Escalation Clause Deficiencies

At a young age, we learn to compare apples to apples. Sesame Street taught generations of kids to find one of these things that’s not like the other. Law schools teach students to make oranges appear to be apples and make anything look like something other than what it is. Versions of the real estate escalation clause (sometimes called acceleration clause) are either poorly written or crafted with cunning.  

Pay More Than The Net Purchase Price of a Competing Offer

On page 1 of my Offer, the purchase price compared to the purchase price on page 1 of another offer compares apples to apples. Purchase price on my page 1 to the Purchase price on the competing Offer’s page 1, MINUS credits and concessions, compares apples to anything but apples. 

My Purchase Price Compared to Your Net Purchase Price. Did you think the comparison was purchase price to purchase price or net purchase price to net purchase price? Look again. Here’s how this comparison might play out:

My Offer is $300,000, and I say I will pay $2,000 more than the Net Purchase price of a competing offer, up to $310,000. 

The competing Offer has a purchase price of $308,000 on page 1. Net purchase price is defined as any monetary contributions by the seller outlined in the competing Offer: purchaser closing costs, credits and property prorations.

The first glaring red flag is property prorations. If property proration means property tax prorations, and the tax proration is $10,000, the seller shall credit the buyer $10,000, reducing the competing Offer to $298,000. ($308,000 – $10,000) By comparing e my purchase price to the competing Offer’s NET, my price is not moving from $300,000. (Nothing for the seller to worry about as long as the listing firm’s commission can cover the $10,000 error. )

Define The Terms. Do The Math.

Listing agents who do the math exactly as called for in the story problem escalation clause will protect their clients from stumbling into this mess. Buyer agents who know their clause are comparing anything but apples to apples will protect their clients from paying more than the parties agreed to or getting their Offer rejected because it didn’t do what the agent thought it did. 

One idea—If the escalation clauses are not what they say they are, avoiding them might be prudent.  Consulting an attorney is your first level of protection.

Love Letters to Sellers: Fair Housing Violations Slip in; Knowingly or Otherwise.

*A letter to the seller: We are Brittany and Kristopher Austin. Our daughters are Elizabeth and Michaela. The crowd of people at your open house today is a sure sign you will have more than a few offers to consider today. We just sold our home, and we know it is challenging to know you’re selling to the right family when all you have is an offer to purchase to consider. Our realtor suggested we add a letter and a photo to our proposal to help you see your home will be a perfect fit for our family (Our two girls might be the same age as yours were when you bought the house.) The photo was of our family volunteering at the Save The Lakes day last summer. It was fun to see it’s a cause you’re interested in too. (We also distribute Thanksgiving turkeys to less fortunate families each year.) We would love the opportunity to join the neighborhood of West Elm. I noticed your girls graduated from St. Mary’s Academy, where our girls are in the 3rd and 5th grades. We are St. Paul’s church members, and living just two blocks away will make it easy for Kristopher to continue leading Bible Study for adults. P.S. Like you, we are graduates of UW Madison, where we met 15 years ago. 

*A fictitious letter from a fictitious couple made from actual sentences I’ve seen in letters to sellers.

National Association Of Realtors on Love Letter Liability

Since 2017, I’ve written about this practice as trampling on Fair Housing Laws. The messages contained in letters like this, intentional or not, take the conversation of the transaction into Fair Housing Violation territory. REALTOR members who disagree with me tell me “Love Letters” help their clients get their offer accepted in competition. I see what the members are saying. And that’s why the practice has no place in real estate transactions.

Negotiation strategy is worth paying for. Marketing, not so much.

“Hey. My house is for sale”  is an effective marketing strategy today. Drawing a crowd is the easiest step in selling your home. Real estate brokers propose fancy marketing plans presented as THE way to attract buyers to your property. Homeowners pay a pretty penny for those plans. When homes sell in less than a few days, those fancy plans never get launched. Is a fancy, pricey program necessary? Maybe not.

In some neighborhoods, the next person who puts their house on the market is the market. Well qualified people are already poised to jump on the next home that pops up on the market.  

Structuring a contract to give a home buyer leverage to walk away is simple. Eight out of ten buyer representatives will draft offers with little thought and many boxes checked. The standard purchase agreement is a fill-in-the-blank form. It’s intended to give the buyer exit opportunities. That’s fine in a buyer’s market. We do not live in a buyer’s market. You do not want to accept an offer that’s less safe for you than you can negotiate.

