One of the more-accurate forecasters is predicting that home prices will start dropping:
Strong home purchase demand in the first quarter of 2020, coupled with tightening supply, has helped prop up home prices through the coronavirus (COVID-19) crisis. However, the anticipated impacts of the recession are beginning to appear across the housing market. Despite new contract signings rising year over year in May, home price growth is expected to stall in June and remain that way throughout the summer. CoreLogic HPI Forecast predicts a month-over-month price decrease of 0.1% in June and a year-over-year decline of 6.6% by May 2021.
Unlike the Great Recession, the current economic downturn is not driven by the housing market, which continues to post gains in many parts of the country. While activity up until now suggests the housing market will eventually bounce back, the forecasted decline in home prices will largely be due to elevated unemployment rates. This prediction is exacerbated by the recent spike in COVID-19 cases across the country.
Expecting prices to fall that quickly is flawed, however.
They are ignoring that for home prices to go down, we would need a load – probably a majority – of sellers who are willing to sell for less than the last guy got. In addition, it would take realtors who recognize what’s needed, and be able to properly advise their sellers on lower pricing.
It ain’t going to happen.
Listing agents only have one pitch – to berate the buyer agents into paying the seller’s price. If we ever get to the point where buyers object to the constantly-rising prices, and/or we run out of buyers altogether, then there will be a long stall before sellers and agents re-calibrate.
Recognizing that a shift in pricing is needed will be hampered by all the usual excuses.
The seller retorts of “I’m In No Rush”, “I Don’t Need to Sell”, and the classic, “I’m Not Going to Give It Away”, will be doused with coronavirus blame before any sellers – even the desperate ones – would consider selling for less than what they think they deserve.
Sales will slow first, so keep an eye on them – but it would take 1-2 years of stallout before sellers and agents start believing that they might not get their price.
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:
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.
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.
Our MLS has been publishing the Coming Soon listings for almost two months now, and agents are using the feature. The list above has 17 out of 59 (27%) of the new listings marked as Coming Soon – the most I’ve seen in one day.
They show up as a ‘new listing’ on the agent hotsheets on the day they are inputted onto the MLS, but the homes are not allowed to be shown until they are ‘active’. Usually the remarks and photos are brief too, which is understandable – they aren’t ready yet. They are coming soon.
The day the listing goes active is determined in advance, and the MLS automatically changes the status on that day. These hot new listings that haven’t been seen yet are now full of photos, videos, and descriptive remarks, but they appear at the top of our hotsheets as a ‘Misc. Change’, which isn’t the same as being on the New list. The only indication that these are fresh listings are the days-on-market being zero:
The strategy is still a bit murky for me. The intent is to build anticipation among agents only, but if the photos & remarks are brief and I can’t show & sell it until some day in the future, it’s not that interesting. But it does give agents a unique advantage to receive advance notice on new inventory before the search portals get it.
Will private websites get a hold of the Coming Soons and publish them for consumers? Yes, and it’s already happening.
Will listing agents be tempted to show their Coming Soon listing prior to it being marked an active listing? Probably, so buyer-agents should call the listing agents every time they see a contender, which will make the listing agent wonder why they are bothering with Coming Soon when they keep getting requests to show it early.
Sixty-six percent of U.S. households currently have a pet or plan to get one in the future, proving that pets and their effects on a home, various belongings/toys, and accommodations must be considered for a majority of households. Additionally, 43 percent of households would be willing to move to better accommodate their pet(s), demonstrating that this is a priority among consumers. A small percentage, one percent, of recent home buyers said they were prompted to make their purchase by the desire for a better home for their pet(s).
When searching for a new home, consumers don’t only look for pet-friendly features within the home; 18 percent of recent home buyers said it was very important that their new neighborhood is convenient to a vet and/or outdoor space for their pet(s). This is important to consider when marketing a home for sale as potential considerations from prospective buyers.
Given their prevalence, REALTORS® must be equipped to advise their clients regarding their pets throughout the buying and selling process. Within the past year, a median of 38 percent of members’ clients have owned a pet, companion animal, or service animal; and 18 percent of members have represented clients that have moved solely for their animal.
Pets are not only important to members professionally, but also personally. Eighty-one percent of REALTORS® consider themselves animal lovers. Additionally, 14 percent of members volunteer for an organization that helps animals. Among those who consider themselves animal lovers and/or volunteer at an animal organization, 13 percent advertise this to potential clients.
In response to the coronavirus, the California Association of Realtors issued several disclosures that need to be signed electronically before showing a home. In addition, Cal-OSHA has mandated strict policies about wearing PPE, cleaning the home before and after showings, etc.
It’s a whole new level of distractions for agents, and because management has made it clear how important it is to comply (five Compass agents have already been turned in by outside realtors for non-compliance), there’s usually more attention on masks, gloves, and booties than on selling. Some agents even insist on pre-qual letters and/or bank statements just to see the house.
I’m all for compliance!
