The Escalation Clause Rendered Useless

“In other words, an entire new world is pointed to, by this….It is authentically a new thing on the face of the earth.  Pieces such as this….” he picked up the pin once more briefly. Closing the lid he returned the box…”can be mass-produced….” The Man In The High Castle, Philip K Dick

We marvel at a new idea, something so special, perfectly suited for nearly no one, yet remarkably powerful for a bold and brave few. Being useless to the masses, its unique appeal makes the authentically new thing sensationally valuable. And then, because everyone wants one, we strip away its authenticity, its most powerful attributes, and render the idea useless. We  did this in the mid ’90’s with a brilliant marketing strategy known as Range Pricing and we just did it again with the Price Escalation Clause.

Savvy, capable real estate buyers, seeking a negotiating strategy to acquire property at a price more than they planned to spend, but at a price less than they are willing to lose the house over, hit upon the Price Escalation Clause (EC) It’s a simple and powerful clause shifting risk from the seller to the most qualified or boldest of a bevy of buyers.

The authentic EC looks like this: “This Offer price is changed to $1,000.00 over the purchase price, of any bona fide Offer Seller has in possession at the time of binding acceptance of this Offer. Said purchase price of this Offer shall not increase above $______________, regardless of the purchase price of said other bona fide Offer. Seller to notify buyer of the purchase price by written notice to buyer with acceptance of this Offer. Buyer agrees to pay any difference between purchase price and appraised value in cash at closing as necessary to satisfy mortgage financing requirements.”

The well versed seller sees safety in this remarkable offer of commitment from the bold and confident buyer. This buyer is a person the  seller wants to be in business with. This buyer knows what she wants and is willing to assume some risk to acquire the property. She fears nothing. She uses a tool that satisfies her desire to prevail.

Unfortunately we’ve lost sight of the purpose. No longer is the EC written as a tool to acquire a property, we’ve turned to mass production and churned out a contingency for the faint of heart who think they can eliminate competition to clear the field for their safety and security. The remarkable piece of authentic art the EC was, is now a plastic charm. In the hands of the unknowing user, what’s being represented as an EC is a useless garble of hidden security terms complete with a poison pill.

We’ve rendered the EC useless, and that’s not really a surprise. However, the smart Realtor and courageous buyer, there is an alternative. I hope you find it.

 

 

 

 

Hottest Trend in Real Estate; Price Escalation Clause

The purchase price of this Offer shall be $1,000.00 greater, up to a maximum price of $_______, than the purchase price of any bona fide offer….

Source: Hottest Trend in Real Estate; Price Escalation Clause

Hottest Trend in Real Estate; Price Escalation Clause

The purchase price of this Offer shall be $1,000.00 greater, up to a maximum price of $_______, than the purchase price of any bona fide offer….

Smart homes, modern kitchens, latest paint colors, big houses, not-so-big houses, the trends never end. This year’s popular trend is not in a can, a box, or a store. It’s an idea. Before you pick out paint, new kitchen appliances, or the latest in bathroom fixtures, you’ve got to get your Offer to Purchase on the house accepted. It’s  seller’s market in South Central Wisconsin where Necessity has once again proven to be the Mother of Invention. Her latest creation is the “Price Escalation Clause” and it’s a powerful idea.

Here’s how it works: House comes on the market at $300,000. Buyer A makes an offer for $300,000. Buyer B offers $310,000. Buyer C, knowing nothing about the other offers, is determined to get her offer accepted. She’s qualified to purchase up to $350,000, and this house is perfect for her. Buyer C writes her offer  as a Purchase Price of $298,000, with a clause to escalate her price if the seller has any offers for more money than the $298,000 she offered, to a price of $1,000.00 higher than any bona fide offer, with a maximum purchase price of $315,000.  Seller likes all of  the offers but likes $315,000 best. Buyer C goes from 3rd best offer to Accepted Offer because she let the seller pick the price, provided it was only $1,000 more than any other offer and not higher than $315,000.

Pretty easy right? Maybe not. Real estate brokers and lawyers recognizing the opportunities for foul play crafted  contingencies which may be more complex than necessary. Everyone has an idea and it seems every idea is incorporated into one of the dozens of versions of an escalation clause. Typical of first generation vehicles, these non-uniform contingencies are overbuilt and cumbersome to navigate.

Here’s a simplified price escalation clause  to help you understand the concept. Check with an attorney before using a version of any escalation clause. This one is only for an example, not to be used in your offer.

