Handling Multiple Offers - PDF Free Download

Handling Multiple Offers Objectives Upon completion of this section the student should be able to: 1. Explain to buyers and sellers how to prepare and evaluate offers based on a buyer s ability to close on terms acceptable to seller. 2. How not to prepare or evaluate offers based on discriminatory information or protected classes. 3. Explain how to use escalation clauses/addendums, evidence of funds documents and other firm approved forms when preparing or presenting multiple offers. 4. Explain how the seller can counter any offer and accept offers in first and backup positions. Also explain that care must be taken so sellers do not accept multiple offers in first position.

Multiple Offers The most important point in understanding multiple offer situations is that the client controls the negotiation strategy. Although the client is likely to follow the advice of the broker, the client s legal and ethical wishes must be followed at all times. How Not to Prepare or Evaluate Offers A discriminating seller might choose one offer over another for any number of fair and legal reasons. This is far different from one who practices discrimination based on a protected class. We have discussed the subject of the Federal Fair Housing Act and the Washington laws on discrimination. Knowledge of protected classes, who they are and what is legal, plays a significant role in reducing risk. In a transaction is it legal if the seller: Refuses to sell to a buyer because he s rude. Refuses to sell to a buyer because they weren t respectful. Refuses to sell to a buyer because they didn t keep their word. Yes, the seller can legally refuse to sell to a buyer, if there is a valid reason why the buyer did not qualify for the purchase. What if this buyer also happens to be of a protected class? Does the answer change? Maybe. Qualification to purchase still comes into play, but refusal cannot be based solely on discrimination of a protected class. The key to determining unlawful discrimination is in the reason a seller takes one offer over another. It is generally agreed that a seller is going to favor an offer from the buyer who is perceived as having the ability to close on the terms most acceptable to the seller. How to Prepare and Evaluate Offers The question of course is in determining which of the terms are most important to the seller. It is obvious that price may be that factor. But to assume that price is the case in all situations would turn the negotiation process into a simple calculation, and we know that is not necessarily true. There are many other possible factors that could be the

tipping point in a transaction. Homes are not numbers. Negotiations take into account many factors which is the very reason brokers must be aware of the Federal Fair Housing Act and Washington law on discrimination. So for the buyer, it is necessary to find out what those factors are, and in a seller s market, craft an offer that best satisfies those seller needs. For the seller, in a seller s market, it is important to let all buyers know what factors are most important to the seller, and then to find through the process of elimination which offer most closely satisfies those needs. Possible factors influencing the seller could be: Possession date Finance terms Prior transaction failures and experiences Title/escrow preferences Pre-inspections and inspection clauses and timeframes Closing date flexibility, and others Earnest money deposit Seller s net proceeds Escalation clause Escalation Addendum The purpose of the escalation addendum for a buyer is to allow them the flexibility of agreeing in advance of the presentation to raising their offer if forced to by a competing offer. The form states the net amount the buyer will pay above the competing offer, and the absolute maximum the buyer will pay. The net amount of the offer is the stated price minus seller concessions (e.g. paying buyer s closing costs). A worksheet is typically provided to assist in doing the calculations, but is not part of the agreement. Worksheet example Purchase price of competing offer $ Less credits to buyer in competing offer $ Plus escalation amount of this offer $ Plus any credits to buyer of this offer $ New purchase price of this offer $

The purpose of the escalation addendum for a seller is to achieve the highest net price possible for their home. For the seller, the escalation clause can be used in three different ways. It can be discarded by the seller, and the seller can counter buyer s offer at any price they choose, without using the escalation addendum in the counter offer. The seller may incorporate the escalation addendum into the contract, including a copy of another offer, justifying the higher price. By signing the contract it ratifies the agreement with that buyer. This is not a counter offer. The seller may use that second buyer s contract in order to justify the price of another buyer. In other words, use that second buyer s offer as a tool to get a higher price from another offeror(buyer). Contracts are not typically confidential. Sellers may use them in any way they choose in order to achieve the highest price possible for their home. COPYRIGHT REALESTATESCHOOL.ORG 40

