Relative Bids May Not be Legal
By Ronald R. Rossi and Laurel M. Champion
August 17th, 2016
A hot topic brokers and agents often ask us about is “relative bidding.”
In a relative bid situation, one party submits an offer that is not for an exact amount but instead states it is “X dollars more” than the highest bid. Relative bids will sometimes come with a cap, or ceiling number, indicating the highest number the buyer will bid. Relative bidding usually occurs when multiple buyers are submitting competing offers for the same piece of property, and the agents know this. We recently heard of a property that was listed for $1,299,999 and sold for more than $1,400,000. One of the offers stated that the buyer would pay $5,000 more than the highest offer to be presented on a particular evening. This is an example of relative bidding.
This practice is occurring frequently with hot properties. Some buyers, frustrated at having been outbid on three or four homes, are willing to submit a contract for “X amount of dollars more” than the highest offer. They will often also waive the inspection contingencies, buying the property “as is” without any repair restrictions and taking their chances.
Of course, we’re most often asked, “Are relative bids legal?” The answer has been – and continues to be – “probably not.”
There are two issues involved in relative-bid cases.
Is the price in a relative-bid contract sufficiently certain for a court to permit enforcement of the contract?
The only case to address this and other issues on relative bids was decided in 1991 and involved a transaction that occurred in another hot market back in 1988. In that case, the court held that as long as the price may be objectively determined, a contract in which the price is not stated but is relative to some other price is enforceable. The price can be objectively determined by looking at the other contracts presented that evening and adding whatever extra amount the relative bidder pledges to add to the highest offer.
Are relative bids legal, valid, and enforceable?
Few cases nationally have been decided on this point. Back in 1849, an Illinois court said that relative bids are “a sharp practice and contrary to public policy and void.” The court in the Illinois case stated that relative bid cases are inherently unfair to other bidders and such a practice, if allowed, would discourage and drive off bidders offering a specific sum.
All the courts have said that a relative bid is a “sharp” practice because, usually, the fact that relative bids will be accepted is essentially concealed. The other bidders are frustrated because they don’t know how to bid successfully, and they don’t know whether the seller will be considering relative bids.
One way sellers can get around this criticism of relative bidding is to state, in their offer for sale, that relative bids will be accepted. However, that creates another problem. What happens when, in response, two or three different buyers each make a relative bid – say, one offer is $1,000 higher than the highest price, another offer is $5,000 higher than the highest price, and the third offer is $10,000 higher than the highest price. In these situations, the courts have found it impossible to determine who has made the highest bid.
The only California case that decided this issue, as mentioned above, found that relative bids, where full disclosure is made, may be OK. But if full disclosure is made and every buyer makes a relative bid, how do you determine which bid is the highest? There is no case giving us guidance in that situation. The 1991 California case concluded it did not have enough evidence before it to determine whether relative bidding was a custom and practice in the real estate industry so as to make it a valid practice everyone would expect and understand.
Based on the fact that we have the guidance of only one California case on this issue, and given the uncertainty of that case, it is our advice that sellers do not accept, and buyers do not make, relative bids.
On the seller’s side, the rationale for not accepting such bids is simple: the bid may not be valid. When a buyer makes such a bid and takes the property “as is,” the buyer often gets cold feet, experiences buyer’s remorse, just gets scared and backs out of the contract after the seller accepts the offer. Frankly, under such circumstances, it would be very difficult for the seller to sue the buyer for liquidated damages (normally the amount of the deposit).
If you are the buyer in this situation, you would be creating a situation that might get you the property on a temporary basis, but you also might find yourself in litigation if the seller accepts your relative bid and you decide you want to back out of the deal after that happens.
No Clear-Cut Answers
Certainly, it is not within the expertise of a broker to advise a seller to accept, or a buyer to offer, a relative bid, especially, when even lawyers have no straightforward, definitive legal answers to give as to the validity of such bidding.
In the recent years’ market, people have been getting more and more creative in how they buy or sell property. Relative bidding is just one of these creative methods they hope will result in a successful purchase or sale. Given the lack of case law on the subject and the inherent unfairness and probable unenforceability issues of relative bidding, however, our advice is generally “stay away” from this particular practice.