin It on Pinterest