Rejecting the Broker Offer of Compensation…Why do we do THIS?

You’re the Agent of the Buyer. You have a Buyer Agency Contract with your client to pay you 3.0% of the Purchase Price at closing as your Buyer Agent Broker Fee. You draft an Offer to Purchase on a property listed by a Broker member of the Multiple Listing Service you belong to. The Offer of Compensation made by the listing  broker to your broker is 3.0%.   Why does your buyer client’s Offer include a provision that states their broker (you) reject the Offer of compensation from the listing broker, and require the Seller to pay your 3.0% buyer agency fee at closing?  These are the mythical reasons we still  do what we’ve been doing for years:

  1. If I don’t accept the broker’s offer of compensation the broker can not take me to arbitration and recover the commission on the grounds that I did not procure the buyer. Not true since January 2005 when Article 17, Standard of Practice 17-4 was amended. If you didn’t procure the buyer you’re not safe from arbitration. You might have the money in your account but you are at risk.
  2. The listing broker might reduce the commission without my permission. This can’t happen. Article 3, Standard of Practice 3-2. Once the Offer is submitted, the fee to the cooperating broker is set as disclosed. You can agree to receive less, but a unilateral reduction is violation of the code of ethics…you can collect in arbitration.
  3. I will get my check at closing instead of waiting fro the listing broker to send it to my broker a week after closing. Back in the day that was true. Today the title company issues the check to the selling broker and a check to the listing broker.
  4. That’s the way we always do it. and That’s the way my broker told me to write the Offer.  Yes. That’s probably why,  but it’s not reasonable.

Are you interested in an idea as to why we might not want to include that language

  1. When the Buyer Broker fee is paid by the Seller as part of the Offer, the fee is as open to negotiation as the price, closing date, included items, and everything else that might make a difference to the Seller’s bottom line.

If you have another opinion based on a fact, I’d like to hear your thoughts.

 

 

Why do we do that? Cuz, we always do.

Because that’s the way I was taught. Yup. That’s a common answer to a question that may get thought more than it get’s asked out loud. And that’s too bad. Change begins with asking, “Why?” Growth is stunted when we accept, “Cuz we always do”. Why do include the Appraisal Contingency in Offers?  Don’t tell me to protect the buyer. That’s not a reason we use the contingency. We use the contingency because it’s there.   And it’s been there since 2011. Carved in ink stone, that relic will protect  a person from an imaginary threat to the point of keeping them from ever getting a chance to appraise the property…cuz they came in second.

What’s wrong with that Appraisal Contingency? It’s old and  stuck in its way. It’s inflexible. It’s a seller unfriendly curmudgeon. It’s not a contingency, it’s an ESCAPE CLAUSE. Read it from the perspective of a seller… a seller who lives in a seller’s market. You can see the problem instantly…should the appraisal, which is a subjective process, show a value of even a dollar less than the purchase price the buyer CAN terminate the Offer. Will they? Probably not, but 30 days from acceptance the seller is in no good place to negotiate and without an agreement to modify the contract to something fair, the buyer is in a position to negotiate price, closing date, concessions of any kind.  Smart sellers and will pass your offer over if they have a smart buyer who knows they don’t need an overkill contingency to be safe.

Savvy Realtors are proactively thinking up better conditions to create a win-win for the buyer and seller who have an offer with an appraisal contingency. This is a version you’re welcome to copy:  Appraisal Contingency:  In the event that said appraisal shows a value less than the purchase price, buyer shall deliver to seller a copy of the appraisal and a signed amendment to the Offer to change the purchase price to appraised value amount. Said amendment shall include no other conditions and shall allow Seller one (1) day to accept. Buyer shall not deliver the Notice to terminate provided for in this contingency prior to seller’s deadline for acceptance of the price change amendment.

If you grew up thinking your’s is not to question why, your’s is to either do or die, there’s good news—you’re not gonna die…ASK WHY and find a better way.  Next contingency that has outlived it’s use is the “Buyer direct Broker to reject the listing broker’s offer of compensation. Seller to pay buyer broker  ____% at closing for buyer agency fees…” This monument to old times has no good reason linger longer…you know why, right?

 

No, Stupid. That’s Not What Business People Do

I sort of hope that happens (housing market collapses) because then people like me would go in and buy.”  Donald Trump 2006.

Trump in 2016, On being called out for rooting for a housing market collapse: “I mean, I’m a businessman, I like it when it-when it goes down it goes down.” “What am I going to do. I’m in business. Never thought I was going to run for office.” 

The Onion didn’t write the satire. This was no fictitious businessman, smirking with selfish irresponsibility. This was the epitome of the money grubbing, selfish thugs who thinks death and misery of others is a game of opportunity for them. If we were in business participating in perpetuation of the no-bubble lie, we have some responsibility for the humanity crisis of the start of this century. If our only contribution to change is taking what is not ours at a steep discount then we are not business people at all.

Oh, I understand, there were opportunities in acquiring properties lost by “business people” who leveraged what they did not have, but that’s not the target of people like Trump. Their target were moms and dads. Young people. Retired people. People with young children who lost their homes because they lost their jobs and their banks refused to modify their aggressive interest rate loans. A business person takes what talent, ability, assets they have and puts them to use to relieve the misery of others.

Another opportunity to be a business person in a crisis will come along again. If I have to think if my action is right or wrong based on my intention to run for office, or If I have to ask rhetorically, “What am I going to do?” then I’m stupid.

 

 

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.