But the buyers are going to tire of the additional hassles……unless they are really interested in the house.
Thankfully, the situation is also forcing realtors to be more adept at video production and virtual showings, so buyers are getting a better feel for a home before deciding to see it in person – which also means that the buyers who do go to the trouble of jumping through the hoops are probably real contenders.
Realtors won’t mind no open houses, fewer looky-loos, and only showing homes to legitimate buyers!
But agents better be ready to go.
It’s already happened three times this year where I sold my listing to the first buyer who saw it!
The old broker saying that “your first offer is your best offer” may be more true now than ever.
Benefits of Selling To The First Buyer:
Maximum negotiating power
Fewer repair hassles
Stop the showings
End the uncertainty
Get Your Money Sooner!
With the improved internet tools, buyers are more prepared than ever to buy your home – and they want to get it over with now, before they have to sign another form or wear another booty!
This is one of the better options I’ve seen for touring a home remotely.
The live tour would be similar to showing the home in person because of the open discussion between buyers and agent, and the recording of the event is especially helpful for reviewing later! https://www.homeroverapp.com/
Are we at the point where buyers only tour the homes in person that are the real contenders? Yes!
Here’s your competition – people will go out, if they feel safe. From Realtor Magazine:
Fifty-six percent of consumers say that despite the ongoing COVID-19 pandemic, they would attend an open house or take a home tour without hesitation, according to the Back To Normal Barometer from research company Engagious. Additionally, nearly half of respondents to the survey say they would return to activities such as taking a cruise, attending a live sporting event, or staying at a hotel.
However, an even greater number—61%—are concerned about the overall public health crisis and the U.S. economy, a sign that consumers are more hopeful about their personal circumstances than they are about the country in general. “People are concerned about societal impacts rather than how [COVID-19] affects them personally,” said Jon Last, president of Sports & Leisure Research Group, a marketing research consultancy based in White Plains, N.Y., and a co-creator of the barometer. “And they feel the same about the economy.”
Engagious presented the findings of the Back To Normal Barometer, a biweekly survey that measures consumer interest in a variety of industries and activities during the COVID-19 pandemic, to the National Association of REALTORS® last week.
The panel also looked at the survey respondents who said they weren’t ready to go to an open house yet and what conditions it would take for them to feel safe enough to do so again. According to Rich Thau, president of Engagious and co-creator of the barometer, they would need specific assurances, including the approval of a COVID-19 vaccine (47%) and assurances from the local health department that touring open houses would be safe (45%). “Two things that are critical are a certificate stating that [an area] has been properly sanitized according to established protocols and that the certificate has been issued by a local authority,” Thau said.
The real estate–related findings come from a national online survey earlier in May of 1,040 buyers and sellers. The goal was to provide insights about how consumers want to safely navigate residential real estate transactions during the COVID-19 pandemic.
Gina Derickson, research director of Engagious, expanded on the precautions that are important to consumers: People want to know that cleaning has taken place before they enter an establishment; they want to see professional cleaners rather than staff (or homeowners) working on high-touch surfaces like doorknobs and elevator buttons; and the right products and right wording are important. People prefer terms like “sanitized” and “disinfected” over “cleaned” on signage.
According to Derickson, respondents also saw a difference in risk associated with open houses depending on what side of the transaction a person falls on. The selling side is viewed as having a higher risk than the buying side. Sellers, Derickson explains, are perceived as having less control over who comes into the home and the surfaces people touch. On the other hand, respondents believe that buyers can better avoid COVID-19–related dangers and have a good sense of what a clean home looks like.
But whether on the buying or selling side, survey respondents agreed on one thing: Agents are crucial in helping them navigate the open house process. “Buyers and sellers depend on agents to inform them and enforce compliance,” Derickson said. “They want the agent to tell them what to do, and they want vetting to make sure the home is safe.”
In analyzing the survey results, Thau said real estate agents matter more than ever on both sides of the transaction. Fifty-eight percent of sellers and 58% of buyers say the buying and selling of real estate is an essential service, and 62% of sellers and 54% of buyers say a real estate agent’s guidance is especially valued during the pandemic.
Don’t Rely Completely on Virtual Tours
Thau offered some intriguing insights into the characteristics of the buyers and sellers themselves. A majority of both say they are comfortable with technology and conducting business on a computer, as well as taking online tours of homes. In addition, 55% of buyers say virtual tours are great for initially vetting which homes they would seriously consider purchasing, though that number dropped quite a bit when asked if a virtual tour was an acceptable substitute for an actual tour. Despite the drop, two out of five buyers say they would consider buying a home without a visit.
Thau revealed that there are ways to enhance the value of a virtual tour, such as including a tour of the neighborhood or providing written information about home improvements the seller has made. He found that 54% of buyers and 55% of sellers believe it’s important to have a real estate professional help buyers navigate virtual homebuying options.
