Jun. 15, 2006 - Multiple Offers - Seller Response
Using Escalation Clauses to "beat" the highest offer, is a relatively new concept. Before Escalation Clauses, when we received more than one offer on a property, the buyers were often put on "Notice of Final and Best". They each put their best offer in a sealed envelope, the envelopes were opened all at the same time. If the seller was lucky, one stood out from the crowd by a substantial margin, and that person got the house.
Let's say the owner receives ten offers. How does the seller choose from those ten offers? Sometimes receiving too many offers is overwhelming, and the seller doesn't like having the fate of ten families, all wanting his house, in his hands.
As a listing agent representing the seller, I would recommend evaluating the buyer qualifications, as the first consideration. Let's say three of the ten are cash offers. The other seven may be set aside without consideration for now, and the three cash offers may be given a notice of final and best. If one of the cash offers is also the highest offer, possibly that one would be accepted on the spot and one or two others would be offered 1st and 2nd backup position. You can counter the three cash offers, but if you tick off all three, you lose your three best buyers, so not necessarily a good move. Better to counter one at a time quickly, before the other offers expire, so you only lose one at a time.
The cash offer is given first consideration because when a property bids up over the asking price, it may be bidding up over the amount at which it can appraise. If the seller accepts the highest offer, without regard to the loan amount, he loses the other 9 when he accepts one. That one can fall apart when the property doesn't appraise, which can leave him with nothing. Going from ten offers to no sale at all, is painful. So you pull the ones with the most cash forward. All cash, then those with more than 20% down and if you have 3 to 5 offers, you reject the zero down to 20% down offers on the spot and counter the higher cash available bidders.
Escalation Clauses have become popular, because buyers are somewhat assured that they are not paying more than X dollars, more than the next highest bidder. But the Seller does not have to accommodate that convenience. Most escalation clauses are only $1,000 more than the highest offer. Often $1,000 more is just not enough to announce a winner. Given a choice between $1,000 more, and someone the seller likes best or someone the seller feels likes their "home" best, often the seller will choose based on "touchy feely" reasons, without regard to the $1,000 difference in offer price.
The MLS cautions agents regarding using Escalation Clauses, and in fact recommends that the seller reject them all, and tell the buyers to submit their highest, final and best offer, with NO Escalation Clauses.
So what the heck is a buyer to do when their hands are tied when the seller announces "Notice of Final and Best...NO Escalation Clauses?!"
Fact is, if 10 buyers stay in the game through "final and best", 9 people will lose. Most often, not all 10 participate in the final round, increasing your odds. This is where you really have to have a good relationship with your Buyer's Agent. Often the Buyer's Agent knows a lot more than you think they know. The listing agent has given them little clues in conversations that might help you. Their gut instincts should be trusted.
There are no guarantees, as 9 must lose this house. But if you can't turn to your agent and follow their advice, and then live with the result, you may need to come up with your best offer all on your own. If you don't get the house, you should think hard about why you didn't just rely on the advices of your Buyer's Agent. That agent knows you best, or should, and should be the person in the mix who can give you the best recommendation regarding what you should do.
You should discuss every possible option with your agent, including putting in a huge escalation clause of $5,000 to $10,000 to get the seller's attention, even though you were told not to. Sometimes the agent will recommend this, but it has to be a large enough increment to get the seller's attention. There is a famous "case" settled out of court, where the Buyer's Agent did just that, AFTER the buyers were told the bidding was OVER.
The most important thing to do is to pretend you are the SELLER when you are making an offer, and forget for a minute that you are the buyer. In life, you should always put yourself on the other side of the table, when considering what to do next. If you would get ticked off if someone puts an escalation clause, after you told them not to, then don't do that. Expect the seller to do exactly what YOU would do, if you were in his position. That usually works best.
Excerpt from Escalation Clause Instructions:
"No matter who you represent, use of this form is risky and requires utmost care and diligence in order to protect your client. NWMLS does not recommend the use of escalation provisions, and this form is provided merely as a courtesy to our members who have been seeking a standard form for consistency." ADVICE ON USE OF THE FORM. Because of the risks inherent in the use of escalation..., (seller) may reject all of the offers and demand that all interested parties make their highest and best offers without escalation provisions."
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