STORIES FROM THE FIELD: The interesting economics of buyer behavior

We came across a situation that we haven’t dealt with in over a year. Back in the day when the market wasn’t so crazy, most properties received an offer or two within the first few weeks of listing. The parties would go back and forth and negotiate until everyone was satisfied with the terms. As the housing market heated up, multiple competing offers on the same property became more common in hot markets, which led to a special form called an “escalation clause,” which basically says that a buyer will pay $X more than the best price from a competing offer, up to a certain maximum price. We recently worked with an agent who is from way outside of the area and is used to working in a much slower and less competitive market. Her seller received multiple offers, each one with an escalation clause. Instead of going with the best offer in hand, they decided to have all agents remove the escalation clause and come in with one single, “highest and best” price. While legal, such a change is not common, and many buyers and their agents find it to be frustrating and a waste of time. Many seller’s agents think that if a buyer is willing to offer $400K as their highest, escalated price, for example, they may be willing to offer that or even more if they are forced to use their best price only. Our experience as agents has been that buyers generally do not offer more than their highest escalated price when they are forced to come up with 1 single number. We think it’s because buyers are only willing to pay their maximum price IF they are forced to by someone else who values the unit nearly as much as they do. That 2nd, lower-priced buyer helps to justify the max price paid. In lieu of this knowledge, buyers are blindly competing with each, with no safeguard in place to protect them from possibly paying 10, 20, 30%+ more than the next best offer. The end result for a seller may be that the winning price is less than what they would have gotten if the escalation clauses were used, in conjunction with the proper marketing and a reasonable review period. The art is in negotiating among the offers to help bring prices up to benefit the seller. Altering “the rules” after offers have been submitted is a surefire way to piss off buyers and their agents and to make a listing agent look amateurish.