Buyers are trying many negotiation strategies when competing with other buyers in this competitive market. From the “Dear Seller” letters to leaving out various contingencies in their offers, buyers are doing what they think it is going to take to get the seller to accept their offer. Let’s talk about some training tips and how to navigate through these negotiation strategies.
“Dear seller” letters
In a competitive market, buyers are looking for any angle to stand out in a pool of interested and eager buyers. One strategy buyers are using to try to gain an edge is personalizing the buyer’s offer by including a “Dear Seller” letter with the offer. The “Dear Seller” letter will often include personal details about the buyer to appeal to the seller on a personal level. Details could include information about the buyer’s profession, family or connection to the neighborhood. It is not unusual for the buyer to include photographs or videos of the buyer or the buyer’s family.
From the buyer’s perspective, personalizing the offer with a letter appealing to the seller can seem like a good negotiation strategy. These letters, however, can put both the seller and the listing agent in danger of violating the Fair Housing Act. By introducing information about the buyer’s family status, race, religion and other characteristics that would define the buyer’s membership in various protected classes, it invites the seller to make a decision about an offer based on the buyer’s membership in a protected class.
Buyers can include these “Dear Seller” letters with their offers. There is nothing illegal or unethical occurring when a buyer includes a “Dear Seller” letter with their offer, but these letters understandably make sellers and agents nervous because of the potential for a fair housing violation. Licensees have an obligation to present all offers, regardless of their terms and accompanying letters, unless presenting the offer or accompanying letter would be contrary to the instructions of the seller.
If a seller does not want to consider a buyer’s letter as part of the seller’s evaluation of offers, there are two different scenarios to consider:
1. Offers accompanied by a buyer’s letter
In this scenario, a buyer submits an offer and along with it includes a letter from the buyer to the seller. The seller could instruct the listing agent to present the offer but not to present the buyer’s letter. In the listing contract, the seller could instruct the listing agent not to present any buyer letters that accompanied an offer. Ideally, the fact that the seller will not review buyer letters would be identified as nonconfidential information at lines 149-150 of the WB-1 Residential Listing Contract — Exclusive Right to Sell. Once this information is identified as nonconfidential, the listing agent may inform other agents, such as in the MLS, that the seller will not review buyer letters.
2. Offers that incorporate a buyer’s letter
In this scenario, the buyer incorporates the buyer’s letter into the offer. This is often achieved by identifying the letter as an addendum to the offer on line 573 of the WB-11 Residential Offer to Purchase in the same way a buyer would incorporate an Addendum S for lead-based paint disclosure in the buyer’s offer. If the buyer incorporates the letter into the offer in this manner, the agent cannot simply “remove” the letter because it is a part of the offer at this point. If a seller will not consider any offers that have incorporated a buyer’s letter, the seller may instruct the listing firm in the listing contract not to present any offers that incorporate a buyer’s letter. Ideally, the fact that the seller will not review any offers that incorporate a buyer’s letter would be identified as nonconfidential information in the listing contract so the listing agent could inform other agents, such as in the MLS, of the seller’s instructions.
The seller could use the listing contract to both instruct the listing agent not to present any buyer letter that accompanies an offer and not to present any offer that incorporates a buyer’s letter.
Wis. Admin. Code § REEB 24.02(19) “Written proposal” means any written document provided by one party to another during the course of a transaction, including but not limited to notices, offers, counteroffers, options, exchanges, rental agreements, and amendments.
Wis. Admin. Code § REEB 24.13(1): Refusal prohibited. Licensees shall not refuse to draft or submit any written proposal unless the terms of the written proposal would be contrary to specific instructions of the other party.
Wis. Admin. Code § REEB 24.13(3)(a): Fair presentation of written proposals. Licensees shall present all written proposals in an objective and unbiased manner to their clients and customers. Licensees shall inform their clients and customers of the advantages and disadvantages of all submitted written proposals.
Offers without a financing commitment contingency
With multiple buyers submitting offers on a listed property, sellers can afford to be choosy when evaluating offers. Offers that are not contingent on financing are appealing to those sellers as these cash offers often appear to be more of a sure thing with fewer barriers to closing. According to the pre-printed terms of the WB-11 Residential Offer to Purchase, if a buyer does not make the buyer’s offer contingent on obtaining a loan commitment, the If This Offer is Not Contingent on Financing Commitment section of the WB-11 is included and the offer is a cash offer. Just because a buyer writes a cash offer does not necessarily mean the buyer has the funds to close the transaction. A key part of the If This Offer is Not Contingent on Financing section of the offer is the buyer agrees to provide proof of funds or other documentation to the seller by the deadline in that section. If the buyer does not deliver the proof of funds or other documentation agreed upon in the offer, the seller has the right to terminate the offer. A listing agent working with a seller who has accepted a cash offer should help the seller be mindful of the buyer’s deadline to deliver proof of funds or other documentation as agreed to by the parties in the offer. The seller’s ability to terminate the offer if the buyer does not timely deliver proof of funds or other documentation can help a seller weed out buyers who perhaps overambitiously drafted a cash offer without actually having the funds to back up that provision in the offer.
