Dishin' Dirt on Multiple Offers and Escalation Clauses with Gary Pickren

Multiple offers is a great thing to get in real estate transaction when you are the seller. But as an agent do you understand the laws and ethical duties surrounding multiple offer situations? For example, are you required to disclose multiple offers to a potential buyer? Can you even disclose and what terms can you provide? In this podcast learn how you are to legally and ethically handle multiple offers. In addition, learn what an escalation clause is and how it is to be handled in a multiple offer situation.  I will explain what an escalation clause is, how it works as well as any and all pitfalls associated with it.

Every agent should listen to this podcast before handling a multiple offer situation or if presented with an escalation clause.   Of course, this podcast will also have Corona Crazy Closings and Gary's Good News Only!

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* Gary serves on the South Carolina Real Estate Commission as a Commissioner. The opinions expressed herein are his opinions and are not necessarily the opinions of the SC Real Estate Commission. This podcast is not to be considered legal advice. Please consult an attorney in your jurisdiction for applicable legal advice germane to your issue.

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* Gary serves on the South Carolina Real Estate Commission as a Commissioner. The opinions expressed herein are his opinions and are not necessarily the opinions of the SC Real Estate Commission. This podcast is not to be considered legal advice. Please consult an attorney in your area.

Transcript

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Hey guys, it's time for another episode of dition dirt with Gary pequin 2020 shows continues to rumble right along and we're here now closing in on the end of the year. And like I've said before, I still think something crazy is about to happen. I can't believe that 2020 will go out with a whimper. But in the meantime, let me see if I can help you guys stay legal with a couple of things that we'll cover today on dish and dirt. So on our show today, we're first thing we're going to do is talk about multiple offers. How do you handle them? What is illegal, what's the ethical way of handling multiple offers, which will also roll right into escalation clauses. Those are something we're seeing more and more I will explain what they are, how they work, and whether they are legal or ethical under the realtor code of ethics. We'll also have another episode of Corona crazy closings. And of course, no episode of dition dirt can be complete without Gary's good news only. Now if you like what we're doing here, once again, I'd ask that you please like us, share us and subscribe to us. Even if you don't like us, that's fine, too. But I do need you to keep sharing us either way, because we're trying to grow what we're doing here so we can get some new exciting guests. I do know that coming up soon, we have a Wall Street Journal best time seller who will be joining us on some sales information. That's fine, I think you will find very helpful to growing your business. So stay tuned for a lot of great guests as we continue to roll through these podcasts. So let's jump right into our topic today. And the market is extremely hot. There's no doubt about it right now. And so there's a good opportunity for you to receive multiple offers on any of your closings. It amazes me over the years how many real estate agents have called me complaining that they did not win a multiple offer situation where they didn't know there were multiple offers. And they mistakenly believe that because the listing agent did not disclose to them that there were multiple offers that somehow the listing agent violated some real estate law, or some real estate code of ethics. The main thing I want everyone to understand today is there is absolutely no law, state, federal or otherwise. Nor is there any realtor code of ethics that requires you to disclose to the other side that you have multiple offers on the property, in fact, is exactly the opposite. If you disclose to any party that you even have an offer on the property without getting the approval of your seller, now you have violated South Carolina State law as well as the realtor code of ethics because under both, you have a duty of confidentiality with your client, your client, the seller may have no desire to notify the other parties that they have multiple offers on the property for various strategic reasons. So the first thing to please understand is, you may not disclose, and you are not required to disclose multiple offers. Unless your seller approves of that. Now, I would tell you, I would get an email or a text message and keep that as proof for your client. Because if the client has amnesia later and can't remember that you gave them permission, you want to have something that would protect you. Now, why would a client a seller not want to immediately tell everybody we have best at or we have multiple offers and want best and final? Well, there's there's a lot of strategies with that. And there's also a lot of risk, if I have two buyers trying to bid for my house. And I notify both of them that I have multiple offers on our own best and final one or both could decide they