Disclosure of Other Offers. Do I or Don’t I?

In the category of no-win situations licensees who answer yes or no to the question “Do you have other offers?” is going to look bad to someone who cares about the answer. The REALTOR Code of Ethics, and the State of Wisconsin laws regarding disclosure read separately have something for everybody to point to when they want to accuse a licensee of failing them or failing to meet their expectations. Fortunately, the response which keeps the licensee on the right side of the law can be determined if the people involved in the conversation are willing to follow a path of logical thinking.

The Code of Ethics sets standards and parameters for ethical fair-play. Ethics are inherently subjective to norms. Your standard of ethics may be higher than those in the Code, and you are welcome to practice your standard. Holding others to your superior standard will result in your expectations being unmet time and again. All REALTORS are subject to the Code of Ethics, but all REALTORS do no practice is every state. State law dictates legal practice standards. Legal standards when greater than an Association Ethical Standard take precedence.

When the question is disclosure of other offers or possible other offers the Rule and the Code are going to send you on a tail chasing circle. NAR Standard of Practice 1-15: IN response to inquiries…(REALTORS) shall, WITH THE SELLERS’ APPROVAL, disclose the existence of offers on the property. OK. When the seller approves disclosing the existence of offers a REALTOR MUST disclose. Question: “Do you have any offers on the property?” With the sellers’ approval you must answer YES if indeed you do have offers. Does the listing contract give you automatic approval to disclose you have other offers? No. How will you know if you do or do not have approval from seller? Do you assume you do or you don’t have permission? Murky.

What does the law say? REEB 24.12 speaks to confidentiality. “…a licensee may, but is not required to, disclose information known by the licensee regarding the existence of other offers on the property…”. Where are we now? Do we disclose or don’t we? Depends.

Do we have an ethical and or legal responsibility to give honest answers, provide accurate information, avoid misrepresentation? Yes, and yes. But…if the client gives us a lawful instruction to keep existence of offers or the fact that no offers are in or coming in confidential, we are to keep the facts confidential. Does that mean we can lie? No. When our answer the accurate representation of a fact related to presence of offers is YES or NO and the answer is contrary to the lawful direction of the client, the only answer is: “It’s confidential”. Does “it’s confidential” remove you from an accusation of ill intentions? Nope. Someone is not going to like the answer.

So what do we learn? The best defense against an accusation is, DON’T participate. The best defense against being found guilty is documentation. Amendments and Notices are proper forms for documenting lawful instructions. An email or a text will help. Your recollection of a phone call, or your opinion of what is standard practice, or best for your reputation are insufficient and possibly just wrong. Depend on the literal interpretation of the law, and the Code. And then make sure the client’s direction is in writing, and lawful.

Inspection Contingency. Advantage Buyer or Seller?

Intention is everything in negotiations. We lose buyers and buyers lose houses for good reasons, and sometimes for reasons that have everything to do with failing to focus on intent.

The inspection contingency is intentional. There was a time not so long ago when there was no mention of a contingency to inspect a property in the WB Offer, and rarely found on company created addenda. Once the concept found its way onto the conversation of potential contingencies for the state approved form the work of making the contingency work began. First question for the committee might have been, “Who is this for?” and the second probably was, “How will it be abused?”.

The opportunity to inspect is first a benefit to the buyer. In essence the inspection slows the process, gives the buyer the chance to get an informed opinion of the condition of the property with some limited ability to renegotiate or possibly part ways. As advantageous as this is to Buyers it’s high risk for the Seller. Inspections will identify some issues and given the chance to ask for something in concessions people tend to ask, and asking takes time. The standard offer inspection contingency gives the seller the leverage to end the conversation if they are pressed by the buyer to make concessions. That’s a necessary authority to keep everyone honest, and allow sellers the opportunity to move on when demands are unacceptable.

Of course we’re all smart and can see how the opportunity to end the conversation is powerful in the hands of the Seller. So we did what is expected of a Buyer Agent: we tweaked the contingency to flip the leverage to the buyer to the detriment of the seller. The person on the receiving end who does not comprehend the difference in the wording will discover the difference when it’s too late.

Time waiting for the contingency to be satisfied is pressure on the Seller. Pressure is stress. In negotiations the person feeling the stress is the one who knows they are at a disadvantage. Whomever has the leverage in the inspection contingency has the advantage in creating or eliminating stress.

Knowing exactly what process the inspection contingency creates is one area where any licensee can be a difference maker in negotiations. When you know who has the lever and what has to happen to get to contingency satisfaction, your client will have the information to make smart choices.

The words matter. The intent of the words is to give one side or the other leverage. Leverage is power, control, and stress inducing. Be intentional. Know the intent.

The Escalation Clause is a Mess. Simplify Your Escalation Terms to be Accepted.

