In a recent discussion on the WRA Legal Hotline, a broker said the seller had received nine offers on their property. This distinct market shift — buyers lining up for properties and sellers with bargaining power — has resulted in several calls to the hotline about how REALTORS® are to work and communicate with buyers, sellers and each other in hot markets.
Disclosure of unaccepted offers
A broker is working with a buyer and wants to know if the listing broker is required to share information about other written offers. What is the disclosure obligation?
This question yields two different responses: one based on license law and one based on the Code of Ethics and the seller’s instructions.
First, for written but not yet accepted offers, the Administrative Code rules indicate that a licensee may, but is not required to, disclose information known by the licensee regarding the existence of other offers on the property.
Second, the answer to the question is also influenced by Standard of Practice 1-15: “REALTORS®, in response to inquiries from buyers or cooperating brokers shall, with the sellers’ approval, disclose the existence of offers on the property. Where disclosure is authorized, REALTORS® shall also disclose, if asked, whether offers were obtained by the listing licensee, another licensee in the listing firm, or by a cooperating broker. (Adopted 1/03, Amended 1/09).”
Per the Standard of Practice 1-15, it would be prudent for the listing broker to ask the seller, at the time of listing, what the seller wants the listing broker to disclose in the event cooperating brokers or buyers ask about other offers. The broker may revisit the conversation as the situation arises as the seller’s instructions to disclose may change during the course of the listing. After the listing broker has the seller’s instructions, the listing broker can disclose the existence of the other offer, if authorized by the seller, when responding to cooperating brokers’ requests. Keep in mind that disclosure of unaccepted offers is only the disclosure of the existence of offers — not any terms and conditions.
Disclosure of accepted offers
Once the seller has accepted an offer, is the listing broker required to share the information with other brokers?
The disclosure of accepted offers is also a multi-layered question. For accepted offers, the Administrative Code rules provide the broker may disclose the fact that a seller has accepted an offer, that the offer is subject to contingencies and that the offer is subject to a clause requiring removal of certain contingencies upon the occurrence of an event such as receipt, acceptance or conditional acceptance of another offer.
The Code of Ethics also includes disclosure guidance in Standard of Practice 3-6, which provides, “REALTORS® shall disclose the existence of accepted offers, including offers with unresolved contingencies, to any broker seeking cooperation. (Adopted 5/86, Amended 1/04).”
Finally the broker should consult with MLS rules for status change requirements as each MLS has specific requirements for reporting the change in status.
Escalation or acceleration clauses
As market forces shift, buyers find themselves in competition with multiple buyers on desirable properties. If a buyer is very interested in a property and knows the seller has been presented with other offers, can the buyer say they will pay more than any other offer?
Yes, negotiating price at an amount above another offered price is a legitimate negotiation strategy. The offer to purchase must state the price the buyer is willing to pay to purchase the property; that price may be determined by referencing the price of another offer. If the buyer wants to use such a strategy, the equation used to determine price must be clear and unambiguous.
Drafting issues to consider include: using only another bona fide offer to determine price, a maximum price that would be offered, requesting the seller provide copies of other offers directly to the buyer, and the time allowed for another offer to be used to set a price. The buyer may also be reminded that price may not be the seller’s most important condition for the sale of property. The devil may be in the details when drafting or reviewing an escalation or acceleration clause. Some clauses in use have attempted to address net sale prices, which may need clear definition.
Backup or secondary offers
When there are multiple secondary offers on a property, which buyer becomes primary first? In the case where a seller has a primary offer and multiple secondary offers, does any one secondary buyer have the right to be elevated before another?
No offer is first unless one of the secondary buyers has negotiated specifically to be elevated first. The standard offer language creates a pool of secondary buyers:
“SECONDARY OFFER: This Offer is secondary to a prior accepted offer. This Offer shall become primary upon delivery of written notice to Buyer that this Offer is primary. Unless otherwise provided, Seller is not obligated to give Buyer notice prior to any deadline, nor is any particular secondary buyer given the right to be made primary ahead of other secondary buyers.”
The italics are the key factor in the negotiations. A buyer may, in additional provisions or in an addendum, modify the secondary offer provisions requiring the seller to elevate this secondary offer into primary position in case the primary offer fails. It is of utmost importance the seller does not unintentionally accept more than one modified offer as the seller cannot elevate more than one buyer into primary position at one time.
Buyer negotiating strategies
The buyer has an accepted secondary offer. The broker was told there was a bump clause, but the broker won’t say how many hours. The buyer has been waiting for days but has received no information about being elevated into primary.
The broker working with the buyer should take time to explain how the secondary position is a waiting game, requiring the buyer to have patience in a world with potentially little or no communication from the listing side. The listing broker keeping confidential information confidential respects both the seller and the primary buyer, and the lack of information is not intended as a slight to the secondary buyer. According to the rules, the terms and conditions — which include the hours in a bump — would be confidential information as would how many secondary offers the seller has accepted. The fact there is what is known as a bump clause is an exception to confidentiality and may be disclosed.
Is the seller required to bump the primary buyer once there is an accepted offer? Can the seller use any secondary offer to bump the primary?
The standard offer provides the seller may, but is not required to, bump a primary offer upon the acceptance of a secondary offer. A buyer in a hot market may use negotiating strategies to become positioned in a stronger position. For example, the offer may be modified to require the seller to bump any primary buyer within a certain amount of time or it may restrict the seller from renegotiating with the primary buyer. Such agreements would be subject to negotiation between the seller and secondary buyer.
The seller may use any bona fide offer to bump the primary buyer. There are no other requirements. The secondary offer may also be subject to sale, it may be for more or less money, or it may be subject to financing or any other contingencies. Whether a seller chooses to bump a primary buyer may very well be influenced by the terms and conditions of the primary offer. When working with a buyer in a hot market, it would be prudent to have the primary buyer prepare for a bump at any time after the acceptance of the offer. It may prevent the buyer from making rushed decisions about waiving the closing of the buyer’s property contingency. To learn more about buyer and seller conduct in hot markets, see “The Best of the Legal Hotline: The Market Is Heating Up for Summer — How to Work with Multiple Buyers,” in the July 2013 issue of Wisconsin Real Estate Magazine. For backup offers, see “First in Line: The Importance of Backup Offers,” in the November 2012 issue of Wisconsin Real Estate Magazine.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.