The purchase price of this Offer shall be $1,000.00 greater, up to a maximum price of $_________(a), than the purchase price of any bona fide offer the seller has received at the time of acceptance of this Offer.  Along with this accepted Offer, Seller shall send written notice to buyer stating the purchase, which shall be no more than $1,000.oo more than said bona fide offer and not more than $___________(a). Buyer and seller agree to promptly execute an amendment to state the purchase price as the amount given on said Notice from Seller to Buyer.

Broker and lawyer crafted contingencies call for the seller to provide the buyer a copy of the competing offer to prove the purchase price of the other offer. You’ll even see the term Net Price used to account for credits and concessions before calculating the escalating buyer’s offering price. Both conditions are good ideas. Whether or not they are necessary depends on the buyer. I believe the need for proof of existence of other offers is overblown, and calculating Net Price is splitting hairs.  Everyday as long as there have been more than one buyer for a property, buyers have offered more money than they might have otherwise, because they knew or thought another offer was coming in to the seller. Never, ever do those buyers require proof that their offer wasn’t already better than the one that did or did not come in. I believe in requiring the sharing of competing offers, we’re are adding a solution where no problem exists.

The easiest offer for a seller to accept is one that is easy to understand, and includes a  preferred price. Keep it simple and legal to have a better chance of being the next owner of the home of your  dreams….oh yes, there is still the issue of appraising for the purchase price. Seller’s be careful…make sure you are protected against appraisals below that escalated purchase price. Appraisers and underwriters are not as inspired as buyers and sellers to put unsupported values on properties.

Always use an attorney to review your contracts.

 

 

 

Falling Oil Prices and Real Estate

Oil at $146 per barrel gave us gasoline over  $4.00 a gallon in 2008.  Today I filled up at $1.49 per gallon and oil went to $26  barrel. Cool. Remember 1974 and the Arab oil embargo? Gas prices doubled to 55 cents a gallon. I looked this up, that 55 cents is $2.81 today. The $1.49 I paid today is equal to 29 cents in 1974.  Twenty nine cents! In 1974 I put a gallon of gas in a snowmobile for a quarter and I probably had an extra 3 or 4 quarters to spend on soda, candy, and maybe a burger.  I thought those days were over.

High oil prices cause a slowdown in production and delivery of goods. Anything we buy is impacted by the cost of fuel so prices of groceries, clothes, and toys cost more. Less goods and Less money to spend on anything other than gas, means less buyers in the stores but that’s OK, there are fewer employees needed to service those customers who will not be buying what they want and only what they need. Can we expect oil prices under $30 a barrel will translate into increased spending?  I think so.

OK, you can see I’m not an economist but I know $17.00 to fill up my car is better for me than $48. I’ve got $31 dollars to save or spend.  Effective Mortgage Company Blog explains how these low gas prices could be good for the housing market. Or, low gas prices might not be good for the housing market if you live in an area where oil production plays a big part in the local economy. Madison is not a big oil producing city. Shoot, we’re not even a big gas guzzling city with everyone driving a Prius, van pooling, taking the bus, or riding a bike.

Here’s where the economics become tricky. Apparently oil prices impact bond prices and bond prices move mortgage rates. We were told in December to expect rates to reach 5% by the fourth quarter of this year. If that happens the economists will have an explanation. Probably will have something to do with Greece, China, North Korea, or some uncertainty about the economy somewhere in the world.

This is what I know: There are historically few homes on the market, interest rates are low, home prices are up (simple supply and demand) and if you have a house to sell and want to buy another, you may need to park yourself at an extended stay motel or the house of a friend. If you can sell your house and not find one to buy you become, well, homeless. Just my opinion, expect to see people who want to sell stay put and that means fewer homes for the consumers to buy. If you can’t buy a house, I suppose you can take the extra cash and drive around the country for the summer, after all gas is only about a quarter a gallon. Maybe we’ll see the opening of drive-ins again, and jobs for car hops.

 

 

 

 

It’s Never Been A Problem Before

A real estate licensee may sign a contract on behalf of a client or principal.

What’s a missing qualifier to that bold statement? How about: As long as the licensee is prepared to personally fulfill the obligation or is prepared to defend herself and her broker from financial liability in court, at a high cost in legal fees the licensee might but shouldn’t sign anything for anybody. Signing on behalf is a bad practice to start because one day something will go wrong.

The liability risk is serious and still we see licensees picking up pens and signing documents we should never touch. A review of files in every real estate office may find more than a few offers to purchase, listing contracts, amendments, counter offers, and closing statements executed by well meaning licensees who thought they were out of harms way.

