Up the Down Escalator: Negotiation


Long before I was certified by Coldwell Banker as a Negotiation Specialist (CNS), and before I became a member of the Real Estate Negotiation Institute and was certified as a Negotiation Expert (CNE), I was a dedicated student of negotiation. I studied all of the World War II Allied conferences in detail, and most of the big international conferences of the first decade and a half of the Postwar years. The results of all that study is that I can say unequivocally that negotiating a real estate deal is a lot less complicated than trying to get Stalin to recognize the Polish government in exile in London at the Yalta Conference in 1945.

Still, just because it's less complicated, that doesn't mean it's easy. Or obvious.

It's an ongoing thing, also. I get (and read) reports on negotiation studies, and I regularly read negotiation blogs, like this one on Why Negotiations Fail.

As a real estate broker with Coldwell Banker Residential Brokerage and a negotiation expert, I get a lot of unsolicited material about real estate negotiation. A recent one is typical: They always suggest some number of "top" strategies recommended by real estate "experts."

OK. We'll see.

I'm certainly not going to run through all the strategies listed in the latest article right now. The first one, though, may warn us about what is to come. The author suggests buyers can make their offers more competitive by including an "escalation clause." That's a clause that says that whatever the best other offers the seller may get, our offer will pay $X more. Not bad at first blush, but it raises some problems. For instance, what if more than one offer has an escalation clause with the same cap? What if adding $X to the best of the other offers makes it more expensive than we really want to pay? Or more than the property will appraise for, making it more likely the lender won't lend without more cash from the buyer?

Also, we'll probably want documentation of the other "best" offer. But that requires showing the escalation clause party another party's offer, something that may create legal difficulties. If the seller agrees to let the agent disclose the other offer, it's legal. (Not in Canada – see the Toronto Star story about it from last June), but in a multiple offer situation in this country, a buyer might make confidentiality a condition of the offer. Look at this language from a standard form:

"The potential Buyer has requested that prior to submitting an Offer to Purchase, you first agree to treat such Offer to Purchase and/or terms: price, contingencies, performance dates, etc. as confidential. Please sign and return the following Confidentiality Agreement so that the Buyer may submit an Offer to Purchase confident that such agreed information shall remain confidential. Upon receipt of the signed Confidentiality Agreement, a written Offer to Purchase will be presented on behalf of the potential Buyer"

In that case, if the offer is revealed, not only is the offer void, but ethical and legal privacy problems come into play.

Even without the form, though, revealing the content of other offers can seriously undermine an agent's reputation, putting future clients at risk.

Besides, if our escalating buyer is willing to pay more for the property, why don't they just offer more. In today's market, when there are multiple offers, commonly the sellers ask everyone to submit their "highest and best" offers. If a buyer's willing to escalate, then obviously they haven't done that. As the seller, I'm starting to get annoyed at these would-be buyers. Do I want to deal with them? And even if the seller accepts the offer, the road to closing looks less smooth and makes the deal more likely to ultimately fail to close.

A few years ago, I had a $1,000,000+ listing and several competing buyers. One had an escalation clause. I told the agent that I would ignore his escalation clause, that his buyers should offer their best and let it go at that. I told him I wasn't going to expose any other buyer's offer to him, so the escalation clause wasn't going to work anyway.

That agent ignored what I told him, and when his buyers didn't win, he was outraged. Waddaya gonna do?

Since I'm certified as a Pricing Strategy Advisor (PSA), when I represent buyers, between us we figure out what the property is worth today, what it's likely to be worth a year from now, how badly the buyers want the property, and what they're willing to pay for it. Equally important is what's Plan B if we can't get this one. In other words, what's the BATNA – the Best Alternative to a Negotiated Agreement? 

I can't give it all away, but I can say that in my view anyone who recommends an escalator clause is recommending trouble, complication and a rough road to the closing even if you get your offer accepted. Still, desperate times may call for desperate measures. If a buyer client insists on an escalation clause, I'll try to negotiate my way out of it, but what the client wants ultimately rules. But at least put a cap on the escalation. But then, if you're willing to pay that, why not offer it?

Negotiation is a serious business. It takes a trained, knowledgeable professional. Key is to know as much as possible about all the parties, to understand the context, to understand the specific situation, and to know what Plan B is, that is to say, the BATNA. That's how you start to win. 

For more information or further discussion, contact me.