Buyers

A Buyers’ and Sellers’ Guide to Multiple Offer Negotiations

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Information for Buyers

  • In some situations sellers will have several competing purchase offers to consider. Sellers have several ways to deal with multiple offers. Sellers can accept the “best” offer; they can inform all potential purchasers that other offers are “on the table”; they can “counter” one offer while putting the other offers to the side awaiting a decision on the counter-offer; or they can “counter” one offer and reject the others.
  • While the listing broker can offer suggestions and advice, decisions about how offers will be presented – and dealt with – are made by the seller – not by the listing broker.
  • There are advantages and disadvantages to the various negotiating strategies you can employ in multiple offer negotiations. A low initial offer may result in buying the property you desire for less than the listed price – or it may result in another buyer’s higher offer being accepted. On the other hand, a full price offer may result in paying more than the seller might have required. In some cases there can be several full price offers competing for the seller’s attention – and acceptance.
  • Your buyer-representative (agent) will explain and advise on the pros and cons of these (and possibly other) negotiating strategies. The final decision, however, is yours to make.
  • Purchase offers generally aren’t confidential. In some cases sellers may make other buyers aware that your offer is in hand, or even disclose details about your offer to another buyer in hope of convincing that buyer to make a “better” offer. In some cases sellers will instruct their listing broker to disclose an offer to other buyers on their behalf.
  • Listing brokers (the sellers representative) are required to follow lawful, ethical instructions from their clients in the same way that buyer-representatives must follow lawful, ethical instructions from their buyer-clients. While some REALTORS® may be reluctant to disclose terms of offers, even at the direction of their seller-clients, the Code of Ethics does not prohibit such disclosure. In some cases state law or real estate regulations may limit the ability of brokers to disclose the existence or terms of offers to third parties.
  • You may want to discuss with your buyer-representative the possibility of making your offer confidential, or of establishing a confidentiality agreement between yourself and the seller prior to commencing negotiations.
  • Realize that as a represented buyer, your broker likely has other buyer-clients, some of whom may be interested in the same properties as you are. Ask your broker how offers and counter-offers will be presented and negotiated if more than one of his buyer-clients are trying to buy the same property.
  • Appreciate that your buyer-representative’s advice is based on past experience and is no guarantee as to how any particular seller will act (or react) in a specific situation.

Information for Sellers

  • It’s possible you may be faced with multiple competing offers to purchase your property. Your listing broker can explain various negotiating strategies for you to consider. For example, you can accept the “best” offer; you can inform all potential purchasers that other offers are “on the table” and invite them to make their “best” offer; you can “counter” one offer while putting the other offers to the side awaiting a decision on your counter-offer; or you can “counter” one offer and reject the others.
  • If you have questions about the possibility of multiple offers and the way they can be dealt with, ask your listing broker to explain your options and alternatives.
  • Realize that each of these approaches has advantages and disadvantages. Patience may result in an even better offer being received; inviting buyers to make their “best” offers may produce an offer (or offers) better than those “on the table” – or may discourage buyers who feel they’ve already made a fair offer resulting in them breaking off negotiations to pursue other properties. Your listing broker will explain the pros and cons of these strategies (and possibly other) negotiating strategies. The decisions, however, are yours to make.
  • Appreciate that your listing broker’s advice is based on past experience and is no guarantee about how any particular buyer will act (or react) in a specific situation.

Information for Buyers and Sellers

Perhaps no situation facing buyers or sellers is more potentially frustrating or fraught with potential for misunderstanding and for missed opportunity than presenting and negotiating multiple, competing offers to purchase the same property. Consider the following issues and dynamics:

  • Sellers want to get the highest price and best terms for their property.
  • Buyers want to buy at the lowest price and on the most favorable terms.
  • Listing brokers – acting on behalf of sellers – represent sellers’ interests.
  • Buyer representatives represent the interests of their buyer-clients.
  • Will a seller disclosing information about one buyer’s offer make a second buyer more likely to make a full price offer? Or will that second buyer pursue a different property?
  • Will telling several buyers that each is being given a chance to make their “best offer” result in spirited competition for the seller’s property? Or will it result in the buyers looking elsewhere?
  • What’s fair? What’s honest? Why isn’t there a single, simple way to deal with multiple competing offers?