It takes smart work to craft offers that commit buyers to their promise. Some agents and attorneys know how to prepare a proposal that shows the buyer is committed to closing. If you’re a buyer, you want to have the choice to choose to have an offer that sellers are eager to accept. Home sellers will surely regret accepting a poorly written offer when their buyer exercises their opportunities to force a renegotiation. 

The agent who knows all people are not standard and standard offers are weak will make sure their client knows the consequences of contingencies and has alternative ideas to shore up the most capable buyer’s commitment. 

Six Percent of What?

Your home has a market value of $400,000. The traditional method of pricing the real estate broker’s fee to sell your property is multiplying your sale price by a percentage factor.  Redfin reports the factor is typically 5% to 6%. In Wisconsin and Virginia, according to List With Clever is 5.85% and 5.3%, respectively. The two states straddle the National Average of 5.45%. 

Even at 6.0%, the factor appears relatively small compared to the sale price. Losing six cents of a dollar isn’t going to change a person’s lifestyle. Here is the formula used: $400,000 X 6.0% = $24,000      

You pay selling fees from your equity, not your sale price. We sell our homes to release our home equity for use on our next life plan. When we apply the product of 6.0% of the sale price to available home equity, we see how the lack of choice in fees might be crippling on some home sellers. A typical American might have $100,000 of net equity after paying off the mortgage(s) and closing costs on a $400,000 home. Twenty-four thousand dollars is 24% of the cash available to use for their next life plan. Spending 24% of your savings on one service could easily be life-altering. 

Do consumers have a choice in service and fees?  Is it a choice when your pool of options is 3,000 practitioners who charge the same price? Today’s consumer of real estate service is more informed when they enter the market than any consumer in the country’s history. They demand a higher level of essential real estate service and are right to expect more at competitive prices. So, where are the alternative real estate models?  

The emerging models. Essential Real Estate, LLC emerged in the Madison, WI market late last year to solve the problem of spending excessive amounts of home equity on real estate service. Home owners who sell for $300,000 with Essential are spending a lot less on commissions and keeping more of their home equity for their next move. The average Essential Real Estate clients pays about 3.4% in total commission. (1.0% plus $499 to Essential, and about 2.0% to buyer agents.) Our service isn’t for everyone. But it is for anyone who prefers to keep an extra $10,000* or so of their home equity and spend less on broker fees.

*$300,000 sale price at 6.0% commission compared to the same price at 3.0% commission plus $499.

Interview Before Hiring a Buyer Agent

It’s Monday in America, and that means thousands of people are learning they came in second on the house they tried to buy over the weekend. Rejection sucks. When the market favors the seller, as this one does, more people will feel the sting of rejection, and very few will feel the thrill of acceptance. For most of those who lost today, their next offer will meet the same fate because they don’t know why their purchase proposals are unacceptable. I believe the solution remains unknown because the person drafting the offer doesn’t give the buyer choices to enhance the terms in the seller’s eyes. 

Two in Ten Offers Are Attractive

I believe there are two assertions about Sundays that are indisputable. One, the first team to 35 points, is significantly more likely to win an NFL game. Second, regardless of the number of offers a seller has in hand on Sunday night, only one and maybe two are good enough to accept as-is. Eight or nine out of ten people are not committed to owning the house. Their offer is a hope, not a promise.

Before you commit to an agent, know their ability

Few licensees understand (well enough to suggest alternatives) the consequences of prewritten contingencies. I heard this true statement from an experienced agent:  I would never write an offer without an inspection contingency. I have to protect my buyer. REALLY? Who decides the protections that go into an offer? Who decides which contingencies are protections and which hinder the opportunity? The buyer who understands the meaning of the contingencies they have to choose from should decide. To know the purpose, the buyer is dependent on the agent’s desire to learn and teach. If you can’t count on a professional to explain the good and bad of the contingencies and offer alternatives, your offer will look a lot like the other rejected offers. 

Plan For Spring Now

The difference between an agent who will be an asset in negotiations and the anchor tied to your ankle is knowledge and ideas. Agents who have trouble explaining contingencies found in an offer are not likely to have opinions on making your offer more appealing without just increasing the price. If you are on the sidelines until spring and are not committed to a broker as your buyer agent, take time to meet with agents. Review the offer and their company addenda. Learn what the agent knows. Find out what ideas they used to give their clients an edge in competition. Find out if they say ‘never’ to options that should be yours to make. If an agent won’t give you the courtesy of respecting your ability to make wise decisions based on information, keep interviewing. 

Beat The High Bid At a Lower Price with Greater Safety

People who lose in home buying competition will assume they were outbid on price. They may be right. Often they’re not. If you’re going to finish anywhere other than first trying to buy a home in a seller’s market, you’re going do so because you didn’t use your strengths. Everyone has strengths. Before you can use them, you have to know them. 

