Open Road   I received a text on May 31, 2013; if accelerator clauses are legal, a good idea? etc.  That’s funny, I had the same question posed to me, only not by text, years ago.  Here is what I said in 2004, as in 9 years ago.  Remember 2004?

Accelerator Clauses

   Accelerator clauses are appearing in buyers’ offers.  “Buyer will pay $___ over any other offer better than theirs.  Seller must provide Buyers copy of better offer.”  Selling agents are declaring that this should ‘guarantee’ a buyer to be in first position.  Listing agents are interested in accepting these clauses to ensure the highest price in a bidding war.  There are forms and clauses being exchanged.

The issue is the meaning of the clause and what terms are being accepted.  The lower offer may have different financing, closing costs, escrow dates, lease backs, repair request, etc. Thus when the clause is triggered….it renders, potentially, another purchase agreement in first position. But is that in a seller’s best interest? What other terms differ between the former highest bid and now the Accelerator Clause triggered bid?

In a recent scenario a listing agent entertained 4 offers, all different prices, close dates, finances, closing costs and different styles of buyer.  The buyers varied from investor group, independent flipper, and first time buyer. If the Seller accepts the accelerator clause of one of the buyers, what does it mean?  Does a buyer now have to change their terms of financing to meet another offer?  As to financing, this will not necessarily work. Does the Buyer have to close earlier or later?  There is little meeting of the minds as to most aspects of the sale, all very important aspects, other than the purchase price.

By accepting the ‘accelerator clause’ the Seller may loses their ability to choose what they feel is the ‘best offer.’  From a seller’s perspective, did they get enough? What if a seller does not accept the Clause and counters All Parties for a highest and best to be ‘reconfirmed,’ by the Seller.  From a buyer’s perspective you have agreed to a higher price, was the other offer even feasible? Assuming it is valid, was it a possible offer? Was the other buyer not concerned about the price due to an appraisal contingency?  Does the Clause Buyer have that protection?.  The now accepted offer triggered by the Clause may or may not be subject to appraisal.

The accelerator clause does not solve much.  It is attractive because it gives hope. The Accelerator Clause is a cousin to the lease option in the family of bad ideas.  In all markets, it is not just price.

  Darren Welsh, 2004

So, that was my opinion in 2004.  Not much has changed.  Except, as fair warning, the Nevada Real Estate disagrees with Accelerator Clauses for different reasons.  In the 2012 Third Edition Nevada Law And Reference Guide, p. 86 (§A(4)(c)) the NRED hints Accelerator Clauses may not be fair dealing.

“Acceleration” Clauses (not what you think!) – The Division has stated it is a violation of fair dealing to insert what it identifies as an “acceleration” clause. This is not the “acceleration clause” found in general contract or financing law. According to the Division, an acceleration clause is a clause in which the offeror promises to pay a certain set amount above the highest offered sale price and usually provides for a maximum or cap amount. The Division’s example is, “I will pay $2,000 over the highest offer up to $300,000.” This type of clause automatically gives one offeror a stated advantage over other offerors and may not allow fair dealing for the other offerors.”

“Though the previous two activities (disclosing offer terms and inserting an acceleration clause) are not a direct violation of any law or regulation, and there is some controversy regarding this, nevertheless, the Real Estate Commission has found these practices to be highly suspect.”

O.K.…per NRED, they are are not an outright violation, but apparently frowned upon as it gives one buyer a “stated advantage.” Clear as mud. I am not sure where the NRED is going with that, considering the fact that merely offering a higher sales price is a stated advantage.  Nonetheless yet another reason the clauses are problematic.