Wisconsin REALTORS® Association Page 2 Legal Update, September 2020
P2
Buyer Strategies
A tight market seems to bring out a flood of offers for the properties
on the market. In a group of potential buyers, the challenge for buyers is
to write the offer the seller chooses. There are various techniques used
to make a buyer’s offer the most attractive and most advantageous for
the seller.
Some of the strategies employed follow the traditional suggestions to
submit a buyer’s highest and best offer. Buyers write offers for amounts
over the list price, include preapproval letters and may pay higher
earnest money deposits, for example, $5,000 or more. The mission is
to make the offer attractive to the seller. Cash buyers may include proof
of funds documentation to further sweeten the prospect of a cash offer.
Other non-traditional strategies may be used by buyers to make their
offers stand out. These may include price escalation provisions, writing
offers with few or no contingencies, or sending a letter to the seller along
with the offer describing why they are the perfect fit for the seller’s home.
Price escalation provisions
A price escalation provision or an acceleration clause – they go by
various names – is a provision or a clause used to negotiate price at
an amount above another buyer’s offered price. The offer to purchase,
as a basic premise, must state the price the buyer is willing to pay
to purchase the property. The price, however, may be determined by
referencing the price of another offer to purchase.
The basics of price escalation are that a buyer is willing to increase
their offered price up to a certain amount over the highest offer, up
to a maximum dollar amount. Because agents are precluded by Wis.
Admin. Code § REEB 24.12 from sharing the terms of an offer, the seller
will have to provide a copy of that highest offer to the buyer directly in
order to implement the price escalation provision. Once the new price
is established, the parties are prudent to draft an amendment clarifying
the new price. If the buyer wants to use such a strategy, the equation
used to determine the offered price must be clear and unambiguous.
In response to multiple offers with price escalation provisions, a
seller has several options. The seller may choose to negotiate price
independent from any price escalation provisions. If the seller elects not
to use the price escalation provisions, the seller instead may counter
one buyer with a counter-offer. The seller may counter at the maximum
price the buyer was willing to pay if the price escalation provisions had
been triggered, or any other price. The buyer receiving the counter-offer
may accept, reject or counter the seller’s counter-offer. Alternately, a
WB-46 Multiple Counter Proposal may be used, allowing the seller to
negotiate simultaneously with more than one buyer. In response to a
seller's multiple counter-proposal, a buyer may approve, counter or
reject the multiple counter-proposal.
Another option for the seller is to accept one of the offers. If it is
one with a price escalation provision, the steps to implement the price
escalation provision would need to be followed. The seller, or the seller's
attorney, may provide the buyer with the price escalation provision along
with a copy of the other buyer's offer. It is important that the seller
provides the document – not the broker – because the broker must
observe the duty of confidentiality to the other buyer. Under Wis. Admin.
Code § REEB 24.12(1), a licensee may not disclose "any of the terms
of one prospective buyer's offer to purchase … to any other prospective
buyer or to any person with the intent that this information be disclosed
to any other prospective buyer."
Offers without contingencies
Some buyers in a competitive market may leave out the contingencies
typically found in an offer. They may choose not to include an Inspection
Contingency, a Financing Commitment Contingency, an Appraisal
Contingency or a Radon Testing Contingency in order to find favor
with the seller. These omissions do not come without a price and a
risk for the buyer: they are not learning information about the property
condition, they are taking the risk they can secure the funds to pay the
purchase price, they are taking the risk the property will appraise for the
purchase price or at least a price acceptable to their lender, and are
forgoing advance knowledge about radon levels in the property. The real
estate professional working with the buyer should discuss the pros and
cons with the buyer before the buyer makes their decision about what
contingencies to include in the offer.
Love Letters
One of the most controversial strategies used by buyers is the inclusion
of a “pick me” or buyer’s “love letter.” To entice a seller to choose their
offer, buyers sometimes write letters to the seller to describe the many
reasons why the seller should “pick them.” A buyer “love letter” may
include personal messages, videos, family photos or any communication
submitted to the seller along with the offer to purchase. These letters
will often provide details about the buyers and gush about how much
they love the home and how happy they would be there. The letter may
come with their child’s drawing of the home as a special touch. Why go
to such lengths? Buyers and their agents use these letters because they
often work and may be crucial in bidding wars.
While not every buyer letter written to a seller comes with risks
of liability for the buyer, the seller and the real estate agents in the
transaction, several possible liability landmines may be present when
love letters are used. It all depends on the specifics of the transaction
and the contents of the buyer’s communication. For instance, letters
admiring a home’s historical significance or discussing significant
features of the landscaping would seem to be innocuous.
i MORE INFO
For information about using price escalation provisions and
multiple counter-proposals, see the WRA LegalTalks video,
"Escalation Clauses and Multiple Counter Proposals," with
Tracy Rucka at www.wra.org/LegalTalks/EscalationClause,
“The Best of the Legal Hotline: Price Escalation” in the July
2020 Wisconsin Real Estate Magazine at www.wra.org/
WREM/Jul20/Hotline, the January 2017 Legal Update, "Price
Escalation Clauses and Multiple Counter-proposals," at www.
wra.org/LU1701 and, regarding the multiple counter-proposal,
pages 4-5 of the Legal Update 99.07, "Form Revisions," at
www.wra.org/LU9907.
i MORE INFO
For a discussion of the considerations involved when a buyer
entertains the idea of not including an Appraisal Contingency,
read “Pick Me! I Didn’t Include an Appraisal Contingency!” in
the October 2020 Wisconsin Real Estate Magazine at www.wra.
org/WREM/Oct20/PickMe.