Knowledgeable buyers and sellers realize there are rarely simple answers to complex situations. But some fundamental principles can make negotiating multiple offers a little simpler.

  • Realize the listing broker represents the seller – and the seller’s interests, and the buyer-representative represents the buyer – and the buyer’s interests. Real estate professionals are subject to state real estate regulation and, if they are REALTORS®, to the Code of Ethics of the National Association of REALTORS®.
  • The Code of Ethics obligates REALTORS® to be honest with all parties; to present offers and counter-offers quickly and objectively; and to cooperate with other brokers. Cooperation involves sharing of relevant information.
  • Frequently frustration and misunderstanding results from cooperating brokers being unaware of the status of offers they have presented on behalf of their buyer-clients. Listing brokers should make reasonable efforts to keep buyer-representatives up-to-date on the status of offers. Similarly, buyer-representatives should keep listing brokers informed about the status of counter-offers their seller-clients have made.

Finally, buyers and sellers need to appreciate that in multiple offer situations only one offer will result in a sale, and the other buyers will often be disappointed their offers were not accepted. While little can be done to assuage that disappointment, fair and honest treatment throughout the offer and negotiation process, coupled with prompt, ongoing and open communication, can enhance the chances that all buyers – successful or not – will feel they were treated fairly and honestly.

What environmental hazards is a seller to disclose?

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A: Environmental hazards are man-made hazards such as noxious or annoying conditions, not natural hazards that exist at the location of the property.

As environmental hazards, the conditions are classified as either:
• Injurious to the health of humans; or
• An interference with an individual’s sensitivities.

Environmental hazards are defects in a property affecting its use by humans. If known to a prospective buyer, the defects may affect a prospective buyer’s decision to purchase the property. Thus, the environmental conditions are material facts. When known to the seller or the agents participating in a transaction, environmental hazards are to be disclosed to prospective buyers since material facts adversely affect
the property’s value.

Environmental hazards located on the property which pose a direct health threat to occupants include:
• Asbestos-containing building materials;
• Carbon monoxide;
• Formaldehyde;
• Hazardous waste;
• Lead;
• Toxic mold; and
• Radon gas concentrations.

The seller’s agent conducts a visual inspection of the property for visible environmental hazards, as well as physical defects, before reviewing the seller-prepared Transfer Disclosure Statement (TDS) for correctness.

On review of the TDS, the agent enters on it any of their observations inconsistent with the seller’s entries to correct the TDS for seller errors or oversights. The TDS becomes one document in the marketing package used to induce buyers to acquire the property.

The timing for delivery of the TDS to prospective buyer as a disclosure is as soon as practicable (ASAP) after the buyer or their agent makes an inquiry seeking further information on the listed property, usually by delivery of a marketing package which includes the TDS.

Also, the seller’s agent delivers, or confirms the buyer’s agent has handed the prospective buyer a copy of the environmental hazard booklet approved by the California Department of Health and Safety (DHS).

The seller is not obligated to hire a third party to investigate and report on whether an environmental hazard is present on or about the property. It is the seller’s and the seller’s agent’s knowledge about hazardous environmental conditions affecting the property which is disclosed on the
TDS.

What are HOA Assessments?

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A: Ownership of a unit in a condominium project or other residential common interest development (CID) includes compulsory membership in the project’s homeowners’ association (HOA). The HOA is in charge
of managing and operating the entire project.