Attorneys, and title company closing agents who don’t represent the Realtor,  know a document signed by a party without proper authority and protection places liability on the Realtor and his Broker.  Even if that liability is the right to appear in court and defend his rights to immunity, the licensee will spend money and time finding out how much money this simple signature is going to cost him.

These are all too common situations:

A closing agent at a title company needs seller’s signature on the closing statement and the seller isn’t present. She passes the document to the listing agent and says, “We do this all the time. Sign it on behalf of the seller. We’re fine with that.” The well meaning licensee who has the best interest of her client in mind, not wanting to appear fearful or unhelpful picks up the pen and signs her name, “Jane Doe, on behalf of James T. Smith, seller”.

An attorney for a buyer instructs her client’s buyer agent to prepare and send a counter offer but, “just sign it on behalf of the buyer. He’s a busy surgeon and he can’t sign today”. The licensee signs the counter offer “John Doe, Realtor on behalf of Mark Anthony, as directed by attorney  Lisa Ward”. That should do it, he thinks and sends off the counter offer which is promptly accepted and made binding by the seller.

That’s an ugly one. Realtor John Doe is exposed to liability and the seller’s broker may be tied to the same sinking boat. Harmed parties will line up all of the usual suspects giving them their right to defend themselves.

Best Practices are better explained by lawyers and there are publications written by lawyers available online.

Be safe. Regardless of what anyone tells you, you are at risk of expensive liability when you sign on behalf of any party to the contract. A legal document prepared by your attorney protecting you as a legally authorized person to sign on behalf of anyone, without liability to any party may be a measure of protection. My advice is to pass the paper back to the  person who said it’s OK to sign,  and say, “It may never have been a problem for you, but it’s never going to become a problem for me. I’m not authorized to sign.”  I promise you will appear wise and prudent. And if anyone thinks differently of you, they have the right to their thoughts no matter how wrong they are.

 

 

 

 

 

 

 

 

 

Words I Wish We Hadn’t Wrote

Robert Fulghum is an author who compiled a book of words he didn’t write, but wished he had… Words I Wish I Wrote. This is a book filled with words painted together into inspiring or pleasing art. My blog isn’t such a thing, but neither is the work of sales trainers and consultants who use words that remove the people from the process. The May edition of The Wisconsin Real Estate Magazine again perpetuates the practice which will make the Realtor less relevant the more the idea is adapted. The Gold Rush Mining For Leads. What is a lead?? Why is it gold??

Unfortunately a lead is what our industry calls people. These leads are not people, they are gold…if they do business with us. Maybe they are lead if they don’t. How long now have we Realtors practiced removing the person from the process? Forever maybe? Do you want to make a ruckus in real estate? Break away from the cliches of Close, Deals, Leads, Touch, Follow up, Drip campaign, SOI, floor call, and FSBO. Surely there are  more but this is a start.  He or She who eliminates these words will see a rise in their attitude and will cause people to have an inspired attitude about him or her. Think about it; when you go in to see a professional, do you want to be a lead or would you prefer to be a person? We treat people the way see them. I’ve never met a lead, I’ve never had a deal. We work with people, parents, sons, daughters, families, who have emotions and wishes. We create contracts. A contract is more valuable than a deal. A person is more respected than a lead.

I think I’ve written about this before.

 

Values and Admiration

Politicians may exist to show us what we look like when the wind of other people’s opinions fills our sails. Values are our rudders. Life is the wind.

Values—Martin Luther King and Malcolm X lived true to their values. They raised attention to issues they believed in to change a wrong. They attracted love and following because they inspired people to higher values. They had no seat to win, no job to secure…they were free to live to mean something to life. Politicians drift from vague commitment to even greater confusion depending on what they have to gain.  Which recent past president do we honor for their commitment to a cause? Who is a profile in courage—and don’t say JFK.

To see how this thought relates to real estate, think of the questions that person in your head asks you as you ponder owning a home. ” Where should my kids go to school? Where do my co-workers think I should live?  What neighborhood will my friends approve? What house style will look best on me? How will I explain to my parents?” With a committee of dozens constantly meeting in our heads, it’s not surprising we move from home to home like no other generation of Americans.

The most content people I meet in this business, clients and other realtors, are people who believe what they believe and move forward on a beam of values. Not everything they do is accepted, supported, admired, or tolerated by everyone. What matters is their commitments matter to them. They bring enthusiasm to their endeavors. They bring happiness to their decisions. They bring joy to their commitments. They don’t waiver and quit because someone says “That won’t work, or that’s not what I would do.”  Values ground us in a way a desire to be admired can’t.

Wherever I hang my hat is my home.