PEORIA – While an escalation clause may seem like a great way to win the bid when a house gets multiple offers, local real estate agents are cautious about using them.
The escalation clause is an addendum prospective buyers can submit with a real estate contract when bidding on a house. The clause allows buyers to propose not only the price they will pay for the house, but also the amount they will go over that price if a higher bid comes in.
These clauses are typically used in a real estate market where homes are getting multiple bids in a short amount of time. For that reason, escalation clauses weren’t common in Peoria until this year, local real estate agents say.
“I think they became more prevalent starting in February. That’s when I started hearing the chatter about it,” said Jason Catton, an agent with Realty Executives Acclaimed and president of the Peoria Area Association of Realtors. “They can be a good tool, but my fear is buyers put too much faith in them. If they really need a house, and they are in a situation where time is of the essence, it may not be the best thing to do.”
Pros and cons for escalation clauses
Some real estate agents refuse to use them. Others use them carefully, providing lots of education to their clients. Since they are a legal contract, escalation clauses should be drawn up by a lawyer, but some real estate agents have taken care of that by providing a contract where buyers can fill in the blanks.
“Being with Coldwell Banker, our brokerage had an attorney prepare one, so we have a standard one that we can add as an addendum to our PARR residential contract. In that case the buyer doesn’t have to have an attorney prepare one,” said Kendra Sipes, an agent with the Knell Group.
There are pros and cons to using the clause, Sipes said. One of the pros is that it gives the buyer a second chance to win the house after the initial offer.
“With the situation now, a lot of times the buyer only has one chance,” Sipes said. “So, if they throw out $200,000 and there’s a higher offer, they don’t have an opportunity to get a counter back. They only have one shot at it. In that case, if the buyer really wants the house, it gives them an opportunity to say, I’d like to pay $200,000 if you are willing to accept, but if you get an offer higher, I’m willing to go up to this amount because I know I’m not gonna have a chance for a counter or to negotiate further, so I’m willing to pay this max up to a certain amount.”
The downside of the clause is that the buyer is showing all their cards at once.
“If it’s a $200,000 property and you offer $200,000 and then put the escalation clause up to $215,000, the seller knows you are willing to pay $215,000,” Sipes said. The seller could disclose this information to the other buyers in an effort to raise the selling price of the house.
Another downside to the escalation clause is that it gives the buyer too much confidence, leading to greater disappointment if it’s not successful, Catton said.
Alternatives to escalation clauses
The truth is, it’s not always price that sells a house. It’s often other terms, like the closing date or a limit on inspections, that give one buyer an edge over their competitors. Rather than using an escalation clause, Catton suggests another tactic to his clients.
“I feel you are really better off putting your best offer out there first. If you go out there with your best offer right off the bat, you are going to possibly alleviate the issue of a multiple-offer situation,” he said. Since time is of the essence, he encourages buyers to be prepared to see a house immediately after it goes on the market and to bid on it quickly.
“I’ll actually have an offer drafted for them, so if they want to make an offer, I can submit it immediately. They put the best and highest out there first, and, since a lot of offers come in at 6 p.m., if we make a 3 or 4 p.m. deadline for the seller to respond, they can take their competition out of the equation,” Catton said. “If they go ahead and put their best and highest out there first, they are not necessarily going to get into that multiple-offer situation.”
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‘Nervous’ real estate agents
While Sipes has used escalation clauses for her clients several times this year, the tactic has not yet been responsible for winning a house. In a couple of cases, no one else ended up bidding on the house, and in another instance, the terms of the escalation clause were still not high enough to win the house.
The escalation clause is just one of many creative techniques people are using to win the house in this difficult market, Sipes said.
“I don’t hate them, but I don’t love them,” said Sipes. “I will say the overall consensus of agents that I talk to is that it makes us a little bit nervous when buyers are paying over what market value is. In an ideal market, we kind of go back to our typical offer process, and I think everybody is a little bit more comfortable in that situation.”
Catton also said he is looking forward to a time when the market gets back to normal.
“I can’t wait until it’s over.”
Leslie Renken can be reached at (309) 370-5087 or [email protected] Follow her on Facebook.com/leslie.renken.