The obligations you undertake when you purchase a unit in a CID, and the HOA’s documentation of those obligations, fall into two classifications:

  • Use restrictions contained in the HOA’s:
  • Articles of incorporation;
  • By-laws;
  • Covenants, Conditions and Restrictions (CC&Rs) of record;
  • Age restriction statements; and
  • Operating rules.
  • Financial obligations to pay assessments as documented in annual reports which include:
  • Pro forma operating budgets;
  • A Certified Public Accountant’s (CPA’s) financial review;
  • An assessment of collections and the
  • Collections enforcement policy;
  • An insurance policy summary;
  • A list of construction defects; and
  • Any notice of changes made in assessments not yet due and payable.

There are two types of assessment charges to fund the expenditures of the HOA:

  1. Regular assessments fund the operating budget to pay for the cost of maintaining the common areas. Regular assessments are set annually and are due and payable in monthly installments.
  2. Special assessments are levied to pay for the cost of repairs and replacements that exceed the amount anticipated and funded by the regular assessments. Special assessments are generally due and payable in a lump sum on a date set by the HOA when making the assessment or added to the regular assessment monthly installments for a specified amount of time.

Annual increases in the dollar amount levied as regular assessments are limited to a 20% increase in the regular assessment over the prior year. An increase in special assessments is limited to 5% of the prior year’s
budgeted expenses.

It is recommended you review all readily available HOA information with your agent before making an offer. With this information, you and your agent are able to better determine the price you will pay for the unit and whether or not you have the ability (and desire) to carry the cost of ownership after acquisition.

Credit Freeze Basics

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What is a credit freeze?

A credit freeze limits access to your credit report, making it more difficult for would-be identity thieves to open accounts in your name. You can still use your credit card normally, but you won’t be able to open new lines of credit.

How do I freeze my credit?

To place a freeze on your credit report, contact all three major credit reporting agencies:

Equifax: 800-349-9960
Website

Experian: 888-397-3742
Website

TransUnion: 888-909-8872
Website

You’ll be asked to provide personal information to verify your identity, and may be a fee, depending on your age and where you live.

Are there drawbacks to a credit freeze?

The protection a credit freeze offers isn’t perfect. Credit freezes only prevent new lines of credit from being opened in your name — if an identity thief already has access to one of your accounts, a credit freeze is not an effective line of defense.

In addition, a credit freeze remains active until you decide to unfreeze it. To unfreeze your credit report and open a new line of credit, you’ll have to contact each credit reporting agency with the PIN number given to you at the time of the initial freeze. A fee may be charged for unfreezing your credit.

What are encumbrances on title?

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A: An encumbrance is a claim or lien on a parcel of real estate and the ownership interests in the property.

A preliminary title report (prelim) issued by a title insurance company is intended to disclose the current vesting and all encumbrances reflected on the public record affecting a property’s title.

Encumbrances set out in a prelim include:

  • General and special taxes;
  • Assessments and bonds;
  • Covenants, conditions and restrictions (CC&Rs);
  • Easements;
  • Rights of way;
  • Liens; and
  • Real estate interests held by others.

The buyer, their agent and escrow review the report for encumbrances on title inconsistent with the terms for the seller’s delivery of title set in the purchase agreement and escrow instructions.

However, both the seller’s agent and buyer’s agent review the prelim immediately for any reported conditions that may interfere with closing the
transaction.

In practice, the buyer’s agent looks for title conditions which conflict with any intended use or change in the use of the property contemplated by the buyer. Interferences with use come in the form of unusual easements or use restrictions (CC&Rs) which obstruct known plans the buyer has to make improvements.

Ultimately, the escrow officer, on review of the prelim, advises the seller of any need to eliminate defects or encumbrances on title which interfere with closing the transaction as instructed.

My Deposit: Will I lose it if escrow is cancelled?

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When the escrow period begins, your good faith deposit is held by escrow to be applied on closing toward your down payment and transactional closing costs.

The deposit is your money, even though it is held in escrow. However, it also serves as a source of the seller’s recovery, upon demand, of any losses you may have caused them to incur. Thus, your deposit may be partially or totally offset when you cancel for any reason not covered by a
contingency provision in the purchase agreement — a material breach of contract.

In this situation, the seller consents to the release of the escrowed deposit to you less any out-of-pocket money losses the seller actually incurred due to your breach.