Evidence of Funds Addendum A key offer component used by buyers to strengthen their position is to make the purchase non-contingent on financing. This means that if they are unable to get the funds necessary to close and all other contingencies and inspection periods have passed, they will typically forfeit their earnest money. While it is a strong choice by the buyer, they need to be sure of what the repercussions are for failing to come up with the funds to close. Since a buyer is not relying on contingent funds (e.g. money from the sale of a property, mortgage loan), the seller will want to have evidence the buyer can actually fund the purchase. Included in the addendum are clear timelines for delivery of evidence for funding the purchase as well as protections for the the seller if the buyer is unable to provide such evidence, typically the ability to terminate the agreement. COPYRIGHT REALESTATESCHOOL.ORG 42

Accepting Offers in First and Backup Positions There are tactical choices when a sale is likely to be a multiple offer situation. For a seller, it is important to be aware of a crucial point, the seller controls the negotiation process, and the negotiation tactics in multiple offer scenarios. If the seller anticipates a multiple offer situation, the seller may choose to take those offers as they come, or set a date and time to review all offers. If a seller chooses a date and time, the seller is under no obligation to adhere to that declaration. The seller has the right to accept any offer at any time they choose, assuming all legal requirements are met (e.g. fair housing law). Highest & Best Sellers are looking of the highest price for the best terms, and it s the broker's job to help them wade through the many options they may face. In a multiple offer situation the best practice is for the listing broker to use something to organize the offers such as a spreadsheet. Being able to evaluate the high points of all offers at the same time will help lead a seller to the most favorable price and terms. Turning Strongest into the Best Sometimes the strongest offer (e.g. high down payment, pre-inspection) might not be the highest purchase price, or may contain elements that are not satisfactory to the seller (e.g. closing date). In this case, a seller may decide to counter the offer that is strongest overall. Date & Time Reconsideration A seller might decide that some or all of the offers may deserve a second chance to improve or change their offer, and choose a time for reconsideration. Doing this does carry risk of buyers not increasing their offer, the best offer lowering their offer, or participants choosing to decline purchasing. Brokers must be aware of the many possible directions a seller might choose to take, and provide for the seller s consideration the advantages and disadvantages of each option. COPYRIGHT REALESTATESCHOOL.ORG 44

Backup Addendum After accepting an offer, sellers can choose to accept a backup offer with a willing buyer. It is imperative to include a backup addendum in order to be sure that the seller is not bound to two different contracts at the same time. There have been a number of times where a seller has signed two contracts without including a backup addendum to clarify which is in first position. It has lead to problems, and why it is a topic in this course. As a broker, it is imperative to include the backup to ensure there is clarity on first position and backup. Buyer Tactics For every buyer, the obvious goal is to have the seller accept their offer over other competing offers. Although it is generally assumed that the seller s decision to choose one offer over any others, involves what s written in the contract, but there are other factors weighing into this decision. Because of this, there are many ways a buyer, or a buyer s broker, can attempt to sway the seller s decision. Tactics might involve any combination of the following: Strive to present the offer in person so that body language can be observed and questions from the seller can be answered immediately. Use a well-respected lender especially one who is who is readily available. Demonstrate through a buyer s letter the financial ability of the buyer, the stability of the buyer, the features in the seller s home that the buyer finds attractive. Buyer s availability to respond to a counter offer. Buyer broker s reputation of working in a collaborative fashion. Flexible terms in the agreement. Inquiring as to terms that might be advantageous to sellers. Note: Always withdraw offers and counter offers in writing before submitting an offer on another property. Remember that an offer or a counter offer can be withdrawn any time prior to the proven and proper delivery of a ratified agreement from the offeree to the offeror. COPYRIGHT REALESTATESCHOOL.ORG 45