Well, it is officially hot out there and we don’t mean the temperature. Some areas are feeling it more than others but with huge demand and a lack of listings to choose from, many members are experiencing multiple offers, back-up offers and even back-ups to back-ups. This is when everyone needs to step up their game and pay very close attention. Whether you represent a buyer or a seller in this environment, you need to be on your toes. This is when mistakes get made and people get upset.
It is also the kind of market that pushes creativity on both sides of a transaction. Buyer agents especially are looking for ways to make their offers stand out and one of the tools they are using is called a Referential Purchase Price Clause or Referential Offer, and it is very important we all understand what that is and how it might work.
What is a Referential Offer?
Here is a brief excerpt from the Real Estate Council of BC’s Professional Standards Manual:
In an environment of multiple offers, a listing agent might be presented with an offer containing what is generally referred to as a ‘‘referential purchase price clause’’ (RPPC). The RPPC is a means by which a buyer endeavours to establish a purchase price by reference to prices contained in competing offers. The thrust of the RPPC is for a buyer to piggyback on the next highest bona fide offer which is acceptable to the seller. Such a clause might read as follows:
The purchase price is $1,000 above the price offered in the nearest competing bona fide offer acceptable to the seller to a maximum price of $350,000. The seller agrees to provide a copy of such nearest competing offer on acceptance of this offer.
A 1985 House of Lords decision from the United Kingdom held that a referential offer is an offer which does not stand on its own and which is not understandable without reference to another bid. The House of Lords held that referential offers were invalid.
The Board really has no specific position on Referential Offers per se other than to have rules that require members to have the skill, knowledge, and ability to write enforceable contracts and represent a client’s best interest.
So, first and foremost – you need to know that a referential offer is considered invalid.
But wait! That does not mean you toss it in the garbage. You don’t just discard a referential offer because it is technically invalid any more than you would discard an offer that was too low. You consider all the offers and, if you and your seller believe that the buyer who sent the referential offer in is likely to best meet all the terms that your seller wants, you change that contract to make it a valid offer.
What to do with a Referential Offer?
Council’s Professional Standards Manual goes on to give guidelines on what a listing agent should consider when confronted by a referential purchase price clause (RPPC) in an offer:
- the listing agent should review the referential offer with the seller very carefully as it might not be the best offer with respect to other terms besides price, such as the financial qualifications of the buyer, dates and any subject to clauses;
- if this offer appears to be the best offer, the listing agent should advise the seller to counter the said offer by deleting the RPPC clause and inserting a fixed price;
- this counter-offer should be open to the buyer who presented the referential offer for acceptance before the expiration of any other offer the seller may be considering;
- if the buyer in question accepts the seller’s counter-offer, then it is no longer a referential offer as it is a contract for a fixed price;
- if the buyer refuses to accept the seller’s counter-offer by the time it is open for acceptance, then the seller is free to counter or accept another offer as long as it has not expired.
So, you take a lemon and you make lemonade. It’s really just negotiating and being savvy about contract law.
The accredited course Writing Enforceable Contracts 102 deals with referential offers among many other things.
This is a good time to remember the Golden Rule and also CREA’s Standards of Business Practice Article 3: Primary Duty to Client:
A REALTOR® shall protect and promote the interests of his or her client. This primary obligation does not relieve the REALTOR® of the responsibility of dealing fairly with all parties to the transaction.
In every deal, we need to remember that the other agent is looking out for their client’s best interest. It can be helpful to remember that all agents must obey their client’s lawful instructions even when those instructions interfere with our expectations for cooperation between members.
A great example is our rule regarding Multiple Offers. We expect to be told that there will be multiple offers, but that rule starts of with, “Unless otherwise instructed by the seller…” That means, the occasional seller is going to tell their agent not to disclose the fact that there are multiple offers for fear that one or two offers may be withdrawn.
That puts the listing agent in a pickle because they know the first thing a buyer agent with an offer is going to ask is, “Are there any other offers?”
This is where you must be on your toes. As a listing agent, you cannot lie if you are asked that question so, if the seller had said, “Don’t tell!” you need to say something like, “I am not at liberty to say.”
And the buyer’s agent must be savvy enough to read between the lines and go back to their client and say, “Listen. I asked if there were other offers and the agent said they can’t tell me. I believe that, if there were no other offers, they would have said so. I expect that there are other offers and the seller has instructed their agent not to disclose that information, which is their right. If that is so, we will be in a multiple offer situation and likely have only one shot at this. I recommend we put our best offer forward. What would you like to do?”
And then you can continue the conversation and your client can tell you what they want you to do. You advise and the client decides.
Now you know how to recognize and handle a Referential Offer if you happen to get one.
These are strange times. There are a lot of things going on and people are confused and anxious. We need each other, and we are in a tremendous position to help clients. Let’s be calm, embrace professionalism, support each other as best we can, and do the very best for our clients.
Sources: FVREB Professional Standards and Communications