do not want to get in a bidding war and can simply walk away from the transaction. And now I lose bet both offers, if one of my offers is really, really good and acceptable, and one offer is really, really bad, I may lose the one that was good and the one that's bad may come up just a few dollars. So there is a risk and immediately jumping to the conclusion that if you tell both sides are both buyers that you have multiple offers, that that will automatically result in a bidding war. Sometimes it results in the parties, both leaving the transaction and not making another offer. So when you have multiple offers, while you are required by law and by the code of ethics is to present the offers to your seller. Now under state law, as you know, you have to read to present those offers in a reasonably prudent and quick manner. You don't have the right to hold those offers. And that's another issue that we constantly see is that when a selling or listing agent has an offer and knows that other offers are coming in, I've actually had them put into writing to other agents that I'm not going to present your offer right now I'm waiting for other offers. That's big real estate, no, no, you can't do that. You must present those in a reasonably tight reasonable timeframe. Now what is reasonable now if I receive an offer at 10am, and I'm in the middle of a closing, I don't have to get out of the closing and go present that offer or if I'm going to see a class or at the doctor's office, that's not reasonable to expect for me to have to leave that appointment to go present that offer. But if I finished my closing at 11 o'clock, certainly within an hour or so I should be able to present that offer to the seller, not waiting two or three days that would not be reasonable. Now there's no requirement that Your seller respond, other than the contract may have an expiration date. But your client can certainly tell you as a seller, if you say, Hey, I think we have other offers coming in, well, I don't want to respond to this offer until the deadline here. Or I want you to go back to the buyer's agent, and say that we will not respond until such time is that going to be acceptable. So your seller drives what you do not the other way around. When you start driving, what your seller does is when you drive yourself right over to the LLR, for a grievance now some of the strategies that you can see with multiple offers, as far as that your offer your seller, masons deny all offers, or buyers offers are so bad, that none of them are appealing, they could just deny all of them and not even ask for finals or multiple offer bids, they can just flat out accept one. So if one offer is so great that they would accept and don't want to lose it, they can just accept that one offer and deny the others, they can negotiate with one offer and deny the others or they can negotiate with one offer. With the other offers still outstanding until their time that they have expired has completely up to the seller, there's multiple strategies as to why you would do one way or the other. Again, during all this period, you have no duty or right to disclose any of this to any of the other buyers for potential buyer, the seller options and what they're doing or the sellers choices, and it must all remain confidential with the seller unless they advise you otherwise. Now another strategy could be asking for best and final. And this seems to be a popular strategy of HGTV and million dollar listing personally million dollar listing LA is one of my absolute favorite shows. I love watching Josh altman and Josh Flagg go at each other, it's really hilarious. But that's all fe and we everything about that show is set up, it's already done. It's not reality. And the problem is a lot of our clients watch that and believe that has become reality, and wants y'all to throw fancy open houses with celebrities, models and sports cars. But that's not how it works. So that's also not how it works with a contract. Now if your client wants you to do best and final, you're only allowed to disclose as much as your seller will allow you. Now your seller may ask you to disclose to all the parties, what the highest bid is right now hopes that the others will go above it, or the offers might be so low that they do not want to disclose to the other parties what their offer is and just say we have multiple offers. Similarly, a seller may say, Hey, we have six offers, let them know how many offers we have, because that might really get a bidding war. Now conversely, some of the lower offers may just bail on it because they don't want to bid with six other people. But if they only have one other offer, it is bad, they may not want to let the other buyer know how many offers they have or the lack of offers they have. So again, all of this needs to be handled with your seller at the at the direction of your seller. And again, I would also say make sure whatever decision your seller makes, that that is put in writing, so that everybody has evidence of what those decisions were made. Now once the best and final offers do arise, there's a couple other things to understand number one, even in best and final multiple offers situations price is not the sole factor as to whether the offer will be accepted. So just because the buyer has submitted the highest offer does not mean