Something Other Than Money

Even people who can count money as one of their strengths have other advantages to tap. So why does the accepted offer not always go to the highest price bidder? Because they failed to see the transaction from the seller’s side of the table. Money matters; after the money comes security. Specific and simple terms with a safe amount of money are better bets than an offer heavy on cash and light on safety.  

Hedging Is a Strategy

It didn’t take long for consumers and real estate agents or lawyers to see a high price would capture home sellers’ attention. A high price offer, appropriately peppered with buyer-safe contingencies, was a potent recipe for outbidding the competition just enough to renegotiate later in the process when seller options have vanished. An owner who identifies a hedged offer will save themselves the pain of discovering the truth behind “too good to be true.”

You’re Stronger Than You Think

High-priced offers come with contingencies unfavorable to the seller because the buyer is not committed to closing. Every contingency is a reservation. Each contingency protects the buyer from being in a position to honor their commitment. A firm offer has promises without exceptions. 

Decide You Are Committed

Overpaying for a property is a choice. If you prefer to pay reasonable prices (and there are no undervalued properties in a seller’s market), you have the first necessary strength: A grasp of reality. From here, we build your arsenal of assets. A person who is fully pre-approved for financing is a match for cash buyers. A person who can make repairs won’t fear the unknown how a person who needs to hire a contractor for simple maintenance. The person who sees risk as an opportunity has an asset. Knowing the truth about the consequences of conditions allows a person to operate without fear. Knowledge and the exclusion of fear are assets. 

Be The Offer To Be Beat

Know your strengths, know market values, and you can commit to being the next owner. Take all of your strengths and put them together in an offer that makes you the offer to beat. Leave no room in security for anyone to nudge you aside. The safest offer is more likely to get a second chance from the seller in the situations where another offer exceeds the safe offer’s price. And when you have a counteroffer, you have a choice. to own or walk away. Flipping the power to you is the goal. To have the choice to accept an offer or give the seller another chance to come to terms with someone else is where you want to be.   

Those who depend on money to tilt the playing field to their advantage are the easiest competitors to beat for the person who negotiates on strengths. And their agents will still think they got beat on price. 

Metropolitan Place Owners Might Be Missing The Market by about $10,000

Home sellers are not getting the full benefit of a SELLER MARKET.  Metropolitan Place Condominium owners are paying a nearly $10,000.00 premium to sell their condos in 2020. A quick comparison of sales in 2020 compared to sales in 2011 proves somebody can save significant money if they had a viable choice. 

2011 Recession Pricing of Condos and Broker Fees

In the first 10 months of 2011 only six Metropolitan Place (360 W Wash) condos sold. The average time on the market was 193 days. Each sale reported to the MLS shows the seller paid buyer brokers a 3.0% commission. We know the RASCWMLS practice offers 50% of the total commission to a buyer agent so let’s assume the typical seller paid a typical 6.0% commission. If 2011 was a buyer’s market (six months on the market and 93% of the final asking price) and the going commission rate of 6.0% was related to the difficulty in attracting a buyer and negotiating a sale, do we expect to see the commission rates change in a favorable seller market? A hundred economists might say yes. Let’s see what happened.

A Fast Market in 2020

Compare the 193 days on the market in 2011 to the 38-day average in 2020. Consider the average sale price to asking price, with no price reductions, is 98.5%. Sixteen units sold in ten months. There are supply and demand. So, what happened to commission rates? Fifteen out of sixteen owners paid 3.0% to buyer agents. Assume that’s 50% of the commission, and it’s safe to conclude the typical commission rate was 6.0% in 2020. If you are an economist, please share your thoughts. Are owners not able to negotiate both sides of the commission? If not, why not? 

Lack of Viable Choice

The average sale price in Metropolitan Place was $357,706. Essential Real Estate, LLC is a choice for complete real estate service at a market rate. We charge $499 plus 1.0% of the sale price to represent our clients. Furthermore, we teach our clients how to negotiate the buyer agent commission AFTER they see the Offers’ quality. Promising to pay 3.0% before you know the terms of an offer is an expensive mistake. Most of our clients receive multiple offers and they negotiate a buyer agent commission of 2.0%. I’m happy to explain how this works. Our clients are delighted to save a few thousand extra dollars.

3.0% + $499 Total Commission v. 6.0% is a Viable Alternative

The average sale price of $357,706 is an opportunity to save $10,000 in home equity. We believe it is better that you keep your home equity than spend it on selling costs and fees. If that seems like a good idea, let’s talk.