Tuesday, May 05, 2015

NO ESCALATION CLAUSES? Or Hoping for Dumb Money

by Osman Parvez
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A small percentage of Boulder brokers are starting to specify "no escalation clauses" in their listings. It's hidden from public view, the verbiage is in the broker comments section of the listing. You need MLS access to see it.    

How many? Not many. As of this writing, less than 5%. Even though it's such a small percentage, it's still a negotiation tactic to discuss and understand. It matters when it's the house you want to buy.

So Boulder... let's talk. 

Why Exclude Escalation Clauses?  

Smart buyers use escalation clauses to avoid leaving money on the table. When a listing broker asks for "no escalation clauses," they're hoping someone is willing to pay a high number without any substantiation. When I worked on the Street, we had a word for investors willing to pay substantially more than market value. We called it "dumb money." 

It's also not just about the price. Is an offer with 5% down and full inspection contingencies the same as a cash offer at a lower price but no inspection? Of course not.   

After twelve years of negotiating real estate deals, and years of experience negotiating deals in the investment world before that, I find it baffling that some agents are uncomfortable with active negotiation. Meanwhile, we've made it a core competency of our business. 

Here's the deal. Escalation clauses force the listing agent to actively negotiate. They have to field questions about the quality of the other offers and in most cases, provide proof. This is something that many agents are simply not skilled at doing. In our experience, certain brokers are reluctant to have in-depth, honest conversations with negotiation counter parties. When pressed for why, they have only vague answers and claim confidentiality.   Others say it was their seller's choice. 

FACT: The verbiage in listing agreements which prohibits shopping offers must be affirmatively selected. In other words, it's NOT the default position in the listing contract. The listing broker has to actively select yes or no. The seller has to sign on it. See §5.8 of the Exclusive Right to Sell (LC50).   

Confidentiality is a tradition in real estate. Old school listing agents love it because it keeps them in the position of having all the information. It also allows them to steer the deal in a direction that benefits their interests, which as we know, is not always aligned with the seller's interest. Escalation clauses claw back some of that leverage and force a more even playing field.  

Most of our clients are the very opposite of dumb money. Buyers and sellers choose us to represent them because we've made it our goal to help them make a smarter real estate decision. We advise our clients to base their offer on proof of market demand and not pay more than the market. Most of our buyers would rather pass on a house than blindly pay tens of thousands (or more) than necessary.  

p.s. Not allowing escalation clauses (or discriminating against them) is not just about leverage. It can actually work against a sellers interest. In a recent deal we were directly involved with, it cost the seller about $100K when the listing broker didn't pick up the phone to negotiate. Our buyer found another house and the seller likely never knew how much money they left on the table due to their broker's poor negotiation skills. 

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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate.  image:  pfly

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