The following is exerted from the most recent Tennessee Association of Realtor’s newsletter. It is a timely article. This week I have run into three separate multiple offer situations and I lost another bid that was over asking price. 

QUESTION: Now that the market has heated up again, I have received multiple offers on a property I listed. One of these offers includes a clause stating that the prospective buyer will pay $XXX over any other offer I receive. How should I handle this and what should I advise my seller-client? I’ve heard these kinds of offers are common in other parts of the country, but this is the first one I’ve dealt with.

ANSWER: This is most often called an “escalation clause” …involving a fixed-price offer, but an additional statement that – if other offers are received – the buyer will exceed any other offers by a certain amount, often up to a “ceiling” price.

The type of offer to which you refer is difficult to handle appropriately. In order to accept an offer that is XX percent (or $xxx) over the highest bid, the purchaser will probably want proof as to what the highest price is (in a bona fide third-party offer) IF such a price plus percentage offer were accepted and the listing broker then informed the offeror what the actual price would be after the addition of the percentage. To REVEAL this information to the potential purchaser making the offer with the escalation clause could place the listing broker in a possibly illegal and unethical position.

This is due to various statutes, the National Association of REALTORS (“NAR”) Code of Ethics and an opinion from the NAR Membership Services department. First, the Tennessee Code Annotated (“T.C.A.”) 62-13-402(3) indicates that information received by any licensee involved in a transaction (including the licensee on the opposing side of the transaction) that might be considered confidential is to remain confidential. Since the price offered by a prospective purchaser could reasonably be deemed confidential as to third parties, it should remain confidential. Additionally, T.C.A. 62-13-402(4) states that a licensee has an obligation to treat all parties to the transaction with honesty and good faith. Therefore, it very well may be a violation of the cited statute for the listing broker to reveal to one potential purchaser what a different potential purchaser offered.

Even if the identity of the buyer making another offer is “shielded”, the very fact that one buyer’s offered price is revealed to a different prospective buyer, the latter statute above (62-13-402(4) COULD be interpreted to require that a listing broker then go back to ALL prospective buyers and reveal what other buyers were offering. A MUCH better and safer approach would be for a listing broker – who receives multiple offers, one of which has an escalation clause – to request that ALL buyers make their highest and best firm price offer or to counter the offer with the escalation clause at a firm dollar amount.

The TN Real Estate Commission has also, in the past, frowned upon escalation clauses.

[SOURCE: TAR’s Legal & Ethics Hot Line Attorneys]