that the seller has to take it or they even will take it because there are many facets to a contract, my client may be willing to take a few $1,000 last on a cash closing that's going to close in 15 days with no due diligence with no inspections, as is versus taking more money that is a 45 day close with an FDA loan tied in with the State Housing loan. And it's contingent on appraisal, inspections due diligence, all that so understand whether you're on the buyer side or seller side, it doesn't matter if the final price that your client submits is the highest that is not the only factor driving the train. It also does that mean that because your client submits the highest offer that the seller even has to accept any of the offers. If they do come back best and find out well multiple offers and all of them are unacceptable to the seller, the seller can still decline any of them, and can even go back to another one and start negotiating with them. There's nothing prohibiting the buyer the seller, once they asked her best and final to still try and negotiate. So if I asked her best and final and two people's finals are bad, and the third one's good, but I think I can get some more money out of them. I still could go to that third party and say, Well, I would take your offer if and I can make a counteroffer to that offer. So I understand there's no ending to that just because you're the highest bidder. And lastly, the only thing that truly matters on on this is that you understand that your client may not discriminate based on any protected class. I have said it once I've said it a million times if your client wants to discriminate fire them if you want to discriminate just get out of our business because we don't need you. There's no reason or room for that in our business. Now let's move over to a another topic directly related to This one, and that is escalation clauses. And the reason we're going to move over to escalation clauses, is because a lot of times when you are in a multiple offer situation, escalation clauses come into being. Now what exactly is an escalation clause? This is wording in a contract that states that when a potential buyer is willing to go over a certain amount, for example, as a buyer, I may agree to pay $1,000 more than the highest offer that the seller receives on the property. Basically, the belief is, I can't lose, if I tell the seller, I'll go $1,000 over your best offer. Now, keep in mind, maybe no, it might not be the case, because price doesn't drop everything. But that is a theory that a lot of buyers have that really want a house. But there are a lot of risks. And there are a lot of pitfalls involved in that. And I'm going to talk about those here over the next few minutes. The first thing to understand however, it is not illegal in South Carolina, to do an escalation clause in a contract, nor is it improper or unethical under the realtor code of ethics. So there's nothing illegal, there's nothing unethical about it. However, that does not mean it's the best practice. And as I tell a lot of my clients that I represent, and I represent real estate agencies all over the state, is regardless what is legal and what isn't. Some things we just don't do, because it's bad for business. It's bad for our clients, it's bad for us. And this is one of those situations I think might just be bad for you, as well as for your client. What we do know is that if you were to Google escalation clauses, you would find multiple articles out there, arguing that they should all be banned country wide. We also know that states as large as Texas, the second largest state by population in the country has outlawed escalation clauses. So why is it that state like Texas would not want us doing escalation clauses, unless there is certainly some issues with them. So let's look into what escalation clauses are and how they work. And what the problem is, as I mentioned earlier, and an escalation clause, typically in the contract, you're going to make an offer and the offer would be, I will pay you $1,000, or $2,000, or whatever over your highest offer. Oftentimes, they will put language in there that says it stairsteps, I will go up$5,000 over the highest offer to a maximum of X amount of dollars. And there allows the bulk of your problem is, these things are number one written extremely poor, a lot of agents will just write their offers$1,000 over highest offer, not$200,000. But we're willing to go with $1,000 over highest offers just $1,000 over the highest offer. And so there's really no understanding as to what our true exposure is. And what you're doing when you do this to your client is you're essentially opening their wallet and say sell or put your hand in it. Because you have offered no cap in most cases, no cap as to what the maximum your client will pay, they'll pay $1,000 over highest offer. Well, on a$200,000 house that can still be 300 grand could be 400 grand, we don't know what the highest offer may be. So you have basically committed your client to making the highest offer some agents like Well, I'm not really worried about it, because we'll make it contingent on appraisal. Well, any seller who receives an escalation calls, who accepts an appraisal contingency the full first thing I'm doing removing the appraisal contingency is not contingent on appraisal. And I'm probably