QUERIN LAW: Dealing with Multiple Offers in 2013

teacherIntroduction. The term “multiple offers” refers to situations in which sellers receive two or more offers to purchase their property.  The reason for multiple offers during the boom years of 2005 – 2007 was because prices were rising rapidly, and buyers wanted their offers accepted quickly in order to lock in the price.  Consider this:  With average prices appreciating, say 18% per year [which was not unheard of], this meant that at 1.5% a month, by the time a buyer closed in 45-60 days, he or she had already realized a sizeable amount of paper equity.  On the other side of the coin, sellers who had already committed to sell were often lured by higher offers that came in while their sale was pending with another buyer.  It is for this reason that there were so many specific performance suits and/or arbitrations filed during this time; sellers didn’t want to close with their buyer, because after they went under contract they found they could get a better price, and looked for reasons to terminate the first transaction.

The circumstances giving rise to multiple offers today are much different than those that existed five or more years ago.  Today, the issue isn’t buyers chasing rising prices – it is the lack of inventory.

In those cases in which a seller is not yet “under contract” with a buyer, he or she may accept multiple offers, so long as each one is in a “back-up” position.  Determining where in line a back-up buyer is placed normally depends upon when their offer is accepted by the seller as a back-up.[1]

While I am sure there are many different back-up scenarios that can cause problems for Realtors® and their clients alike, I am going to focus on just two:

  • When there is more than one back-up offer; and,
  • When the listing agent, or another agent in the same office, is acting as agent for both the first buyer and the back-up buyer, or for multiple back-up buyers.

Multiple Back-Up Offers. Where there is more than one back-up offer, the confusion increases exponentially.  Here are some of the sources of confusion:

  • When does the statutory 5-business day right of revocation commence for the back-up buyer?
  • When do the contingencies, e.g. condition of title, professional inspection, financing, etc., commence?
  • What event results in the back-up buyer being elevated to the first position?
  • Do seller and buyer have to enter into a Termination Agreement, mutually agreeing that the sale has failed? Or is it enough that the buyer has failed to strictly adhere, in one or more respects, to the terms of the Sale Agreement [e.g. failure to submit for financing within, say three business days]?
  • Can the seller and buyer modify the terms of the original Sale Agreement that the back-up buyer is behind?  In other words, is the “back-up” status behind the first buyer only to the extent that the terms don’t change? Can the back-up buyer object to seller concessions given to the first position buyer, arguing that that contract has now been changed, and he/she is no longer in a second position?[2]
  • How is earnest money to be dealt with when there is/are one or more back-up offers?
  • Can the back-up buyer withdraw from that position at any time, so long as they have not been elevated to the first position?

From a company risk management perspective, the best policy may be to simply prohibit listing agents from taking more than a single back-up at a time. Thus, rather than having a second back-up buyer, wait until the first back-up is elevated to the first position, before taking the next back-up.

Realtors® Acting as Disclosed Dual Agents.  As for the listing Realtor® acting as a disclosed dual agent for the first or second-position buyer, this arrangement has “disaster” written all over it.  Technically, it is nearly impossible to avoid the appearance of favoritism, even if none exists. Since the first and second-position buyers cannot both close on the property, one party will inevitably be unhappy.  Short of refusing to represent buyers in these situations, one solution is to secure another agent in the company [preferably from a different office], to represent the first or second position buyer, so the listing agent can do his or her job without appearance of playing favorites.

Multiple Offers with Equity Sales. When multiple offers occur in equity sale transactions, the protocols would be handled the same as in the past.  That is, the first accepted offer is at the front of the line, and all subsequent offers are in a “back-up” position, based upon date of seller acceptance.[3] Each back-up moves up the line, when his/her predecessor falls away.  This protocol is not necessarily the same for short sale transactions.

Multiple Offers with Short Sales.  Since sellers are not the real decision makers in short sales, the issue is not what they want – it’s what the banks want.  It is hard to say there is any “rule of thumb” in these instances, which is why listing agents should verify with their lender how multiple offers should be handled.

