Should you try making a “referential offer” in a multiple offer situation?

In the current, frenzied real estate market the dangerous phenomenon of “no subject” offers has returned yet again.

Subject conditions in real estate offers allow a buyer to conduct his or her due diligence prior to having the contract of purchase and sale become legally binding. Subject conditions may include 1) mortgage financing, 2) home inspection, 3) title review, 4) strata documents review etc. These are normally suggested by the buyer’s realtor when the offer of purchase is being drafted.

Waiving such conditions is never a good idea, but when people are panic buying they often throw caution and prudence to the wind.

While few predicted a real estate boom in early 2020 when the pandemic was just getting underway (in fact CMHC notoriously predicted a price drop of 9-18% in Canada for this year), the government’s response to COVID-19 was to lower interest rates to historical lows. Lower interest rates have attracted more buyers into the market. More demand pushes up the prices.

In addition, the pandemic facilitated the policy of governments and large businesses mandating substantial numbers of their staff to work from home. Without the need to commute to Vancouver every day, a lot of people decided to move to the suburbs, which in turn has driven the price of housing in the smaller cities to unprecedented levels (a million dollars for a house in Chilliwack or Mission is now common).

So what is a realtor to do when advising his buyer in a situation where there will be multiple offers?

One option, which is permitted by the Real Estate Council of British Columbia (“RECBC”) is to make a “referential offer”.

A referential offer is basically an offer which is dependent on another offer (when the buyer is expecting the seller to get one or more other competing offers).

In today’s market, some listing realtors will only accept offers on a Saturday for instance. Their hope is that a lot of potential buyers will make offers at the same time and a bidding war can be facilitated, resulting in a sale over the list price.

The recommended referential offer on the RECBC website is:

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.

In its materials, the RECBC makes reference to two court cases (a 1985 House of Lords decision from the UK and a BC Court of Appeal case) which hold that referential offers are invalid as they cannot stand on their own and basically are not understandable without a reference to another bid.

For this reason, the RECBC suggests that the listing realtor have his sellers make a counter offer to a buyer (who has made an otherwise acceptable referential offer) with the actual purchase price included, so that if it’s accepted, a firm “non-referential” contract is created.

However, anytime someone makes a counter offer, it gives the other party the opportunity to change their mind and back out of their original offer, so this strategy is not without risk to the seller.

An alternative referential offer which can stand on its own, but leaves the option open of increasing the purchase price if a higher, competing offer is received might look like this:

“The purchase price is $1,525,000. In the event that the Vendor receives a competing bonafide offer above $1,525,000 prior to accepting or rejecting this offer, then the purchase price shall be $5,000 above the price offered in the competing bona fide offer that is acceptable to the seller, up to a maximum of $1,575,000. The seller agrees to provide a copy of such competing bonafide offer on acceptance of this offer.”

Such a strategy allows the buyers’ purchase price to be increased (without having to receive and accept a counter offer from the sellers), while putting an upside limit on what the buyer will ultimately pay.

If the buyers are required to pay more than their original bid, they are entitled to see the next best offer to satisfy themselves that such other offer did in fact exist.

Is this strategy foolproof in a multiple offer situation?

For sure it is not.

Firstly, in the example above, competing bids may be higher than the referential offer’s maximum price of $1,575,000.

Secondly, even if there are no other bids higher than $1,525,000 in the example, the seller may simply make a counter offer to the referential buyer at $1,575,000 knowing that the buyer will go to that amount if pushed.

Thirdly, most realtors are unfamiliar with referential offers and so they may discourage a seller from entertaining one.

There is no easy way for a realtor to guide a buyer in a multiple offer situation, as emotion often rules the day –particularly if the buyer has been outbid on several previous occasions.

The best advice to a buyer in such a circumstance is to make the best offer that they are comfortable with and to walk away if that offer is not accepted. There will always be another opportunity around the corner no matter how many times a buyer may have been outbid.

The referential offer is one way making a reasonable offer while still allowing for an increase (to the buyers’ maximum price if need be).

If you have questions about referential offers or real estate offers in general contact Kenneth Pazder or Melissa Valana at 604-682-1509 for a complimentary consultation.

© 2021 Pazder Law Corporation

DISCLAIMER: The foregoing is not intended as legal advice, but is presented for information purposes only. Always consult a lawyer before making a decision about making a referential offer or other customized real estate offer.