also removing your right to terminate under due diligence, because I know that's what you're going to do when you have buyer's remorse. So we already have a lot of issue on even getting this across the finish line at that point. And if you were to sort of try to submit a contract, knowing that it's not going to appraise and knowing that the seller is going to have to renegotiate, I think that's a bad faith offer. And I do believe there are some ethical concerns and maybe even some legal concerns. I will have a podcast on that later on that I'm planning on doing. The other option at this point then would be well, why don't we put in the contract? I'm $1,000 over highest offer not to exceed X dollars. So what do you believe as a listing agent happens when your seller sees what x dollar is. So for instance, I am making an offer of 300 Grand i will go up to $5,000 over the highest offer but not to exceed 325 grand, my seller has now seen the magical number of 325 What is my seller won't 325 at a minimum, he's not going to want 300 305 310 his response is I want the 325. But now the other problem is for my buyer, I have now exposed my buyers best and final number. Even though my my buyer really doesn't want that to be known. Because he's telling you he wants to make an offer of 300. He's willing to go to 325. So here we have expose that number in a contract, which the seller won't. So if I represent the seller and I received this escalation clause of 300 grand I'll go up 5000 over the best offer not to exceed 325 I'm just going to counteroffer you at$325,000 because that's what my seller is going to expect now. I know you're willing to go that Number so why would I even accept anything less than the 325. The second issue, probably the most important issue is the level of potential fraud, the level of fraud or the level of dishonesty in this transaction. Now, if you think everybody in real estate is 100% trustworthy, then I have a beachfront lot in Tennessee to sell you as George Strait was saying in that song. They're dishonest people in every walk of life, dishonest buyers, dishonest sellers in every walk of life. So we are assuming that when we make a offer with a escalation clause, that we will actually get a truthful number from the seller showing us exactly what that best offer was. Now, oftentimes, the parties will not authorize you to release a copy of their contract to that seller. So it might be a situation where your seller never even sees the other contracts, and they're taking it on face value that the seller got that offer, I guess you could put in your contract. And in order for this to kick in, the seller has to provide a copy of that offer. Of course, they're going to redact the names because the buyers has the first offer is not going to authorize him to release that offer. And there's questions as to whether you can even release it without that buyer's permission. Because it does have confidential information, which I don't think other parties are entitled to such as how much Mr. Mrs. Jones down the street are willing to pay for a house. I think that is confidential. I do believe that violates the realtor code of ethics for you to disclose that. So I don't believe that you can disclose that other offer without the buyers permission. And I don't know why a buyer would let you release his contract to a competing offer. But let's jump through that hoop and just assume we're wrong on that. And it doesn't violate any codes of ethics or any laws, and you can disclose it. How do we know that that offer didn't come from his brother in law? Friend, somebody at some club he's a member of how do we know he didn't pay somebody to make the offer? How do we know that two agents in the office who are struggling financially don't get together and say, Hey, help me out here, bring me some offer? Well, you know, we've got a better offer, we'll go ahead and take it. But I just need you to bring me this big offer. So I can get some more money out of these people, you truly have absolutely no way of knowing whether or not these offers are legit. So the next issue you have with these escalation clauses, is what happens when we have multiple parties with escalation clauses, I got party one who says I'll go$1,000 over the best offer and I got party two, he says he'll go over $1,000 or the best offer. I mean, where does it in, we just get going $1,000 over everybody for infinity. There's no end number inside there unless they put numbers in there. So now you're getting into an issue with what in fact is the highest number, what's the dollar amount. Also remember how we talked earlier about how price is not the only driver of contract. So this party says they'll go$1,000 over the best price offer. But what happens is the best offer has better terms. So there's really no guarantee that even if you are the highest offer, that they're going to accept your escalation clause language, because if you're$1,000 over the best offer, but the best offer is cash is going to close in 10 days with no contingencies and your financing and appraisal contingency, your escalation clause still isn't going to win. Essentially, what you're doing here is giving every buyer who gives you an escalation clause, a free right of refusal. Because even if you are to go with the escalation clause, and that escalation clause