As a Realtor listing agent on a short sale, how do you evaluate an offer you receive? When is the "highest" offer not the "best" offer? And what are your fiduciary duties to your seller?
MYTH OF "HIGHEST" & "BEST"
Traditionally we are taught to accept "highest & best" offers. We are conditioned to an upward-moving market. But this term used primarily in competitive situations (such as multiple offers), not in reference to distressed property.
According to our California Department of Real Estate exam, an agent owes the principal these five basic fiduciary duties:
- Utmost Care
- Obedience and Good Faith
- Disclosure of Material Facts
This may be shocking to you, but "fiduciary duty" does not include "highest" price!!! That is a commonly held myth that the seller always must get "highest & best" price.
PRICE AND TERMS
Every offer package equals Price AND Terms. There are only 2 parts to an offer: (1) PRICE and (2) TERMS. Price is only part of the package; terms are just as important as price. We all know the old adage, "You name the price, I'll name the terms" or vice-versa.
For example, I can pay you 1 million dollars for that property, but you finance and I'm only going to pay you only $500 per month on a seller carry-back. Or in another example, I'll pay you only 80% of your asking price but I'll pay you in cash, close within 10 days, and you can live in the house free for 1 year! So we must look at the entire package of both price and terms; they are not mutually exclusive.
WHEN DOES HIGHEST EQUAL BEST?
In a competitive situation, when all terms are equal, similar, or comparable, the highest price is usually the best for that client's situation. If the higher price has better terms (such as cash, not financing), and the property is not distressed (it's a Retail / equity sale), then highest would usually be best.
WHEN DOES HIGHEST NOT EQUAL BEST?
When some terms are clearly superior to the price, or when sentiment is important, the highest price may not equal the best price. Terms, for example, may include close of escrow date, contingencies involved, and financing terms. If the home owners must sell quickly, or if the property is distressed property, the seller is very motivated (because the Seller MUST sell), then TERMS become more important than price. Examples are: Short Sale, REO, Auction, Estate Sale, and Sheriff's Sale.
HOW TO EVALUATE AN OFFER
When you receive an offer, print it and and read every clause. Examine both price and terms. Grab a pen and paper, and take notes of all aspects of that file. Comparing offers, if you receive more than one. Do research if needed, clarify anything that's not clear, and call the buyer's agent to ask questions. Write down the "pros" & "cons" of each offer.
LISTING AGENT RESPONSIBILITIES
As the listing agent for a short sale, you must present all offers until the Sellers say not to (in writing). Before presenting offers, you should read & understand incoming offers. Present those offers immediately upon receipt, being careful to explain all parts of an offer ("pros" & "cons"). Present several options, to your sellers, make recommendations, but remember it's their decision. Always advise Sellers to consult legal counsel and/or tax professional and let Sellers make their own decision. Remember to respond in writing to the buyer's agent with an acceptance, a rejection, or a counter-offer. Be courteous to all parties, and demonstrate professional behavior to EVERYONE involved, including the cooperating agent. You have to do what's best for Sellers, and negotiate in Seller's best interests, without being focused on your compensation.
Thanks for staying tuned!
Regina P. Brown
CA Real Estate Broker
DRE # 00983670