BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
With the real estate market shifting to a sellers’ market in a number of locations, we have received a lot of inquiries regarding the advantages and disadvantages of writing a sharp offer, also known as an escalation clause. A sharp offer is an offer written by a buyer which states, “Buyer offers $5,000 [or any other amount] more than the next highest offer.” This practice is discouraged as there are a number of legal pitfalls associated with it. Consider the following scenarios:
SCENARIO NO. 1: I am a listing agent. The seller received five offers and accepted an offer stating “Buyer will pay $10,000 over the next highest offer.” The seller accepted that offer and declined the rest. When the buyer realized how much the buyer was paying based on the next highest offer, the buyer canceled the offer. Is the contract enforceable?
RESPONSE: Arguably not. The statute of frauds requires that sufficient terms be in writing to enforce a contract, which must include a readily ascertainable purchase price. If a contract is too vague and ambiguous to determine the exact terms, arguably the contract is illusory and unenforceable. The buyer could argue that when the buyer made the offer, the buyer did not know the exact price the buyer was offering and therefore did not make an informed offer. Likewise, because the exact offer number had not yet been determined, the buyer could argue that it was illusory and therefore, it is an unenforceable contract.
SCENARIO NO. 2: I represent buyers in the buyers’ purchase of a home. The buyers had missed out on a number of other properties in a competitive market. The buyers asked me to write a sharp offer on a home offering to pay $5,000 higher than the next highest offer and waive all contingencies. However, when the seller showed the buyers the next highest offer and the buyers determined the final sale price, they realized that they did not have loan approval for that high purchase price and could not close the transaction. What are the buyer’s options?
RESPONSE: If there is a liquidated damages provision, the buyer can cancel the purchase contract, but the seller may likely assert a claim to the buyer’s deposit. The seller may take the position that the buyer breached the contract by writing a non-contingent offer and had agreed to a purchase price based on the sharp bid formula. If there is no liquidated damages provision, the seller could sue the buyer for specific performance. If a lawsuit is filed, as indicated in the above scenario, a question could be raised as to whether the contract was even enforceable to begin with.
SCENARIO NO. 3: I represent a seller who accepted a sharp offer from a buyer. The buyer has not removed the buyer’s appraisal contingency, but the appraisal came in under the sales price. Can the buyer cancel and receive their deposit back?
RESPONSE: Likely, yes. If there is an appraisal contingency and the property did not appraise at the sales price, the buyer can likely cancel the contract and receive their deposit back. On the other hand, if there is no appraisal contingency or the buyer removed their contingency and the property did not appraise, assuming there is a liquidated damages provision, the buyer can cancel the contract, but potentially jeopardize their deposit.
DISCUSSION: Sharp offers are not recommended for a variety of reasons. A sharp offer could be challenged as being an unenforceable contract in that the exact purchase price is not readily ascertainable from the face of the contract and therefore, the buyer does not know exactly how much the buyer is offering. By writing a sharp offer, a buyer could be placed in a difficult position if the buyer’s offer ends up being more than the buyer can afford. If the buyer writes such an offer without an appraisal contingency, the buyer’s deposit could be jeopardized if the property does not appraise at the sales price. Likewise, if there is an appraisal contingency, the buyer could cancel, leaving the seller without a buyer in that instance.
PRACTICE TIPS:
- Agents representing buyers are discouraged from writing sharp offers on behalf of their clients. If the client insists on a sharp offer, the agent should recommend that the buyer consider adding a cap on the purchase price in the offer at the upper limit of what buyer is willing to and can pay.
- If the buyer agrees to a cap on their sharp offer, buyer’s agent should discuss the issue with their manager to assist in drafting these provisions with a cap on the sales price (e.g., “Buyer will pay $5,000 over the highest offer received by seller, up to a maximum offer of $970,000”)
- If a listing agent receives a sharp offer, the agent should advise the seller of the issues with the sharp offer and it may not be an enforceable contract. Even if the seller wants to accept the buyer’s sharp bid offer, the seller should NOT just sign the buyer’s offer.
- A recommended practice in this regard would be to counter that buyer with an exact offer price so the buyer is aware of the exact amount the buyer is paying. For example:
- “Paragraph __ of offer: Buyer’s offer to pay $_____ more than any other offer, is specifically deleted from this Agreement.”
- “Purchase Price shall be $_________.”
If the buyer insists upon seeing the other offers, the seller and listing agent can respond that the sharp bid provision was deleted from the contract and the seller has made a firm price counteroffer.
If the buyer cannot afford the price or cannot close the escrow, the buyer can decline to accept the counteroffer.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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