contract wins, we still don't have a contract until we put it in writing and signed by all the parties, it's gotta gotta be signed off on. So once you notify that party, the buyer that hey, your escalation clause wins, I had an offer of x and your x plus 1000. So I'm going to take yours, here's the contract, there's no guarantee the buyer is going to sign that. They may decide now they don't like how high the bid got on this property. And so they're going to back out. So as you know, a lot of buyers have buyer's remorse. And when you have buyer's remorse, you can always use the due diligence or the repair addendums to try to get out of the closing. Because if somebody has overpaid, and they now have regret, they'll use one of those other provisions in the contract to terminate. And once that happens, all the other offers that you already had in place that you could have negotiated with who are bonafide purchasers who are willing to put their number on the dotted line telling you what they will pay have now moved on to other houses. And lastly, the big issue that you also have is when the buyer is the winner, and they have now paid more than the house is worth, they're going to have to come up with more money to come to closing because a good listing agent would never allow an appraisal contingency and an escalation clause contract. So now what we have is a buyer who is overpaying for the house above appraised value and a conventional loan where they are already bringing 5% for the down payment. They're now bringing the VI percent for the down payment plus the amount that's over the value of the contract. So if the house appraises at 300. And they've agreed to pay twit 325, they're bringing $15,000 as a down payment for their 5%. And then on top of that, they are bringing the remaining $25,000. For the amount that's over the appraised value, the lender is not going to loan them money based on the contract, they're going to base it on the appraised value of the house. So now instead of bringing 15,000, to closing your clients bringing$40,000 to closing, a lot of buyers don't understand that when they do these clauses, I'm not a fan of escalation clauses. I have not talked to anybody at the realtors Association who are fans of these clauses. I think they're very dangerous. I don't think they serve your client. Well, I think a better option is to sit down with your client and say, You wanted to make an offer of 300, you're willing to go to 325. If you want to win this prize were between 303 25 do you want to go if you want to win, let's go in and 315. Let's go in 325. But if we're going to get into this escalation clause, you're going to be the loser in the end. And here's why I explained to them how as an agent, you do not believe it is in their best interest. If they will not relent, and they demand an escalation clause, you have one or two things you can do, you can remove yourself as their agent, simply say that I'm best suited to handle you anymore, and let them hire another agent, which means you'll give up any claim to procuring cause on that other property, or you can have them put it into writing that you have fully explained it. And they're fully aware of all the risk and so forth, and we're willing to move forward with the escalation clause. I'm not a big fan of the second way, because most courts you cannot disclose and disclaim enough items to satisfy a court of law. So that would be our advice today is to not do the escalation clauses. Alright, so I hope that gives you all some valuable information on escalation clauses as well as multiple offers. If you still have any questions, you can always email me and Gary at Blair cato.com. Our sponsor for today is Blair Cato, Pickering and castrillon Real Estate Attorneys here in Columbia, the Midlands, Lexington as well as Greenville and the Upstate, if you have any real estate needs, please don't hesitate to reach out to us. We are moving forward together with you. So in today's Corona, crazy closings, we had a unusual situation happened during the middle of the pandemic. Again, as you remember, we were doing closings in our parking lot. And people were kind of on edge about a lot of things going on. So we had a gentleman who was buying, I think it was maybe$100,000 house and and the contract he had negotiated probably five or $10,000 worth of repairs, which the seller had done. When he shows up to the closing in the parking lot. He is ranting and raving and screaming and waving arms and really almost out of control that he wanted the sellers to perform about $40,000 worth of improvements to the house not repairs, but improvements. He wanted a new bathroom and all kinds of things. And unless they would be willing to come in to the closing come in before the closing with a check for 40 grand or either go to the house and make those repairs he wasn't going to close. So of course you know what happened, the seller said we're not going to close and the everybody left the part or the closing parking lot, and the buyer was still ranting and raving few weeks later, we get a phone call from the seller. Apparently this was an investment property which they didn't live in. But they found out that the buyer had moved most of his belongings into their garage, and literally had pitched a tent in the backyard and was living in their backyard and