To disburse funds, escrow first needs to have mutual instructions signed by both you and the seller. When you or the seller make a demand for the funds and the demand is opposed due to a refusal to consent, the resolution and eventual disbursement depends on who has the right to receive the funds held by escrow. A forfeiture of the deposit is not permitted in spite of wording to the contrary in some purchase agreements.

Within a period of 30 days after escrow’s receipt of the first demand for the funds, you and the seller are separately obligated to:

  • Determine who is entitled to the funds; and
  • Hand escrow cancellation and release of funds instructions to clear the deposit out of escrow.

For a seller to receive any part of your deposit, they need to provide you with evidence of the money losses they incurred due to your unexcused failure to close escrow.

Money losses a seller may have incurred on a buyer’s breach include:

  • Lost rental income caused by the terms of the sale;
  • A decline in the property’s value below the price agreed to by the date of the breach when they re-market the property for sale;
  • Transactional expenses unrecoverable when the property is resold; and
  • Other expenditures directly related to the transaction which will go uncompensated (on a resale or retention of the property).

When escrow does not receive mutual instructions to disburse funds within 30 days of a demand by either you or the seller, the escrow company deposits the funds with the court and closes their file. On the deposit with the court, escrow is relieved of any further responsibility to account for the funds.

Types of Agency-Brokerage Relationships

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Seller’s agent

Also known as a listing agent, a seller’s agent is hired by and represents the seller. All fiduciary duties are owed to the seller. The agency relationship usually is evidenced by a listing contract. Once a property is listed, the seller’s agent either can attempt to sell it or, in addition, may be permitted by the seller to cooperate with another licensee who will attempt to find a suitable buyer for the property, A seller’s agent negotiates the best possible price and terms for the seller. The agent represents the seller’s best interest throughout the transaction.

Buyer’s agent

A real estate licensee is hired by a prospective buyer as an agent to find an acceptable property for purchase and to negotiate the best possible price and terms for the buyer. The agent represents the buyer’s best interest throughout the transaction. The buyer can pay the agent directly through a negotiated fee, or the buyer’s agent may be paid by the seller or a commission split with the listing agent.

Subagent

A cooperating agent who works for a listing broker-salesperson in the sale of a property. The subagent represents the seller, and therefore, works with the buyer, but not for the buyer. The subagent owes fiduciary duties to the listing broker and to the seller. Although subagents can’t assist the buyer in any way that would be detrimental to their client the seller, a buyer-customer working with a subagent can expect the subagent to treat him honestly. A subagent generally may provide the buyer with certain types of services, often called ministerial services, which are factually based and do not require the licensee’s judgment.

Disclosed dual agent

Dual agency is a relationship in which the brokerage represents both the buyer and the seller in the same real estate transaction. Dual agency relationships don’t carry with them all of the traditional fiduciary duties to the clients; instead, dual agents owe limited fiduciary duties. The fiduciary duty of loyalty to the client is limited. This focuses on confidentially and the negotiation process. Because of the potential for conflicts of interest in a dual agency relationship, it’s vital that all parties to the dual agency relationship give their informed consent. In many states, this must be in writing. Disclosed dual agency is legal in most states.

Designated agent

Also called, among other things “appointed agency,” this is a brokerage practice that allows the managing broker to designate which licensees in the brokerage will act as agents of the seller, and which will act as agents of the buyer, without the individual licensees being dual agents. The designated agents give their clients full representation, with all of the attendant fiduciary duties. To use designated agency, it specifically must be permitted by state law. State laws vary, and in some states permitting this practice, the managing broker also is not a dual agent.

Nonagency relationship

This relationship is called, among other things, a transaction broker, or facilitator. Some states permit a type of nonagency relationship with a consumer. These relationships vary considerably from state to state, both as far as the duties owed to the consumer and the terminology used to describe the relationship. Very generally, in these relationships, the duties owed to the consumer are less than the complete, traditional fiduciary duties, but in most states which allow for this type of relationship, the licensee still owes fiduciary duties to the consumer.

