"Offer Inflation" 2014: Offers as the New Dinner Reservation?

 We know about “currency inflation.”  This is a process by which the exchange value of currency falls, even though the stated value of the currency rises ($100 in the bank is now $103), but since what formerly cost $100 now costs $105.  See http://en.wikipedia.org/wiki/Inflation. Consumers have figured this out.

 We know about “grade inflation.”  This is where the value of given grade goes down, because everyone in class is given increasingly higher grades over time.  An “A” is no longer a measure of as much student achievement, since everyone gets one.  See http://en.wikipedia.org/wiki/Grade_inflation and see http://www.gradeinflation.com.  College and graduate school admissions officers have figured this out.

 It is 2014.  In Manhattan real estate, there is now “Offer Inflation.”  This is where a buyer’s written statement with the magic 8 words “I offer to purchase the apartment for $X” has less value than it had previously, even though it sounds the same as it always did.  And property sellers are beginning to figure this out too!

 Now, we are not saying that the prospective buyer is intentionally misleading anyone with the 8 magic words.  It’s just that the buyer might want the apartment – and then again, he might NOT want it.  So he just “gets the ball rolling” by uttering these 8 magic words. 

 This was not always the case.  One effect of technology is that it is much easier to initiate the process of finding an available apartment and proposing to purchase it.   The result is that the value of the buyer’s investment in the process is less.  And in New York City, there is no actual dollar cost to making an offer to purchase an apartment – since no money changes hands at this point.   So the offer means less to the buyer.  And so it ends up meaning less to everyone in the process – including the seller, who may rightfully be skeptical when it happens on multiple occasions in a short time period.  Just saying.

 How is this possible?  Due to a very old legal principle inherited from England, generally speaking, agreements to buy and sell real estate are not enforceable unless they are in writing and signed by the party to be bound.  So, the usual process to make a deal proceeds in these principal steps from the buyer’s point of view: 

1.      The buyer views the apartment and decides in his mind to purchase it.
2.      The buyer makes an offer to purchase the apartment at a given price point.
3.      The buyer receives word from the seller, perhaps after some negotiation, that the offer is accepted.
4.      The deal terms are put into a term sheet — an outline for the attorneys to use.
5.       A formal contract, based on the term sheet, is signed by the purchaser and seller and delivered back to purchaser, at which point there is a binding commitment to sell and to purchase.

 While there is no binding agreement until the last step is taken—until recently, it could generally be assumed that the buyer meant what he said by his offer and that the deal would proceed smoothly from 2 to 5.  But no longer.  Now, in the minds of some apartment shoppers, it is just another cost-free conversation (or more usually, email).

 To these buyers, making an offer is only somewhat more meaningful than making a dinner reservation.  And we all know of people who make a reservation at 3 different restaurants for a given night.  The dining customer can justify this in his mind since there is some truth in his actions since he will likely eat somewhere.  So the offer is real — as to one destination.  And there are apartment buyers – particularly sharp-pencil investment purchasers – who put in multiple offers at the same time (sometimes using different agents),  knowing they will buy but one.

 What is magical about these 8 words is this:  the seller’s agent — whether he believes these words or not — is obliged by law to report them to the seller.  So the buyer’s words do get the seller’s agent to act.  This does get the ball rolling….although not always very far.

 Sellers are not immune from changing their minds either, of course, but more often, for some reason, this is a condition afflicting buyers.

 The best we can do, when representing buyers, is to be sincere.

 The best we can do when representing sellers, is to be aware.