Why wouldn’t a home seller accept an Offer with a promise from the buyer to pay $1,000.00 more than another bona fide offer in the seller’s possession? Well, they likely would if a buyer made that Offer. Rarely is an Offer made this simple. Escalating price offers are muddied with conditions of seller providing proof, calculating price by deducting for eligible credits, and buyer’s final approval. It’s the uncertainty of the caveats which dilute the promise to a giant “maybe”; and maybe means “maybe not”. Once tied into a contract, untangling is difficult. Rather than take a chance on the caveats, owners prefer to avoid the escalation clause and counter the cleanest offer on price. The escalation clauses used today challenge the ability of the presenting agent to explain the nuances. The more confused the seller becomes, the more likely the seller is to look away.

If the reason the Escalation Clause is not preferred by sellers for reasons of uncertainty and lack of clarity, the solution is simple: eliminate the uncertainty. The following is an escalation clause suggestion for the well qualified, confident, risk tolerant, prepared buyer who intends to own the property.

First, know we are likely to pay more than we planned to get the home we want to own. Is that overpaying? Maybe. That’s for you to decide after you factor in the reasons you’re trying to buy. Understanding we are in a market where price and terms are set by the seller and driven by consumer demand is where we can choose to begin, or wait to be convinced. The sooner we acknowledge reality the closer we are to an accepted Offer.

Second, be prepared. There are pre qualification letters, pre approval letters, and loan commitments. You don’t have to have an accepted offer to get an underwritten commitment letter for yourself to buy a property. Lenders will do this for you to improve your negotiating position. They may charge a fee, but I know a few local lenders and mortgage companies who will do this for you for free. Put yourself in the place of the seller. You want to know the buyer is absolutely positively prepared with financing or cash in the bank to buy your home. Conditions of verifying information and underwriting approval require a seller to wait in uncertainty for several weeks. If you could avoid that wait and worry you absolutely would. So will the person looking at your offer.

Third, write the Offer you can live with even if it means you paid more than you might have had to. You’re going to think about the price you paid once, and you’re going to forget about the price when you begin to live the life you see for yourself in the home.

Fourth, tell the owner you will pay more $_________ than the price on page one of the bona fide offer they have in their hands at the time of acceptance of your offer. Cap the amount you are willing to escalate your Offer to.

Fifth, and this is the most important part of your escalating offer promise. Don’t require any proof of a bona fide offer from the seller. Trust them. Trust the listing firm is not misrepresenting your proposal and the calculation is being done as stated in your offer. Remember, never, ever have we required a seller prove they have other offers when we’re told other offers are in or coming in. Demanding to see proof is unique to the escalation clause and the reason to demand that proof is inconsistent with the normal practice of making a decision on terms based on what we think is reality.

Your escalating price should be determined by comparing only the purchase price number on page 1 of the Offers. Forget about deducting for credits, concessions, and costs to close. The proof requirement, the deductions for credits, concessions, and cost only confounds the seller. Keep it simple. Make it attractive. Own the home if that’s what you want to do and move on. To compete and win, put your commitment on the table and stand behind your promise. Give the seller every reason to trust you. The other buyer’s are giving the seller reasons to doubt them. Let them be them, you be you and you be committed.

What does this mean?

Every word and punctuation in a contract may be insignificant until it’s necessary to determine what it is the parties agreed to. The Offer to Purchase has nine pages of words which may have been scrutinized to the extent that they are commonly understood to mean this or that. To help decide what is or isn’t a defect, this word has it’s own definition in the contract. Unfortunately the definition is sufficiently subjective to leave buyers and sellers at odds and locked in disagreement. The definition is so uncertain that sellers are suspicious of the inspection contingency fearing they will be entangled in a commitment to a buyer who insists a maintenance item is a defect.

Smart licensees have come up with a way to better assure sellers that their buyer client won’t come up with a list of nickle and dime conditions they want compensation for. The solution begins with assuring the seller that the buyer will not consider a condition a defect as long as the cost to cure does not exceed X dollars. Because the buyer won’t consider a condition at or below X as a defect, the seller can rest easy knowing the vague definition of a defect in the Offer has been tightened up in their favor.

A version of limiting a defect to an item in excess of X is making the rounds and its intent is not clear. Have you seen this:

With regards to the Inspection Contingency, Buyer will not amend the Offer to purchase contract with credits, price reductions or require repairs for defects summarized in buyer provided inspection report so long as the collective total of defects does not have a repair estimate greater than $1,000.

What does that mean? When placed in context with the inspection contingency it seems to mean the buyer will not request the seller to amend the offer to reduce the price, pay a credit, or require repairs for any item estimated to be $1,000 or less in cost. That’s fine but the contingency is not about amending the Offer. It’s about delivering Notice of Defects to which the buyer objects. Doesn’t it seem that the only thing accomplished by promising to not amend for conditions below a dollar amount is to promise not to amend the Offer? The buyer’s right to deliver Notice of Defects is not restricted by the buyer promising to not amend the Offer.

If we interpret the statement as meaning the buyer will not deliver Notice for such items under $1,000.00 we may be surprised when the buyer’s attorney reads the provision as it’s written and takes the position that the right to deliver notice of objection to defects is unaltered and that $900 item is a defect. Unless the parties agree a dollar amount was part of the definition of a defect, they only agreed to not amend the Offer, and any defect as defined is fair game.

Any real estate lawyers who have an opinion on this are invited to weigh in. And by “weigh in” I mean write a comment.