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Non-Refundable Means Refundable

I ran into a 3-offer bidding war yesterday where we were competing against a buyer who had offered a $50,000 non-refundable deposit. The seller wanted us to match it to stay in the game.

We didn’t like the sound of non-refundable (or their price), even though we agreed that it would be unlikely that a judge would allow a home seller to double-dip – unless there were actual damages. If the buyer did end up cancelling, and the seller sold it again for the same price or higher, is the seller damaged?  Not really, but we didn’t want to risk potentially having to battle it out in court to find out.

Here is a great article about a case involving a non-refundable deposit of $620,000 – and how the courts felt about the seller trying to keep it:

https://www.neufeldmarks.com/when-nonrefundable-means-refundable/

The article also discusses the liquidated damages clause, and that selling an option-to-purchase to the buyer would be a better strategy for getting them to commit non-refundable money.

Inventory Watch

We only had 65 new SFR listings between La Jolla and Carlsbad over the last seven days, which is an 18% drop from the previous week and the lowest count since the beginning of the pandemic. The demand is still hot – there were 85 new pendings – but if the inventory count does what it’s done in previous years, it will really fall off the next couple of months (see top graph).

But who knows – this is 2020!

We have three offers on our $1,195,000 listing in Vista, and should determine a winner today. The Big Question – do you take a full price cash offer that is contingent upon selling another home?  Given how hot the market is, it’s worth considering!

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‘Swamp the Boat’ Offer

Here’s how I handle a hot one when I’m the listing agent.

My listing of 7206 Durango in Carlsbad was appropriately priced at $999,000, given what we were selling and the homeowners’ desire to move sooner, not later. What do I mean when I say ‘appropriately priced”?

Sure, it was 2,699sf but it wasn’t a standard tract house.

We had twelve showings in two days, and for those who had been used to seeing other similar-sized homes nearby in Aviara and La Costa Valley and expected the same….well, you could tell by the look on their face – even with a mask on!  They were stunned, and had trouble comprehending what they just saw.

It was because the house was a funky combination of a 1970s-built 1,517sf house with a pseudo-granny flat added on.

The challenges:

  • The original house was in decent shape, but not a full remodel like the last two comps.
  • The granny flat was one bedroom/one bath, and both were upstairs.
  • The granny flat had an unpermitted kitchen.
  • The granny flat was too big to be permitted as an ADU today.
  • The backyard was 15-20ft of concrete, then a slope that went up about 40 feet.

I knew from the beginning that the buyer pool for this combo was going to be much smaller than it was for the last two comps that both closed for $1,115,000.  They were both fully-remodeled one-story homes on culdesacs, and we were the opposite.

One of the showings on Day Two was a single guy who came with his mom and an older-guy agent.  The agent had only been licensed for four years (his license number on his card was over 2000000), and because they had sincere interest, he asked me what would it take to buy the property.

This is where I differ greatly from virtually all other agents.

Most agents will make some vague reference to how hot the property has been based on the number of showings, and tell you to do your best. If you ask about their rules of engagement, it gets more vague because they usually don’t have a strategy, other than spreading out all the offers on the dining-room table and telling the seller to pick one.

I gave the buyer, his mom, and his agent a couple of ideas. I told them that I had received an offer of $1,000,000 on the first day, and two other parties told me they would be writing offers too.

Then I described his two choices:

Idea #1: Either you can write an initial offer around list price or higher, and I will conduct a highest-and-best round.  You can probably expect that there will be at least one buyer who will pay 5% over list, so it you offer that much or a little more, you might win.

Idea #2:  You can swamp the boat. Make an offer so outrageously high that no one else will touch it.

An hour later, I received his offer for $1,125,000, with no appraisal! On a $999,000 list price!

I shopped the price around with the other three contenders, but nobody wanted a piece of that.

It was a fair and transparent process where everyone had a chance to buy the property.  It’s what is best for the sellers, plus none of the buyers thought they were robbed – they had a fair chance to buy it.

Bidding Wars Everywhere!

Our Serra Mesa townhouse listing garnered five offers – one at list price, and four over! It will be the highest sale in the history of the complex. Hat tip to ‘just some guy’ for sending this in:

In the ultra-competitive Westchester market, the odds were stacked against Heather Harrison and her client. A stately suburban home that was listed on Tuesday already had 30 showings lined up for that upcoming Saturday.

