Relative Bid Offers−Safe or Insane?
Among other tactics used in multiple-offer situations is the use of an Escalation clause to form a Relative bid, also referred to with somewhat of a negative connotation as “Sharp Bids”. This tactic is sometimes employed in real estate purchase agreements when competing buyers are vying for a property.
Here’s how a Relative Bid (AKA Escalation Clause) might work. A buyer wishing to avail themselves of this tactic should prepare their offer with an initial stated offer price, and a caveat that their offer shall be “X” amount higher than the highest verifiable offer up to the buyer’s desired price cap—the highest the buyer would be willing to go in a worst-case scenario. That’s the correct way to prepare a relative bid—a baseline, the overbid, and a cap.
What are some of the advantages and disadvantages of Relative Bids?
The main disadvantage is that most real estate agents do not know how to handle or write relative bids for their clients. In fact, one of the largest real estate companies in the Bay Area disallows their agents from employing or even entertaining this type of bid for fear they might muck it up and end up in a lawsuit.
To us, that’s throwing the baby out with the bathwater.
One specious argument against relative bid offers is that your relative bid may place you at an offer price above an inferior offer, perhaps rife with contingencies. A logical and practical rebuttal to this is that sellers use inferior offers all the time to counter lower-priced offers with superior terms that match higher-priced offers they have no intention of accepting.
The advantage for a buyer is they are no longer bidding blindly against themselves. Say, for example, a home is listed for $1,900,000 and there are 17 competing offers, as there were for a home we recently listed in Redwood City. Buyers have no real idea how high to bid to secure the property, and in many cases, they bid far higher than the next-closest bidder—effectively bidding against themselves.
A relative bid allows them to offer a specific amount higher than the highest offer and have control over how much they overbid in a multiple-offer situation—but only if it’s done properly.
Is it legal? Absolutely. In fact, another large company (with whom we have previously worked) in the South Bay actually recommends to their agents that they make the option of a relative bid known to their buyers to avert a claim of a lapse in the agent’s fiduciary duty—by not explaining all potential bidding options to one’s client.
For sellers, a relative bid can also be advantageous because it may reveal how high a competing buyer is actually willing to go. The buyer’s cap typically represents their true “best and highest” price. If another legitimate offer triggers the escalation provision, the seller may ultimately receive a higher price than they would have through conventional blind bidding.
The disadvantage for a seller is that a relative bid may actually limit the upside. In a blind-bid situation, an aggressive buyer might submit an offer $100,000 or more above the next-highest offer simply because they don’t know what it will take to win. With a relative bid, however, that same buyer may only need to beat the next-highest verifiable offer by, say, $20,000. In that situation, the buyer saves $80,000—and the seller leaves that same $80,000 on the table.
As a seller and a buyer, yoiu should at least know that you have all the tools available to you when buying or selling a home? At RE/MAX- MorGANHOMES, we are not only allowed to use an Escalation Clause and accept and write Relative bid offers, but we have also used them to our advantage in several strategic and crucial situations—much to the satisfaction of our prevailing buyers.
Disclaimer:
Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA, with more than 20 years of experience helping sellers and buyers in their community. They may be reached at (650) 508.1441.
The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax, or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.
