JULY, 1997 NEWSLETTER

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

From a legal perspective, there are several interesting aspects of the current real estate market. "Inventory" (supply) is low, the economy is doing well and interest rates are low, so demand is strong. As a result, prices have risen. There are many situations in hot areas with multiple offers above asking price.

• [In our April, 1997 Newsletter we discussed in depth the causes of low inventory. We believe that many people are waiting for a new tax law before selling. We are closer to a new law, but until it actually happens, we do not know what it may be or when it might be effective. Up to now, all we have are proposals, all of which are conflicting.]

Sharp bidding is a practice not favored by Courts, and a sharp bid creates concern among other parties as being improper or unethical; however, if appropriate, it appears to be legal and effective.

An example of sharp bidding is an offer of "$1,000 above the highest offer received, not to exceed $500,000."

Is this legal?

First, we must review a little basic contract law: many people, even experienced real estate agents, find it hard to understand that a Seller who receives a full price offer does not have to accept that offer, or any offer. A Listing Agreement is a contract between an Owner and a real estate agent: "Find me a buyer who will offer my price, or an acceptable price, and I will pay you a commission."

Along comes a Buyer who offers full price. Must the Seller sell? NO!

A Seller does not have to sell unless he has signed a Contract with the Buyer. A Listing Agreement is not between the Seller and Buyer: rather it is a compensation contract with a real estate agent. A Seller can reject any offer, even a full price offer or an above asking price offer.

However, if a Seller rejects a full price offer, he may owe a commission, even if he decides not to sell.

A Buyer may find it offensive that a Seller can reject a non-contingent full price offer, but without a contract signed by the seller, the Buyer has no rights and the Seller is not obligated to sell, even at full price with no contingencies. (If you really do not believe this, and many people do not, see Estate of Lynch (1923) 62 Cal.App. 687.)

From a legal point of view, the first question is whether a sharp bid offer price is too vague to be binding: to be legal a contract requires certainty of all vital terms, including price. The 1991 case of Carver v Teitsworth (1 Cal.App.4th 845) ruled that since the price could be determined (not solely from the terms of the sharp bid offer, because that offer in itself did not contain a price, but the offer did contain a formula for determining the price), the offer was not invalid for lack of a vital term.

The real issue in Carver was as follows: several offers had been received. The Seller replied, "I will accept the highest sealed bid offer above $795,000, on noon Friday." Since he committed in writing to selling, he was bound by the highest offer.

Buyer #1 offered $851,501. Mr. Carver offered "$1,000 above the highest bid received."

Buyer #1 and Carver sued each other and the Seller, claiming entitlement to the property.

The Court ruled that while the sharp bid was not uncertain, it was possibly unfair, since the trial court had not examined whether (1) sharp bidding was a commonly accepted practice, or (2) the other parties were aware that a sharp bid would be acceptable.

Therefore the Court sent the case back for further trial to determine whether it was unexpected and unfair in this circumstance.

Conclusion: If you are a seller, and receive multiple offers and want to start a bidding war, you have several options:

• open bidding at one meeting.
• open bidding over a specified period [example: "We will accept new offers between now and Friday. We will let each interested buyer know the highest price as it changes. On Friday at noon, we will accept/ consider the best offer."]
• sealed bids [example: "Friday at noon we will accept the best sealed bid offer and sharp bidding (also known as relative bidding or formula bidding) will be allowed."]

In March, we got 2 new Probate clients:

• Joseph did his own Living Trust, but did not have the Deed notarized, transferring his home into the Trust. Now his estate must go through Probate. Last month, we were successful in taking a short-cut: at our request, with approval by all heirs, the Probate Judge ruled that the un-notarized deed was valid and that Probate was unnecessary. [If Joseph had had the deed notarized, his kids would have saved $3,000 in unnecessary legal fees.]

• Ray did a Living Trust for Mom, but Ray never knew that Mom needed to transfer the property into the Trust. Again, Probate is needed. But there will be no short-cuts on this Probate.

The major problem with Probate is unnecessary lawyer's fees. However, even those can be minimized by asking the Probate lawyer to take an hourly fee instead of the state statutory percentage fee. See Living Trusts.

Another new client illustrates how we can save money with good planning. Art (age 70) has been diagnosed with cancer; he has several months left. We are doing some very sophisticated gifting and expect to save over $200,000 in taxes for his heirs.

But the most important thing about Art is his attitude. Knowing he has little time left, Art has decided to make every minute count and focus on what is important to him: family!

Most of us do not know how much time we have left, and we should all think about what is important, as well as making it easy for our heirs after we are gone.

If you have been thinking about estate planning and are waiting to see if the new tax law proposals (allowing everyone to leave $1,000,000 tax free) are passed, don't wait. Whatever law exists on the date you pass away will apply to you. More importantly, the new laws will apply automatically, and the documents we prepare do NOT have to be changed if the new proposals become law.

The only time to postpone estate planning is if your marital status will change in the near future. "Should we wait because we will have more children soon?" No. We can plan for them now.