Reader Question: Our agent is suggesting that we write an offer on a home we like to include a contingency that we are willing to pay more for the house if another buyer makes an offer at the same time. They would word the contingency so the seller shares a better offer with us and gives us the right to outbid them. While it seems like a smart tactic, could another buyer use the same tactic against us? Is the suggestion ethical? We thought our offer would be confidential. Are real estate agents allowed to share our proposal with other buyers?
Monty’s Answer: Real estate agents are not allowed by law to share the amount of your offer or any other details of your proposal with anyone except the seller. However, in my home state, the law does not extend to the seller of the home you want to buy. The seller can share your offer with other potential buyers.
This type of clause is often called a price escalator or acceleration clause. There may be other similar names, such as a last-look clause. I have not researched every state but will assume they are legal in all states. The fact your agent is suggesting this clause is a good indicator it is legal. Double check by asking your agent.
A controversial clause
Some consumers and real estate agents believe price escalation clauses are unethical or ineffective. There are also supporters who will point to the real estate auction sale or the law itself as legitimizing the practice. In an auction, the seller shares the highest bid price until no one offers a higher one. Some homebuyers can point to success using it. Home sellers may counter-offer a price escalation clause out of an offer. Listing agents may advise their seller to counter-offer a poorly drafted accelerator clause, or any such clause, out of an offer.
A clause that would likely be countered out might state "The buyer agrees to pay $___ more than the highest offer received by the Seller, not to exceed a sales price of $_______.
A clause that would likely be acceptable would state the terms of the escalation, such as the escalation factor based on net proceeds; that the competing offer is bona fide and acceptable to the Seller and for more than your offer; the increment of the increase that will generate net proceeds to the seller by $___; It would have a cap amount and identify the documentation to justify the increase; It would contain a disclosure that there may be multiple escalations and those escalations may exceed your cap; It would include the procedure to be followed if you are obtaining a loan. How will the additional price increase be dealt with in financing? For example, will you pay the increase in cash and keep the mortgage constant, or will you want to finance the additional capital? The particular circumstances of the buyer or the seller may require other inclusions into such a contingency.
Circumstances for use
While hot markets with low inventory and a trend for multiple offers are more common for the use of the escalation cause, unique properties, properties in highly desirable locations, or right-of-first-refusal contracts can also trigger the desire for an escalation clause. Fear of loss, timing issues, etcetera, can also give rise to their use.
The advantages of an escalation clause
You may benefit with an inside track if other potential buyers are not aware of the tactic or have declined its use. You can eliminate the competition, and it can shorten a negotiation. The seller may perceive that you are the buyer who is most open and the most desirous of the home.
The risk of an escalation clause
You are revealing that you will pay more for the property than your offer, which is a bit counterintuitive. The seller is not obligated to react to either your proposal or this tactic, and may be perceived by a seller as unethical or a dirty trick if your offer is the only offer utilizing it. From a seller’s viewpoint, accepting an offer with a price escalation clause eliminates the seller’s ability to counter-offer multiple buyers. They will never know if one of the other contenders would have gone higher than the buyer with the price escalation clause. The escalation clause is no guarantee and drafting it can be tricky. Consider a legal review of the provision before submission.
Richard Montgomery is the author of "House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home." He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Find him at DearMonty.com.
This article originally appeared on Santa Rosa Press Gazette: Can our offer be shared with other buyers?