What are Contingency Provisions? Do I need them?

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Contingency provisions describe an event, activity or condition which needs to occur before the purchase agreement transaction can proceed toward closing. On the occurrence of the event or approval of information described in a contingency provision, the contingency has been satisfied and is no longer an obstacle to further performance and closing.

Contingency provisions authorize the buyer or seller to cancel the transaction when:

  • The described event fails to occur; or
  • The information received is disapproved.

Contingency provisions stating conditions allowing for the termination of an agreement are separated into two categories:

  • Event-occurrence contingency provisions — those provisions satisfied by the existence, completion or outcome of an activity or event which eliminates the contingency; and
  • Further-approval or personal-satisfaction contingency provisions — those provisions satisfied by the receipt, review and approval of data, documents and reports which eliminate the contingency.

Event-occurrence contingency provisions address the occurrence of specific activities and events, such as:

  • The sale or acquisition of other property by the buyer or the seller;
  • Obtaining purchase-assist financing;
  • The approval of building permits; and
  • The elimination of title conditions, or the release of encumbrances, such as liens or leases.

Further-approval contingency provisions address the right of the buyer or seller to cancel the transaction on their disapproval due to unacceptable property conditions and material facts, such as:

  • Disclosures and inspection reports concerning the physical integrity and natural and environmental hazards of the property;
  • Appraisals;
  • Title reports; and
  • Rental income and expenses.

To terminate a purchase agreement under a contingency provision, the buyer or seller needs to have a reasonable cause to cancel for the cancellation to be enforceable. When a reasonable basis exists, they may avoid enforcement of the purchase agreement by the other person by notice of cancellation.

Contingency provisions contained in purchase agreements are eliminated by either:

  • Satisfaction of the contingency provision by the occurrence of an event or by someone’s approval of the conditions contained in information, data, documents or a report; or
  • Waiver or expiration of the contingency provision.

Contingency provisions are unique as they deal with uncertainties at the time an agreement is entered into. As a matter of good practice, contingency provisions are included in purchase agreements to eliminate any uncertainty about aspects the property’s title, income/expenses or physical condition. Before escrow is able to close, contingency provisions need to be eliminated.

Fixed Rate Vs. Adjustable Rate Mortgage Loans

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A fixed rate mortgage (FRM) provides the classic method for calculating interest that accrues on principal over the life of a mortgage. With an FRM, the interest rate and scheduled payments remain fixed for the life of the mortgage, giving certainty to future payment obligations.

The FRM is the most consumer-friendly and risk-free type of mortgage financing. While always available for homebuyers in need of a mortgage, FRM financing for business or investment properties typically has short due dates of three to seven years. 

An adjustable rate mortgage (ARM), as diametrically opposed to an FRM, calls for periodic adjustments to the interest rate. In turn, the amount of the scheduled payments fluctuates with each interest rate adjustment over the period remaining on the mortgage’s original amortization period. 

The unique feature defining all ARMs is an interest rate formula, typically comprised of:

  • An introductory interest rate applicable for a short period of several months, also known as a teaser rate or qualifying rate
  • An index figure, a proxy for future changes in the lender’s cost of funds.
  • A margin rate, which does not change during the life of the mortgage and is the earnings spread a lender adds to the index figure to determine the annual rate of interest charged on principal following each adjustment in the mortgage rate
  • An adjustment interval at the end of which the mortgage interest rate is changed to reflect a rise or fall in the index figure.

The ARM’s adjusted interest rate is determined by adding the index figure to the margin rate (at set intervals, and subject to any caps or floors as limitations beyond which the mortgage rate cannot change). 

ARMs become popular when property prices or FRM interest rates rise faster than the rise in personal incomes. ARMs allow you to leverage the lower initial interest rate charged on an ARM (compared to the FRM rate) into a higher mortgage amount to fund the purchase of a home. In turn, you are able to pay a higher price for a home, but take on the risk your payments will increase over the coming years.