In terms of traditional in-person home tours, both buyers and sellers see value in precautions, such as providing sanitary wipes, limiting visitors to two to four at a time, providing hand sanitizer, and requiring masks, gloves, and shoe coverings. Thau also noted that buyers and sellers see hand sanitizer, sanitary wipes, and visitor limitations as precautions that will need to remain in place over the long term.
Thau also included a caution for agents in reference to in-person tours: Thirty-eight percent of buyers and 48% of sellers indicate that they would consider legal action if they contracted COVID-19 after a showing. And 29% of buyers and 41% of sellers indicate that they would still consider suing even if they had signed a release. However, 58% of buyers say they’re willing to waive their right to sue.
Agents Expected to Offer COVID-19 Guidance
According to Thau, what matters the most to buyers and sellers about in-person tours is the real estate agent, who is expected to know and enforce health-related safety rules. Sixty-four percent of buyers and sellers state that agents should understand state and local protocols for COVID-19 safety and provide guidance, and 63% of buyers and 64% of sellers say that if someone in the home is not following health protocols during a visit, they expect the real estate agent to address it.
Buyers and sellers also indicated that it is important for an agent to know how to close a real estate transaction electronically, and a majority of both indicated that agents add value to an online search. Helping buyers uncover valuable information about a property, helping them sift through online listings, and providing more in-depth pictures and videos of properties were among the ways agents could be of service to clients. And while 40% of buyers and 52% of sellers stated that they wouldn’t need to meet their real estate agent in person to buy or sell a home, they did place a premium on oral communication—70% of buyers and 66% of sellers said they felt more comfortable talking on the phone or talking via Skype, FaceTime, Zoom, or a similar app that allows face-to-face communication, which are much higher numbers than those who felt comfortable communicating by email or text.
What this means, Thau said, is that agents really matter during the pandemic. Forty-seven percent of buyers and 53% of sellers indicated that relying on a real estate professional for buying or selling a home was more important than before. “Agents’ value has gone up tremendously as a result of the pandemic,” he said. “People need reassurance.” And he offered this advice: “Know the protocols, follow them, and don’t be afraid to enforce them.”
Our MLS is going to provide a Coming Soon feature, which will fluster the agents who say that the Coming Soons build anticipation (like a movie trailer) and test pricing, but who then use the concept to circumvent the MLS and instead advertise directly to the consumer in hopes of double-ending the commission.
The Coming Soon status launches in San Diego Paragon Tuesday, May 19th. From that day forward, when entering listings for sale in San Diego Paragon, you may choose between Active and Coming Soon.
To prepare for this launch, Paragon will undergo scheduled maintenance from 10:00 PM PT Monday, May 18th to 6:00 AM PT on Tuesday, May 19th – a total of eight hours. Paragon will be unavailable during this time. Below is a brief video to help you understand the details of this status.
How does Coming Soon work?
Coming Soon allows listing agents to take up to 21 days to stage the property, take interior photos, prepare it for showings, and so on, without Days on Market accruing.
How is Coming Soon similar to Active?
– Marketing is allowed in both statuses, so long as Coming Soon listings are clearly marked as Coming Soon.
– Both Coming Soon and Active listings are fully displayed to other professional users of MLS systems.
– The listing agent offers a commission on both Coming Soon and Active listings.
How is Coming Soon unique?
– Coming Soon listings have limited distribution: they will not go out from the MLS to portals like Zillow, Trulia, and Realtor.com, or to IDX broker and agent websites.
– Showings are not permitted in Coming Soon.
– Because of these limitations, Days on Market do not count in Coming Soon.
We’ve touched on two differences that the coronavirus is causing in residential real estate sales; the cumbersome arrangements now required just to see a house for sale, and how wearing masks will help buyers hide their interest in a home.
What else is changing?
The real estate flyers are gone now, and public open houses are heading for extinction too – and the 3D tours are being heralded as a worthy substitute. It’s too bad too, because the industry never fully grasped the biggest benefit of open houses – helping to create urgency in the buyers, especially when the home is fresh on the market.
The 3D tours are very crafty, and buyers should love them for offering maximum convenience within minutes – or seconds. Sellers don’t have to leave their house every Sunday afternoon, and agents won’t have to work weekends any more.
What’s wrong with that?
Have you ever seen a perfect house? Me neither.
The 3D tour allows the viewer to scroll around the home at their own pace, which is a plus. But it’s too easy for viewers to give up when they see something unusual or have trouble navigating.
You gotta give the house a chance.
Rather than relying on a thorough walk-around with an agent who is explaining every nuance, the home-buying decisions will be based on fancy imagery on a computer screen.
Won’t the interested parties pursue an in-home visit? Yes, and they are the most likely real buyers.
But it’s the internet viewers who click out too quickly who will miss out – and fewer buyers relying on less information isn’t a positive for home sales. Instead, the sales process gets dumbed down further, and those who support the 3D tours as an adequate substitute for agent advice are contributing to the downfall.
It’s all going that way anyway, but at least you can say you saw it coming!
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