Realistically, it is hard to say that there is actually such a thing as a “back-up offer” in a short sale transaction.  This is because most banks either entertain multiple offers, or they do not.  If they do, they will review them as submitted, with the understanding that they will decide among the offers in no particular order of preference. That is, while they are considering the first offer, a second may come in, and the bank may accept the second over the first. The bank is not necessarily committed to dealing with each offer sequentially. The fact that the second offer was chronologically “behind” the first one means nothing. This is because in “bank speak” their paperwork makes it clear that everything is conditional and nothing is final – until right before closing.  Thus, while Buyer #1 may believe the bank has accepted his or her short sale offer, the bank can always change its mind, reverse course, and accept a second offer it finds more attractive.  This can occur at any time during a pending transaction.  The process might be likened to Hollywood engagements – everything is conditional and nothing is final – until right before the ceremony. Just ask Julia Roberts.

This is the reason today, at least with short sales, that there can be no such thing as a specific performance suit.  The contract is between the seller and buyer – the bank is not technically a party.  Yet it calls all the shots.  So when a bank derails a pending transaction, accepting a subsequent buyer over the first one that appears to have been “accepted,” there is really very little the first buyer can do.  To bring a claim against the seller is futile, since the seller cannot convey marketable title to a buyer without lender consent.  In short, the rejected buyer cannot “make” the seller sell, since the short sale price requires the lender’s consent – and the lender is not a party to the buyer-seller contact.

Multiple Offers with REO Sales.  Again, with lenders it is hard to say a “rule of thumb” exists for handling multiple offers, since each bank has its own protocols.  However, in my experience with the Big Banks [e.g. B of A, Chase, Citi, Wells Fargo, etc.] if they “accept” an offer, they will include a bank-drafted Addendum that effectively takes away almost every right and remedy a buyer would normally have under the OREF Sale Agreement – including the right to specific performance.

In what I would describe as a legal non sequitur, the banks’ Addenda usually say that the buyer’s sole “remedy” in the event of a breach is a return of their earnest money deposit.  There is no right to “force” the bank to sell, should a spurned buyer be replaced with another.  Whether this clause would hold up in court is problematic, but in the short run, it means that should the bank change its mind about selling to a particular buyer, it may do so.  Anyone that wants to sue the bank to test this “no-remedy remedy” provision can do so if they have the time and appetite for litigation.   Thus, the take-away in REO sales is that likely, the bank will handle multiple offers any way it wants, since there is no apparent downside, such as damages and/or specific performance.

Conclusion.  We will undoubtedly see more multiple offers, especially in the short sale arena, where there can be a veritable “feeding frenzy” in the $100,000 to $250,000 range.  However, as noted above, the bank, acting as the defacto seller, should be consulted as to how it wants Realtors® to deal with them, should there be multiple offers.

As for equity sales, they should be handled in much the same way as in the past.  Several years ago, OREF developed a back-up offer form.  It is still useful today, as it deals with many of the pitfalls discussed above for equity sales.  One pitfall avoided means one less Realtor® sued, which is a good thing.

Lastly, for Realtors®, the important thing is to remember that the “best practice” protocols used for equity sales do not really apply when banks are selling REOs, or short sale owners are selling.  In those cases, the old adage that “You dance with the one that `brung´ you,” does not apply.  Banks are free to change their minds and court as many other buyers as they wish. Why?  Because they can.

[1] Note: This is totally different from multiple offers in short sales, where the bank may (or may not) want to entertain multiple offers. If so, they will tell the listing agent to submit them as they come in. The bank can pick and choose which it wants to entertain, regardless of the order of submission.  In those cases in which the bank will only entertain one short sale at a time, a second offer can be placed in a “back-up” position, but frankly, it is a doubtful strategy, since Buyer No. 2 will have to wait an indeterminate amount of time for the bank to respond, and by the time Buyer No. 2 is entitled to go to the front of the line weeks or months later, they may have already moved on with another offer.

[2] If you wonder how or why Buyer #2 might find out what’s going on in the transaction involving Buyer #1, the answer is that some agents say more than they should. So when the agent for Buyer #2 is asking the agent for Buyer #1 for a status report, the agent for Buyer #1 may release more information than is prudent.  I know this to have happened and Buyer #2 argued that they should now be in first position, since the offer he was behind had now changed. Remember: Loose lips sink ships Realtors®.

[3] Under contract law, the term “acceptance” means: (a) The seller has accepted and signed the buyer’s offer, and (b) Seller’s acceptance has been communicated to the buyer. Until (a) and (b) have both occurred, a buyer may revoke his/her offer by communicating their revocation to the seller.