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:

What’s Hot

I have to hand it to Brett and team in their preparation of this 1975-built home in Solana Beach.  The flooring was removed downstairs, and they added a heavy epoxy paint to the exposed-concrete, which gave it a trendy-hip look to go with the colorful formica in the kitchen:

The list price is $1,850,000, and they already have four offers!

Link to Listing

PQ Bidding War!

Let’s review what it takes to create a solid bidding war.

  1. Maintain and improve your home constantly over the years.
  2. Install a master bathroom like this!

3. List with Jim the Realtor for an attractive price, do $3,200 of staging, and take off for the weekend!

I inputted the listing at 8:30am on Saturday morning with professional photos, and got immediate results – over 100 people came to open house the same day.

Sunday’s open house had nearly as many people, and those who didn’t attend could watch my walk-around tour on video: https://youtu.be/LCEDYc4rkaQ

We’ve received EIGHT WRITTEN OFFERS (seven over list price), and going for more.  Three showings set up for today, and Donna and I are fielding questions and encouraging higher bids all day long!

To ensure top dollar, we treat everyone fairly and give them every opportunity to bid up the price. The highest offer so far is $890,000, and others have said they are going higher so we raised the list price from $869,000 to $899,000 on the MLS for added exposure on the realtor hotsheet. I mentioned that we have eight offers too.

Want this kind of attention when selling your home? Hire Jim the Realtor!


Leucadia Bidding War

Word on the street is that there are 11 offers on this new listing in Leucadia, and it’s up to $1,200,000:

https://www.zillow.com/homedetails/460-Parkwood-Ln-Encinitas-CA-92024/16709568_zpid/

It goes to show you that you don’t have to worry about under-pricing a home…..as long as you put it on the open market so every buyer gets a crack at it!

19 Offers

Are you looking for proof that there are buyers being very patient, and are waiting in the wings until they see the perfect fit?

Consider this one, which I heard reports of receiving 18, 19 or 20 offers.  It was listed for $888,000, and closed for $1,000,000, or 13% over list price:

https://www.zillow.com/homedetails/1090-Balour-Dr-Encinitas-CA-92024/16720408_zpid/

It had the popular hot tickets – full remodel with the white/gray modern look, natural light via skylights, one-story, and garage granny flat (permits unknown).

Inventory Watch

The surge noted last week continued its hot streak, which should be expected as the selling season really gets rolling.  The total number of pendings increased 6%, and those over $2,000,000 increased 24%!

Glad to see the $2,000,000+ market having some life, with 462 active listings – or 54% of the total inventory of houses for sale between La Jolla and Carlsbad.

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

Even though it might feel warmer, we are still lagging behind last year:

Weekly Total Pendings

Week
2018
2019
% diff
Jan
244
217
-11%
Feb
262
233
-11%
Feb
280
255
-9%
Feb
295
263
-11%
Feb
318
261
-18%
Mar
328
267
-19%
Mar
339
284
-16%

What might contribute to buyers wanting to wait-and-see a bit longer is the lack of bidding wars.  Instead of having to deal with the messy multiple-offer situations, agents who get a hot listing just sell it off-market now.

Without bidding wars, we don’t have those disappointed losers who get more determined to grab the next one, and move quickly to pay whatever it takes.

(more…)

Price Reductions – How Much?

Home sellers who have been on the market for 30 or more days and are tired of not selling may eventually consider a price reduction – but by how much?

There are a number of reasons why a home isn’t selling.  Thankfully, you don’t have to be an expert on why – because price will fix anything:

  1. Inferior location
  2. Funky floor plan
  3. Repairs needed
  4. Market conditions
  5. Few or no comps
  6. Struggling economy
  7. Low zestimate
  8. Listing agent
  9. Bad weather
  10. Bad neighbors

Buyers are willing to pay within 5% of the list price.  So if you are getting showings and offers, then the list price is about right.

If you’re not getting offers, then the list price must be more than 5% wrong.

Won’t buyers make an offer, even a low one? No – it’s too easy for buyers to stay on the fence while they wait-and-see, rather than make a low offer.  In fact, we rarely see an offer that is lower than 5% below the list price because buyers would rather not bother – plus they don’t want to offend anyone.

A proper price reduction re-ignites the urgency and enthusiasm in buyers, which makes them want to write a good offer.

How much is needed to get buyers to engage?

Lower the price by 5%.

You see sellers lowering their price by 1% or less, but that’s not impressing the buyers – if anything, it reminds them that your price is still wrong because it still looks too much like the old price.

Lowering the price by 5% not only re-engages the existing buyers who are considering your home, but it also picks up a new set of buyers who weren’t looking as high as your previous price.

It may sound bold, but what else can a seller do to regain momentum?

Two things: a) Complete repairs/improvements to bring the home’s value up, or b) cancel the listing and try again a few month later.

If you don’t want to bother with repairs and really want to sell now, then do this exercise:

How does your home compare to the active listings priced at 5% below their current price – are you winning that test?  Is your house the best of that bunch?  Find the group of active listings where your house is the obvious winner, and you’ll know the price that will work.

If 5% sounds like too much, and waiting longer for that perfect couple with 2.2 kids to come along is easier to swallow, then no problem.  It could happen.

But if you’re tired of waiting and will consider a price reduction, then 5% is the recommended amount – which isn’t giving it away.  It’s just recognizing that the initial list price was too optimistic, and a more-realistic price is needed.

Smaller reductions won’t cause buyers into doing anything different than they’ve been doing – waiting for a fair price/value for today’s market.

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