Escalation

Proof of Competing Offer

judson726 Buyer, Seller , 0 Comment

Question: When making an offer to buy a home and the listing agent says that there is another bid in for the same home, can I get proof of that bid?

Answer: The short answer is no. There’s no way to get absolute proof of another offer (except when an Escalation Addendum is used, which I’ll address later), but there are strategies to help determine how legitimate the claim is.

Ask Questions

There’s a myth that agents aren’t allowed to disclose the details of an offer to another agent when, in fact, it’s perfectly legal unless the seller declines it in the listing agreement (rare). When I’m told about another offer, my first reaction is to ask questions about the competing offer’s terms, how/when the seller will make a decision, and anything else that’s relevant to the offer. In most cases, I’m able to advise my client with a high level of confidence whether or not the other offer is legitimate and the appropriate response.

Situational Awareness

Here are a few factors you can look at to determine the likelihood of multiple offers:

  • Days on Market: The highest chance for multiple offers is on/after the first weekend a property is listed, with the likelihood decreasing with each week that passes, and significantly after the first 3-4 weeks.
  • Price: If you think the list price seems below market price, you’re probably not the only one. In some cases, agents price a home to encourage multiple offers. If the deal seems too good to be true, be prepared to compete.
  • Rarity: The more rare the home is, the higher the likelihood of multiple offers. A 1BR/1BA 750sqft condo in Ballston for $425,000 is probably not going to generate competing offers, but a Lyon Village colonial with wrap-around porch, open floor plan, and 20,000 square foot flat lawn w/ privacy fence probably has a few buyers who have been waiting for 6-12 months for a home like that to hit the market.

Of course, multiple offers can come at anytime. I once had a listing that had one offer in over a year and then ended up with two offers on a random Monday. I couldn’t explain it and it was certainly an interesting conversation with the two agents who submitted offers.

Risky Business

Made up offers are a lot less common than you’d imagine because most agents understand how much riskier it is to negotiate using a fabricated offer instead of negotiating through strong counter offers and honest negotiations. The risk comes from the number of buyers who have no interest in getting involved in a competitive offer situation and will withdraw or stop negotiating when they find out about a competing offer. The risk of losing one legitimate offer to a fake one keeps most agents honest.

Escalation Addenda Work

If you doubt the merits of a competing offer, but want to keep yourself in contention if the offer is legitimate, an Escalation Addendum may be the best way to proceed. If the seller chooses to ratify your offer using an escalated sales price through the Escalation Addendum, they must provide “a complete copy of [the] other offer used to justify the escalated sales price.” For a more detailed explanation of Escalation Addenda, see my previous article for ARLnow.

Have you ever sniffed out a fabricated offer during the negotiation process? Have you ever incorrectly assumed an offer was fake and lost a home you really wanted?

Advanced Buyer Strategies: Escalation Addendum

judson726 Buyer , , 0 Comment

Question: I made an offer on a competitive property for sale and really wanted it so we submitted the offer with an Escalation Addendum. Post-submission, we received an email from the Listing Agent saying, “you won” with the full escalation amount updated on the Sales Contract. After we signed and ratified the contract, we requested the competing offer(s) used to justify the price escalation and were told by the Listing Agent that they did not use the Escalation Addendum and it was just a counter offer. Is this allowed?

Great question! There are a lot of factors at play and I’ll do my best to address the key points without turning this into a book. Feel free to contact me with any follow-up questions or if I can help clarify something. Before I dive into the response, I’ll explain some basic terms.

What is a Sales Contract? A Sales Contract is the main contract between a Buyer and Seller that lays out the majority of the terms influencing a home sale. It includes the sales price, when the property will be sold, and which items convey/transfer with the sale (washer/dryer, hot tub, curtains, etc).

What is an Escalation Addendum (EA)? EAs should be used with great care and full understanding. It is an “advanced” strategy used by Buyer Agents to increase the chance of their offer being accepted on a competitive listing. When used correctly, it allows a Buyer to be aggressive up to their maximum offer price and protect them from over-paying relative to the other offers.

It is included with a Sales Contract and provides terms to the Seller that allow the offer price to be increased up to a maximum amount in specific dollar increments in the case of a competing offer. For example, a potential Buyer may submit an offer for $500,000 with an EA allowing an escalation to $550,000 in increments of $1,000. If the Seller receives another offer with comparable terms for $520,000, the Seller may use the EA to automatically increase the original offer from $500,000 to $521,000. If the competing offer is for $549,500, the original offer may be increased to $550,000.

 

I am going to base my answer on the assumption that this occurred in Arlington/NOVA and the Northern Virginia Association of Realtors (NVAR) standard form contracts were used (more on this later). Our EA is designed to be a binding agreement between the Buyer and Seller. When used by a Buyer, it constitutes a formal offer and when used and signed by the Seller, it becomes a fully enforceable contract at the stated price (at or below the full escalation amount). If used, the “Seller shall provide to Purchaser a complete copy of Other Offer used to justify the escalated sales price” which is what our reader requested before being informed the EA was not actually used.

This is where things get a bit complicated. The way I interpret the question is that instead of the Seller signing off on the new sales price on the EA, he/she submitted a new sales price via the Sales Contract and the parties agreed to the price there. In this case, what the reader signed was a counter offer because it was done through the Sales Contract. Had the Seller added the new price to the EA and signed it, the EA would have been enforceable and the Seller would have been required to present the entire competing offer. Unfortunately, the “you won” email holds no weight in this discussion because anything said outside of contract documents does not count.

Earlier, I mentioned that I based my response on the reader using NVAR forms. That’s important to note because DC and Maryland have very different escalation rules. An escalation in DC or Maryland cannot be signed by the Seller and therefore cannot be made into a binding/enforceable document. If the escalation is used, the changes are made to the Sales Contract and do not require the Seller to furnish an entire copy of the competing offer, just the terms used to justify an escalation. For these and many other reasons, I urge anybody considering using an escalation strategy to make sure they understand the contractual implications in their jurisdiction.

Key takeaways:

  • Escalations are a risk/reward strategy and should only be used with full understanding.
  • In NOVA, EAs become enforceable contracts once signed by both parties.
  • When an EA is used, the Seller must provide a full copy of the competing offer, showing comparable terms, to justify the escalation.
  • Anything written in an email, said by phone, or otherwise communicated outside of the contract is not binding.
  • Virginia contracts differ greatly from DC and Maryland in certain areas so it’s important to work with a Realtor/Broker who understands your jurisdiction.