“I put in a full price offer at $1.275 million, that was the asking price,” Harrison said. “The client went to highest and best on Monday at 5 p.m., and I counseled my client to bid accordingly, waive his mortgage contingency, then we bid $1.45 million and we got it.”

With the suburbs seeing record volume, agents and brokers like Harrison, who runs Compass’ operations in Westchester alongside her husband Zach, are counseling their clients on how to prevail in a fierce bidding war.

According to Redfin, offers on single-family homes in August were most likely to be involved in a bidding war, at 56.6% of offers, followed by townhomes at 54.7% and condos at 41.3% – 54.5% of offers overall engaged in bidding wars.

Time waits for no buyer in the suburbs

With record-low interest rates, paltry inventory and a surge in buyers, agents are advising clients to be extraordinarily aggressive to win.

“You’ve got to really advise your clients appropriately, quickly and make sure that they know there’s not even a week to come see the property – you’ve got to go,” Harrison said. “The property comes on within 24 hours, and if it meets your buyers criteria you want to get them out to see it.”

When it comes to counseling a client through a bidding war, education is paramount, Harrison said. Prospective buyers need to be armed with as much data as possible about the market they’re targeting. Another critical element, according to agents, is not to make the deals contingent upon things like inspections and not to “nickel and dime” the seller. That will set the prospective buyer apart, Harrison said.

“I’ve also been encouraging them to write kind of like a love letter so to speak to the sellers, so they’re not just like an offer on a piece of paper, they’re giving a little color about themselves, why they’re moving, why they like their house, and giving a picture of them so that the sellers can feel good about who they’re selling to and it’s not just about the numbers,” Harrison said.

To win, waive those contingencies goodbye

Susan Hamblen, broker and owner of Long Island-based EXIT Realty Achieve, said that her agents are slammed with business, and homes that are “priced right” are getting offers within the first 24 hours.

“Homes are going $40,000 to $60,000 over ask, easily,” Hamblen said, attributing the bidding wars partly to the influx of buyers from New York City. “We have about two months of inventory and the buyer demand is just crazy.”

Eugene Cordano, vice president and director of sales at Halstead in New Jersey, said that in his market, bidding wars have triggered offers between 15% and 20% over asking, across all home prices.

To that tune, Cordano agreed with Harrison that it’s important to stick out in a bidding war.

“The old axioms of real estate do not change,” Cordano said. “But the highest bid does not always prevail.”

The influx of buyers from New York City to New Jersey at the beginning of April through June meant that there was more money to spend on homes.

“For our seller-clients, we were counseling them on how the buyers waive appraisals or waive mortgage contingencies,” Cordano said. “With the influx of New York City buyers bidding these houses up, oftentimes waiving the financing/mortgage/appraisal contingencies was not a difficult thing to ask for and most of them did that.”

When it comes to buyers, it’s a different story.

“If the buyer really wanted that home, it was often, “How do we structure this offer to make sure that it stands out and wins the day?’” Cordano said. “That’s not a scientific process. Sometimes that is something that’s very emotionally driven, or driven to the point where the buyer really wants it and is just willing to pay and will offer, either in price or in terms, something that will win the day versus all the other buyers that were there.”

Spreading out in the hottest market will cost you

Vickie Mox, an agent with RE/MAX Dallas Suburbs, covers the Collin County area, north of Dallas. She said the surrounding towns are busiest right now.

The Dallas suburbs of Frisco and Plano are the hottest because they have low rates of inventory and are priced to sell, spurring bidding wars, Mox said.

“Houses that are more unique with large lots and that have been totally updated [sell quicker], and there’s nothing for the buyer to do but move in,” Mox said. “[That listing] could conceivably have 10 offers, and that’s usually between the price range $250,000 to $400,000.”

Once you get over $400,000 there are fewer buyers and there’s less demand for the property, according to Mox.

“But a $500,000 house could have multiple offers if it has everything the buyers are looking for which is being updated to a large yard or a three-car garage, in the right neighborhood and right school district,” she said.

