The FSBO Experience

The NY Daily News has an interesting and informative article: For Sale By Owner: Getting a good price without broker expense. Sure, I'm biased, but take note of his final point: while it makes sense to save money without a broker, a lawyer is worth the money.

The 6% Commission and FSBO

There are many arguments to be made in favor using a real estate agent when buying or selling a home -- although there are many arguments against, as well. Particularly from a seller's perspective, the cost of using an agent is probably the number 1 reason why a seller might choose to forego an agent and sell "FSBO" (For Sale by Owner).

On today's CNNMoney page, there is an interesting article about the efforts of brokers and agents to maintain a standard 6% of the sale price commission for helping a seller sell a home. The article notes that the 6% works out to a "whopping" $12,000 on the sale of an average American home -- which means a sale price of $200,000. There are not too many homes in the Puget Sound area at that price, so if you live here and are thinking of selling with an agent, the cost to you would be significantly more -- closer to $21,000, given a King County median price of about $350,000. (Would that make it a "mega-whopping" commission? "Ultra-whopping"?)

There are many sources on the web regarding the costs and benefits of FSBO. There are also many web sites that will help you sell your home yourself. If you do it yourself, however, remember that you're participating in a legal transaction worth hundreds of thousands of dollars. Accordingly, "experts overwhelmingly suggest hiring an attorney to draft, or at least review, all the paperwork, making sure it's legal, complete and does exactly what the drafters want it to do."

The Financing Contingency

I just authored a post on Rain City Guide that addresses financing contingencies. Rain City Guide is an excellent blog operated by a real estate agent here in Seattle. I encourage you to surf liberally.

Escalation Clauses - Potential Pitfalls for Buyers

For a detailed description of escalation clauses (what they are, how they work), please see my prior post.

Buyers often include escalation clauses in their offers in an attempt to ensure that the offer will have the best purchase price. When sellers receive multiple offers, they will consider many factors in determining which one is best, but of course the purchase price is the primary consideration. Thus, in a hot housing market such as the current one, buyers often must compete with other buyers for a particular house, and the easiest way (but not only way) to win that competition is by offering the highest price. An escalation clause helps a buyer to put forth the best purchase price possible.

So what's the downside? Before going further, I must note: interpretation and use of an escalation clause is clearly the practice of law. I have long believed that consumers benefit when lawyers provide the legal services needed when buying or selling a home. So I've launched Quill Realty, where every buyer client and every seller client is paired with an attorney to protect their interests from start to finish.

By including an escalation clause, buyers tip their hands as to the highest price they are willing to pay for the home. Sellers can use this knowldege to their advantage -- and to the disadvantage of the buyers. For example, assume that a seller indicates she will entertain all offers on a particular date. Two buyers, Buyer A and Buyer B, each put in an offer at the asking price of $400k. Recognizing the likelihood that there would be multiple offers, both buyers included an escalation clause. Buyer A's clause escalates the price in $1k increments up to a cap of $405k; Buyer B's clause escalates in $2k increments up to $420k.

When considering these offers, the seller could simply sign and return Buyer B's offer with a contract price of $407k. However, Seller could also return the offer as a counteroffer with a sale price of $420k. Admittedly, this gives Buyer B the option of accepting or rejecting the price, versus binding Buyer B to a price of $407k. Nonetheless, the seller may be willing to take this risk given an extra gain of $13k -- after all, Buyer B has already indicated a willingness to pay that amount. Thus, by tipping the seller off to his maximum price, Buyer B may end up paying it.

Escalation Clauses - Potential Pitfalls for Sellers

An escalation clause is a clause in a purchase and sale agreement that, under certain circumstances, automatically elevates the offer price so as to beat any other offer. The offer will contain the buyer's initial offering price. If the seller receives another offer with the same price, an escalation clause will raise the first offer's price in specified increments until it beats the other offers, usually up to a maximum amount. In other words, escalation clauses act as de facto bidding wars, except that the bidding happens automatically by comparing the competing offers.

So what's the downside? Before going further, I must note: interpretation and use of an escalation clause is clearly the practice of law. I have long believed that consumers benefit when lawyers provide the legal services needed when buying or selling a home. So I've launched Quill Realty, where every buyer client and every seller client is paired with an attorney to protect their interests from start to finish.

In this hot housing market, it has been common for sellers to market their home so that they receive multiple offers. This is often accomplished by listing the house with a comment indicating that all offers will be considered on a particular date. The house may be slightly underpriced as well in order to attract more buyers. Buyers, recognizing that they are probably in a competitive situation, will often include an escalation clause in their contract. Thus, sellers are able to generate competitive bidding that drives up the final sales price.

If you are selling your home and hope to receive multiple offers, it is important that you know how to interpret escalation clauses. If there is a misunderstanding as to how they work, then you will not obtain the best possible sales price. If you are relying on your agent, make sure your agent has a solid understanding of this issue. I note that, in Washington, agents are not allowed to practice law -- they can only complete pre-printed legal forms. I question whether the interpretation of multiple escalation clauses constitutes the practice of law and thus should only be done by lawyers.

It is also important to understand the subtle differences that may exist in competing escalation clauses. Usually, the language is fairly straightforward: the offer price automatically escalates above a comparable competing offer. If the seller accepts this offer, the agreed price for the sale is determined by the escalation clause. For example, assume a seller receives two comparable offers, each offering to purchase the home for $400,000. Offer "A" contains an escalation clause that escalates the purchase price in increments of $2000, up to a maximum of $410,000. Offer "B" contains a similar clause that escalates the purchase price in increments of $2500, with no maxiumum amount. When the seller accepts Offer "B," the agreed purchase price will be $412,500 ($2500 above the competing offer's maximum price).

However, some buyers will write the escalation clause a little differently. For example, rather than automatically escalating the price, the clause may require that the final escalated amount be presented to the buyers as a counteroffer. Thus, when the seller signs and returns the offer as a counteroffer, the buyers retain the right to accept or reject the escalated purchase price.

This can cause problems and, if not handled correctly, lead to a less-than-optimum sales price. Returning to the example above, assume that Offer "B"s escalation clause required the escalated amount to be presented as a counter offer. Assume further that the seller did not appreciate this difference. Accordingly, the seller simply signed and returned the offer with the new purchase price of $412,500, thinking that he had sold his house for significantly more than the asking price. However, after receiving the signed offer (which was really a counteroffer), the buyers reconsidered and decided they did not want to pay that much. Accordingly, they decline the counteroffer. The seller is then left with only a single offer of $400,000 and has lost the advantage associated with the escalation clauses.

If the seller had appreciated the subtle differences in Offer "B"s escalation clause, he could have handled the matter a little differently. The seller could have encouraged the buyers to make a counter-counteroffer, if the price of $412,500 was too much. If these buyers had in fact come back with a counter-counteroffer, say $405,000, then Offer "A"s escalation clause would have escalated off of that amount to a price of $407,000. In other words, by handling the situation correctly in this case, the seller could have obtained an additional $7000 from the sale.

To gain the benefit of escalation clauses, it is important that sellers understand how such clauses work.

Welcome to my new blog!

In an effort to further market my law practice, as well as raise awareness about legal issues surrounding the residential real estate market, I decided to jump into the Blogger Pool -- with both feet! Well, not really, as blogspot appears to be a pretty easy way to get a blog up and running. Perhaps I'll get my own blog-shop one day, but for now this free blog sub-lease seems like the way to go. Please return on a regular basis, as I'll try to post something relevant at least once a week.