Q: I’m representing a Buyer in what we know will be a multiple offer situation. My client told me that she wants to “make a bid $5,000 more than the best offer received by Seller.” I am troubled by this approach. Is it legal? How should I handle this?
A: This type of offer has been known by multiple names: a “Relative Offer,” “Sharp Bid,” and “Escalation Clause.” These terms are all used interchangeably to describe a Buyer’s offer in multiple offer situations which specifies that the Buyer is willing to purchase the property for a set amount above whatever is being offered by any of the other prospective Buyers rather than making a specific dollar offer. For simplification in this Practice Tip, we will call all of these efforts “Relative Offers.”
Although it is legal to prepare a Relative Offer, Clients should be strongly discouraged from writing Relative Offers because of a number of potential problems.
POTENTIAL PROBLEMS WITH RELATIVE OFFERS
- Uncertainty: The first issue with these offers is: if a Buyer’s offer is “$5,000 more than the best offer,” what constitutes the “best offer?” Is it the price alone, or does it take into account the financial effect of the other terms, such as credits, repairs, and who pays for certain services and inspections? Even when specifying $5,000 more than the highest price offered, the language is not sufficiently clear. Other contractual terms can impact the Seller’s net, therefore, making a clear evaluation of the “best” or “highest” offer uncertain. If any of the other Offers are subject to a confidentiality agreement, then neither the Seller nor the Listing Agent will be able to disclose the contents of those offers to prove what was the “best” offer. Even greater uncertainty is created when the Seller receives more than one Relative Offer.
- Potential Blank Check: Buyer is making an offer without knowing how much they are really offering. The end result is that the Seller might accept and specify that the amount the Buyer must pay is greater than what the Buyer is actually willing, or capable, of spending.
- Utilizing a Maximum Amount: One tactic to avoid the blank check problem is to put a cap on the maximum amount of the offer (e.g., “$5,000 over the highest offer received by Seller, up to a maximum offer of $970,000”). Although this enables the Buyer to know the maximum amount of their offer, this technique also puts the Seller on notice of what the Buyer is really willing to pay, and allows the Seller to make a counter-offer at that amount or even higher.
- Appellate Court Determination: There is only one Appellate Decision that has dealt with this concept. In that case, the Court determined that this type of offer is “too uncertain” to be an enforceable contract because if the offer is accepted without any counter-offer or other clarifying contract documentation, such as an Addendum or Amendment, there is no specificity as to the sales price.
- Fairness: Listing Agents should stop and consider whether a Seller will want to accept a contract from a person who is trying to take advantage of offers from other perspective buyers who are playing fairly? How will this Buyer treat the Seller during escrow when it comes to negotiating contingency removals, extensions, etc.?
PRACTICE TIPS:
- Buyer’s Agents: If you represent a Buyer who wants to make a Relative Offer, strongly suggest that they reconsider based upon the potential problems listed in this Tip. However, if the Buyer insists upon using this technique, document in an e-mail to the client your recommendations and the Buyer’s decision to disregard your advice; then prepare the offer as instructed by the client. It is not illegal or unethical to make such an offer – it’s just not a good idea.
See Weekly Practice Tip: How to Handle Clients Who Will Not Follow Advice? (11/16/2018)
- Listing Agents:
a. If you receive a Relative Offer, advise your Seller that there is no obligation to honor it. The Seller may treat it like any other offer in that it can be rejected or countered but it cannot be accepted “as is.”
b. Even if the Seller wants to accept the Buyer’s Relative Offer, the Seller should NOT just sign the Buyer’s offer. Instead, the Seller should be encouraged to counter at a fixed price, even if that price is the exact same amount that the Buyer would have paid based on their Relative Offer. The best language to include in the Counter Offer should delete the language used to create the Buyer’s Relative Offer. (“Paragraph __ of offer: Buyer’s offer to pay $_____ more than any other offer, is specifically deleted from this Agreement.”) Then, the Counter Offer should state “Purchase Price shall be $_________.” Then, if that Buyer insists upon seeing the other offers, the Seller and Listing Agent can choose to either (a) show the highest offer (as long as it is not subject to a confidentiality agreement) or (b) respond that the Relative Offer component was stricken and the Seller has made a firm price Counter Offer.
3. Both Agents: The final purchase Agreement must have an agreed-upon, actual sales price that can be determined solely by looking at the signed contract. For example, it is not sufficient for a Seller, who wants to accept a Relative Offer, to just forward to Buyer’s Agent a copy of the “highest offer.” There must be an actual Counter Offer signed by the Parties clearly stating the actual sales price and all of the other terms that the Seller is changing in the Offer. Arguably, there has not been a meeting of the minds and no binding contract unless the steps recommended above are followed. This becomes a problem that Attorneys for the Parties will only be able to resolve after considerable time and expense is incurred.
ATTORNEY-CLIENT PRIVILEGED COMMUNICATION: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
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