Total existing-home sales—completed transactions that include single-family homes, townhomes, condominiums and co-ops—rose 3.1% from December to a seasonally adjusted annual rate of 4.00 million in January.
BARRISTER'S BRIEFING: Good Intentions Paving the Way to Hell: Love Letters and Escalation Clauses
The old proverb states, “The road to hell is paved with good intentions.” This becomes the challenge to all buyer agents acting in their client’s best interests; do the right thing, but don’t do it to such an extent to cause harm.
In past years, Realtors encouraged drafting a “love letter” to the homeowner, where the buyer would make an emotional appeal to the homeowner as to why they should sell their home to them. Another strategy was to employ the use of an “escalation clause” where a buyer’s offer increased incrementally based upon certain factors, hopefully making the buyer’s offer the winning bid. While both these ideas seemed like strong strategies and were supportive of acting in a client’s bests interests, they are now being questioned for their shortcomings.
The idea is that the buyer sends a heartfelt letter to the homeowner explaining why the homeowner should sell their home to them. These letters are more about emotion and less about facts. While these letters sound like a great opportunity to have your client explain why they should be chosen, they have a strong potential of exposing your client to fair housing discrimination (and open the agent to fair housing violations) because they provide the homeowner with personal information and characteristics that might not otherwise be revealed. These factors may knowingly or unconsciously be used to reject your client.
The typical letter may say how the buyer looks forward to their children playing in the back yard, or hanging Christmas decorations on the front porch, or how they look forward to grandma being able to visit and make matzo ball soup in the kitchen. Or maybe they say how it’s close to the church they attend, or it’s near the military base where someone serves. While all this information creates character, it also lets the homeowner know things that they should not be aware of: religion, familial status, age, race, military status are just a few of the protected classes that may be revealed. Based upon this information, the homeowner may reject the client and, importantly for the Realtor providing this information, the agent may be in violation of fair housing laws (they’re not supposed to provide this information).
As a result, NAR, NYSAR and many brokerages discourage the use of “love letters.” Best practices dictate that in an effort to protect your client and yourself from fair housing issues you should:
1. Explain the pitfalls of these letters;
2. Remind your client that your duty and their decision to buy should be based upon objective criteria (price, terms, etc.) and not emotion;
3. Refuse to deliver, read, or assist in the writing of these letters; and
4. If you represent the seller who receives a letter, suggest they not read it and/or document all offers received and the seller’s reasoning for accepting/rejecting them.
An escalation clause is a provision in an offer where the buyer agrees to increase the amount they are willing to pay based upon the highest offer presented. The clause will automatically increase the offer price just above that highest offer to a maximum cap, otherwise, they could pay too much (For example, Buyer A has an escalation clause that states that she “will pay $500 more than the highest offer up to a cap of $500,000.”) The benefit of an escalation clause is that it reduces the amount a buyer will pay to an amount just above the highest offer and reduces the risk of overpaying for a property. However, this practice is fraught with problems.
First and foremost, Realtors try to draft these clauses themselves. Usually, these clauses end up poorly drafted and expose their clients to liability. But, worse is that the Realtor may be deemed engaging in the “practice of law,” which is prohibited by the Code of Ethics and a violation of state law. Obviously, this is bad and could jeopardize the Realtor’s reputation or career. Realtors who are not licensed attorneys should never draft escalation clauses.
Second, in controlling the amount a buyer will pay for a property, the buyer may be revealing their maximum offer price. This is the buyer’s most prized secret. Armed with this information, the seller can now leverage it, as the Code of Ethics states that offers are not confidential and may be “shopped” by the seller. Therefore, a seller may now reveal how much the buyer is willing to pay in an effort to get another buyer to offer more. As a result, some escalation clauses have a non-disclosure provision. While this may strengthen the privacy of the offer, problems remain: (1) the homeowner may reject the offer with the non-disclosure provision until such time that the provision is removed; (2) depending on how the non-disclosure is drafted, the homeowner may reject the offer and, thereafter, share the offer to other prospective buyers; (3) share the offer with other possible buyers in violation of the provision with the hope that the buyer with the non-disclosure will never know about it being shared.
Third, what happens when more than one escalation clause is presented? By simple operation, both clauses act in tandem and immediately escalate the offer price to the price above the lowest maximum cap. For example, Buyer A has “$500 above the next highest offer up to a cap of $550,000.” Buyer B has a clause that says “$500 above the next highest offer up to a cap of $600,000.” If the current asking price is $200,000, it is instantaneously increased to $600,000 (Buyer A will pay up to $550,000 and Buyer B will pay $500 above that). This may not be the best plan for a buyer and the buyer may be better off negotiating direct with the seller. Exacerbating this problem is the potential for “friendly” escalation clauses that may be fraudulent. These “friendly” clauses are made by fictitious or by friendly buyers who make offers for the sole purpose of triggering the escalation clause.
These “friendly” offers bring us to the final problem: proof of the next highest offer. Often, in an effort to prove that there is another offer that is being outbid, the presenter of the escalation clause will demand a copy of the next highest offer. However, as noted previously, some offers have a non-disclosure form. The seller may refuse to present that lower offer to the buyer with the escalation clause for fear of violating the non-disclosure agreement. Alternatively, if a “friendly” offer was presented, the buyer with the escalation clause has no way of knowing if it was a legitimate offer.
While Realtors use their best efforts and are required to act in the best interests of clients in a race to get a buyer for their desired property, the buyer’s agent may have a lapse in judgment. While “love letters” and escalation clauses seem like great shortcuts down a path to success, think before utilizing these tools. Consult with your broker or even speak to an attorney. The primrose path you are on can get scary, dark, and in some cases hotter than hell if it involves your license or litigation.