using the water hose in the backyard for cooking and for taking bath. So he just decided to squat on the property as if it was his own. And they had to go through an entire eviction process to get him off the property. And that is by far one of the best examples of Corona craziness that I have seen. And now let's roll right into Gary's good news. Only a lot of good things going on out there to share with you today. Wells Fargo just released a report saying that they expect a swift recovery for the US economy in 2021. Based on the vaccines, they stated that there was tons of pent up demand by consumers and if you think about that, how many people have you talked to that are dying to go on a vacation or go do something so if the vaccine does come out of as effective as we believe it should be 96% effective is what they're saying. Then a lot of people will be ready to get back out and start spending money and that's good news. All right. Now we're gonna roll into Gary's good news only as we finish our episode today. First of all, Wells Fargo has reported they expect a swift recovery for the US economy in 2021 based on the vaccines, again, these are vaccines that were developed in less than six months because of operation warp speed. incredible feat of the US mind power to get such important things done in six months. Wells Fargo sided pent up demand is the main reason that the I would make a swift recovery. I think it'll be when the governor is finally in these lockdown so people can go back to work and provide for their families that will get the economy rolling more than anything. The second thing to share with you is my good friend Edie Andel and I were talking yesterday, and he was one of the, the builder, executive construction owner and builder of executive construction homes here in Columbia, South Carolina. He was on one of my podcasts a couple of weeks ago, where we talked about some lumber issues. But Eddie was telling me he was listening to a real estate economist who was saying that they expect this real estate boom to last, at least, and to 2022. So while some of us were a little concerned that this real estate economy was a bubble, and next year, we would lose a good portion of it. National economists say no, this is going to last well through next year into 2022. And this kind of mirrors what realtor.com is saying, because realtor.com predicts a 7% increase next year in sales. So that's also very good news. Now today, the economy is looking still good with the Dow Jones over 30,000 points. Now on the COVID. Front, what better news Can I give you then the first vaccine was given to somebody in Europe, an 80 year old lady received the first doses of the vaccine from Pfizer. This week, we understand from the ministration, that the vaccine is being delivered as we speak to frontline workers here in the United States, and that Americans should be receiving the vaccine within days, they're still thinking well over 100 million doses could be out. By February, which would be almost a third of our entire country could have received some form of vaccination for those who want to get it. Lastly, this is an interesting story. So, you know, I know a lot of people were concerned about Thanksgiving and that this, we will see a tremendous number of new cases as a result of Thanksgiving. And right now we are seeing new cases. But the interesting thing is it has nothing to do with thanksgiving. If you look at the weekly change and national COVID hospitalizations between November 10 and 17th. They were up 24% from November 17, to the 24th 14%. From the 24th to December one was 12%. Remember, thanksgiving was what the last couple of days of November, so hospitalizations would have been up by December 1. Mad Decent refers to decent, right, they're only up 6%. So what that showing is that the decreased look at the numbers went from 24% to 14 to 12 to six, so that it doesn't appear that Thanksgiving has had really any significant increases on that at all. I would caution you to be very careful when you hear the numbers of hospitalizations are overrun, actually go look at and you'll see that most of the hospitals are actually not overrun. And there's a very few hospitals are even over 80% capacity. Remember, hospitals are typically over 80% capacity anyway, because of normal, use the hospitals and make money being at 50% capacity. So we haven't seen any hospitals, right yet that are above capacity. So if you're hearing that in the media, that's not really being you're not really being provided the whole story there. So go to the CDC website. And you can look on their website, and they'll show you where the hospitals are laying around our city. But you got to also keep in mind that when they say hospitals at 75% capacity, you have to understand that hospitals should be at 75% capacity. Otherwise, they're not making any money. They don't make money by having empty beds. So that's today's good news only and I hope you all enjoyed that. Hope you all will call him back next week for another episode of dishing dirt. We appreciate all of your support of this podcast. As I've said many times before, if you'll please share it like us and subscribe to us. We would greatly appreciate it and you can also follow me on Instagram at Pickering Gary. That's PSC k r e n d a r y hope everybody has a wonderful week.