Listing agents have reported scenarios in which a buyer wrote a cash offer when the buyer did not actually have the funds to close but rather had an accepted offer on a property the buyer had listed for sale. The buyer is assuming their property will sell in time such that the buyer will have the funds to close and thus does not need to obtain financing. Most agents would agree that making an offer based on speculative future events can be a risky move for a buyer. Even if the buyer has an accepted offer on a property the buyer has listed for sale, there are several events that could derail that transaction leaving the buyer without the actual funds necessary to close on the property the buyer is trying to purchase. One option for a buyer in this scenario is to draft an offer that includes the If This Offer is Not Contingent on Financing Commitment section of the offer; and rather than agreeing to provide proof of funds, the buyer could use lines 300-301 of the WB-11 Residential Offer to Purchase to specify the documentation that the buyer is willing to provide to the seller, and that may include the copy of an accepted offer on the property the buyer has listed for sale or even a copy of an accepted offer on the property the buyer has listed for sale accompanied by a loan commitment for the property the buyer is attempting to sell.
The key thing for agents to watch for when a seller accepts a cash offer is to make sure a buyer provides either proof of funds or whatever other documentation the parties agreed to on lines 300-301 of the WB-11 Residential Offer to Purchase by the deadline in the offer. If a buyer misses the deadline, the seller could choose to offer an amendment to extend the deadline, or the seller could terminate the offer by delivering written notice of termination to the buyer and weed out a buyer who made a cash offer but did not actually have the funds to back up that proposition.
Another component for a listing agent to discuss with a seller when a seller accepts a cash offer is that the seller is agreeing to allow the buyer’s appraiser access to the property for purposes of an appraisal but that the offer is not contingent on an appraisal unless the buyer separately includes an appraisal contingency.
IF THIS OFFER IS NOT CONTINGENT ON FINANCING COMMITMENT Within ________ days (“7” if left blank) after acceptance, Buyer shall deliver to Seller either: (1) reasonable written verification from a financial institution or third party in control of Buyer’s funds that Buyer has, at the time of verification, sufficient funds to close; or (2) __________________________________________________________ _____________________________________________ [Specify documentation Buyer agrees to deliver to Seller]. If such written verification or documentation is not delivered, Seller has the right to terminate this Offer by delivering written notice to Buyer prior to Seller’s Actual Receipt of a copy of Buyer’s written verification. Buyer may or may not obtain mortgage financing but does not need the protection of a financing commitment contingency. Seller agrees to allow Buyer’s appraiser access to the Property for purposes of an appraisal. Buyer understands and agrees that this Offer is not subject to the appraisal meeting any particular value, unless this Offer is subject to an appraisal contingency, nor does the right of access for an appraisal constitute a financing commitment contingency.
Offers without a closing of the buyer’s property contingency
Another ambitious strategy buyers are employing in the current market is drafting an offer that does not include the Closing of Buyer’s Property Contingency, when in reality the buyer does need to sell a property to be able to close on the seller’s property. Again, when a seller is evaluating offers, accepting an offer that is not dependent on a whole other transaction is more attractive than accepting an offer that is dependent on another transaction. Buyers are, of course, aware of this and as such are opting not to include the Closing of Buyer’s Property Contingency to stay competitive.
Agents must draft offers according to the instruction of the party, but if a buyer is asking an agent to draft an offer that does not include the Closing of Buyer’s Property Contingency when a buyer actually does need to sell the property, the agent should discuss the risks to this strategy with the buyer. If a buyer cannot afford to purchase the seller’s property without selling the buyer’s current property and does not make the buyer’s offer contingent on the closing of the buyer’s property, the buyer is risking being in breach of contract if the buyer cannot close on the seller’s property. A buyer might have a property listed for sale and may even have an accepted offer on the buyer’s property and think that is as good as sold and thus the buyer chooses not to make the buyer’s offer contingent on the closing of the buyer’s property — but as all agents know, a transaction is never a done deal until it closes.
Offers without an inspection contingency
That was in last month’s magazine! See the article “The Home Inspection in a Competitive Market,” in the May 2021 Wisconsin Real Estate Magazine at www.wra.org/WREM/May21/HomeInspection.
Buyers offering to pay $X over appraisal amount
Buyers offering to pay some dollar amount over the appraised value is a provision that is becoming more and more common. In the current market, buyers are often offering over list price to induce the seller to accept that buyer’s offer, and everything in the transaction is going just great until the appraisal comes in for less than the agreed upon purchase price. By including a provision where the buyer agrees to pay some dollar amount over the appraised value, the buyer is acknowledging that the property may not appraise at the purchase price or better, and the buyer is accepting that. The problem with this strategy though is often in the drafting.
Offer with an appraisal contingency
According to the preprinted terms of the Appraisal Contingency in the WB-11 Residential Offer to Purchase, if the appraisal comes in lower than the agreed upon purchase price, the buyer can issue a notice objecting to the appraisal. What happens next depends on whether the seller has a right to cure.