In Colorado Springs, which Redfin said recently has the No. 1 hottest ZIP code right now, there could be at least three to five offers on a home in the first 48 to 72 hours of being listed, according to Keller Williams Associate Broker Scott Sanchez.

“The typical thing here in the Springs has been a $10,000-plus minimum to go over list price,” Sanchez told HousingWire.

“Maybe two years ago it was kind of common for five grand over, maybe $10,000 tops,” Sanchez said. “Last year, you start getting into the $10,000 to $15,000 range and this year it’s been $20,000 on the good homes that are well marketed and even if they’re priced up, they still will get 20 grand over.”

Bidding wars aren’t necessarily uncommon for Peck Barham, a real estate agent at TeamBarham, Keller Williams Homewood outside Birmingham, Alabama, but not at this rate.

“We haven’t seen [bidding] quite like this,” Barham said. “I think in August something like 600 homes went under contract in a three-week period, which for Birmingham is a lot. That’s a lot of homes going real fast.”

Link to Article

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.

22 Offers

Not mentioned was the list price was $7,000,000 (on April 2nd), and the listing agent represented the buyer too:

Even in the throes of a pandemic, the offers started coming in almost immediately.

The day after an off-market opportunity in Beverly Hills was made known in late March, as Los Angeles County residents adjusted to new stay-at-home orders, the listing agent found his inbox flooded and his phone ringing off the hook. Seemingly everyone wanted a piece of the property, which was marketed by email. Within the first 24 hours, there were dozens of calls on the property and 18 offers made.

“I knew we’d see some action, I just didn’t know how much,” said Paul Salazar, the listing agent with Hilton & Hyland.

The home on North Bedford Drive, a popular street in the Flats section, received a total of 22 offers, according to Salazar. The potential buyers were a mix of end-users — buyers who wish to remodel and live in the home — and developers looking to tear down the existing structure and build. Ultimately, it was an end-user that purchased the property for $6.75 million.

The Italianate-style house, built in 1928, has four bedrooms, 3.5 bathrooms and more than 3,500 square feet. A large motor court sits off the front of the one-third-acre property.

Salazar believes marketing the home as an off-market opportunity gave it more exclusivity, but the excitement began to wear off as “everyone began watching the news” and reality of the coronavirus set in. Additionally, about one-third of the buyers, specifically those carrying mortgages, were ruled out over concerns that loans might be frozen due to the pandemic.

“It looked like it was going to be a big bidding war, but it ended up being a long negotiation with 3-4 buyers going back and forth,” Salazar said.  Had the pandemic never happened, Salazar believes the property would have sold for about $1 million more.

While the coronavirus has stifled sales throughout the Southland, L.A. County’s high-end market has continued to produce a steady stream of multimillion-dollar deals.

In April, there were eight sales of $10 million or more including two deals north of $36 million in nearby Bel-Air. Last month, there were five sales of $10 million or more including two transactions of $21.5 million or more.

Link to Article

Tiny Fest

It always seemed to me that if ADUs were selling for $50,000 or less, there would be lots of interest.  Literally the first one I ran into (below) at the Tiny Fest was priced at $50,000, and people were standing in line to experience this 8.5 ft x 30 ft home with kitchen and full bath (seen in right window).

https://backporchhomes.lpages.co/back-porch-homes-companion-gallery/

This one was tall enough that it had two lofts:

https://www.tinymountainhouses.com/

For those who want to do it themselves, these guys will sell you the kit for $63,000.  The vaulted ceiling added some extra luxury:

https://www.volstrukt.com/

This was my favorite granny flat because of the porch. The upgraded version costs $65,000:

https://prefabtinyhomes.org/

This was the deal of the day.  For $15,000 you get the building with full bath and the trailer:

www.bosstinyhouse.com

Here’s my tour of the homes:

Over List!

An update on two of the homes featured here that garnered multiple offers. As expected, they sold for well over their list price.  This one got $51,000 over the top of their price range:

This one had 20+ offers, and sold for a whopping $190,100 OVER LIST PRICE!

The fully-renovated, one-story homes are HOT!

Plus let’s also include this old classic in Olde Carlsbad that sold for $30,000 over list price, or $773/sf in an area that has averaged $539/sf over the last six months:

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