If the seller does not have a right to cure and the buyer issues a notice objecting to the appraised value, the offer is null and void. Consider an offer that includes an Appraisal Contingency and the seller does not have the right to cure, but the buyer’s offer includes a provision stating the buyer would pay some dollar amount over the appraised value. What is the effect of the buyer issuing a notice objecting to the appraised value? Is the offer null and void, or is the buyer agreeing to keep going but only if the parties amend the offer to change the purchase price to the agreed upon amount over the appraised value? It is unclear what is supposed to happen in this scenario.
Giving the seller the right to cure in the Appraisal Contingency but also including a provision stating the buyer will pay some dollar amount over the appraised value does not make the situation any clearer. Consider an offer that includes an appraisal contingency where the seller does have a right to cure, but the buyer’s offer also includes a provision that says the buyer will pay some dollar amount over the appraised value. What is the effect of the buyer issuing a notice objecting to the appraised value? Does the standard right to cure provision in the Appraisal Contingency kick in whereby the seller agrees to amend the purchase price to match the appraised value? Or does the provision in which the buyer agreed to pay some dollar amount over the appraised value kick in? In the example provided, it is entirely unclear what should happen next. If a buyer is willing to pay some dollar amount over the appraised value and would like to include the Appraisal Contingency, one way to address this would be to draft an alternate Right to Cure provision where, if the seller is choosing to cure, the parties agree to amend the purchase price to be that pre-negotiated dollar amount over the appraised value. By including the standard right to cure and a provision stating the buyer will pay some dollar amount over the appraised value, there are two conflicting ways to cure and no predetermined path to keep the transaction moving.
Offer without an appraisal contingency
If a buyer submits an offer that does not include the Appraisal Contingency but does include a provision stating the buyer will pay some dollar amount over the appraised value, there does not seem to be any mechanism to trigger that provision.
Consider an offer that does not include an Appraisal Contingency but does include a Financing Commitment Contingency and also a provision where the buyer is agreeing to pay some dollar amount over the appraised value. The lender has an appraisal, and the appraisal comes back lower than the agreed upon purchase price. Then what? Based on the offer described, the seller has no way to trigger the buyer’s agreement to pay some dollar amount over the appraised value. Additional language would be needed to say what would trigger the buyer’s agreement to pay more and how it is achieved. Additionally, both parties should be educated about how an appraisal for less than the agreed upon purchase price might affect the buyer’s ability to obtain a loan commitment.
Buyers wondering what happened to their offers
Agents are busy and things are moving quickly in this market, but it is important to remember that there is a hopeful buyer on the other side of every offer. It might be a buyer who has lost out on the last five properties on which they made offers. It may be a first-time buyer who would be overwhelmed with the process regardless of the market. Not only is there a hopeful buyer on the other side of every offer, but there is an agent who is working with that buyer and upon whom the buyer is depending for answers. When a seller receives multiple offers on a property, the seller may not want to take the time or effort to reject each and every unsuccessful offer, but rather the seller lets them expire without action. This leaves both buyers and the agents working with those buyers wondering what happened to the buyer’s offer. Was it ever presented? If so, when? In a perfect world, the seller would take the time to reject each unsuccessful offer and return it to the buyer rejected so the buyer would know that the buyer’s offer was presented, the seller considered it and then decided to reject it. Listing agents, however, do not have the power to make sellers do this, so there may be offers out there that the seller does not respond to at all. This can lead to frustrated buyers and the agents working with buyers. While listing agents do not have the power to make sellers respond to all offers, agents do have an obligation to promptly inform those buyers whether an offer has been accepted, rejected or countered. Furthermore, an agent shall respond in writing with the date and time when an offer was presented, if requested by a buyer or the agent working with a buyer, and respond in writing with the date and time that an offer was rejected or expired without acceptance, if requested by a buyer or the agent working with a buyer.
Wis. Admin. Code § REEB 24.13 (4) NOTIFICATION OF ACTION ON WRITTEN PROPOSAL. Licensees shall promptly inform their clients and customers whether the other party has accepted, rejected, or countered their written proposal. A licensee shall immediately provide a written statement to the other party’s firm that includes the date and time when the written proposal was presented when such a statement is requested by the other party or the other party’s firm. A licensee shall immediately provide a written statement to the other party’s firm that includes the date and time when the written proposal was rejected or had expired without acceptance when such a statement is requested by the other party or the other party’s firm.
This market, while great for sellers, is proving challenging for buyers as well as agents working with buyers. Creative negotiation is a powerful tool an agent can offer to a buyer, but creative negotiation can lead to problems when buyers forego contingencies that might actually make sense for those buyers or when buyers include extras like the “Dear Seller” letters that can lead to potential fair housing violations for sellers and agents alike. Keeping an eye on one’s duties to provide services fairly and honestly and with reasonable skill and care can help agents navigate these new negotiation strategies as the arise.
Jennifer Lindsley is Staff Attorney and Director of Training for the WRA.