In a hot housing market, it’s often not enough to quickly make an offer on a house you just discovered. You’ll likely face competition from at least one other buyer (if not more), and it will be up to the seller to decide who can best close the deal.
To improve your odds of winning a bidding war, you’ll need to plan your approach days or weeks in advance. Here’s how you can get an edge on the competition.
What Is a Bidding War?
A bidding war is when at least two prospective buyers have made legitimate offers for a home and the seller needs to determine which one is best. It could be an easy decision for the seller, especially if one prospective buyer has a much more attractive offer than others.
The bidding war could also turn into a drawn-out process if the purchase offers are very similar, such as prospective buyers who are preapproved, made an offer of a similar amount and are both flexible on contingencies. That’s when a seller is in the driver’s seat and can sit back and watch while the buyers try to outbid each other on money, terms or both.
Bidding wars are common—in most of 2020, over half of home offers written by Redfin agents faced competitive bids, according to the company’s study. Although historically low interest rates have sparked buying activity recently, some neighborhoods are always sought-after and attract multiple offers whenever a home comes up for sale.
5 Steps to Winning a Bidding War
Preparing a strategy is vital because you might have just a few hours to respond during a back-and-forth negotiation with the seller. Here are five steps you can take to prepare for a bidding war.
1. Get Preapproved
Preapproval is a step most buyers will take anyway, but it’s absolutely essential for anyone in a competitive bidding situation. Prequalification is not enough, as it doesn’t show that the lender conducted the same amount of due diligence—such as checking your earnings and doing a hard credit check—that a preapproval would require.
Although a preapproval takes longer than a prequalification and might even require that you fill out a mortgage application, it’s worth it.
2. Know Your Financial Limits
When you’re preparing for a bidding war, think of it like an auction—you need to know how much house you can afford before you actually bid. There are three primary financial tactics you can use to get a financial edge on other bidders.
Include an Escalation Clause
Once you know the maximum amount you’re willing to bid, you can include an escalation clause in your purchase offer to ensure you can instantly counteract any other bid. An escalation clause lets you increase your bid to avoid being outbid by another buyer up to a specified amount.
For example, if a home is priced at $300,000 and you know you’re in or may face a competitive bidding situation, you could offer $305,000 and agree that you’ll beat any other bids by $5,000 up to $330,000, if that’s your limit. It will be up to the seller to accept this clause, but it shows that you’re serious about closing the deal.
Provide More Earnest Money
Buyers typically provide 1% to 5% of the purchase price as earnest money—a form of a security deposit—in a purchase contract, which gives sellers the assurance that you will follow through with the purchase. If you bail out on the contract without citing a contingency, you will likely lose the earnest money. If you put down more than the typical earnest money amount, it will tell the seller that you’re determined to follow through to the closing.
Offer to Pay in Cash
If you have the ability to offer an all-cash bid, you gain a distinct advantage because you eliminate the possibility of a mortgage falling through before closing. Buying with cash will make the process go quicker because you won’t need to go through the approval process with a lender, who would also request an appraisal.
If you can’t cover the entire purchase price in cash, you could agree to a larger down payment on the house, which increases your approval odds and might make your bid more attractive.
3. Remove Some or All Contingencies
When you make an offer to purchase a house, you know the deal could fall through for numerous reasons, and you don’t want to lose your earnest money because of it. That’s why you include contingencies in the purchase contract; if the home inspection uncovers major problems or you can’t sell your current home in time to close on the new one, you can get out of the contract without penalty.
But if you’re in an intense bidding war, you can get an edge by removing all or most contingencies. The seller would likely prefer fewer potential roadblocks, so this might slide your bid to the top of the list. However, there are problems with this approach: you could be stuck with a badly flawed house or be forced to forfeit several thousand dollars in earnest money if you can’t afford to buy the new home while your current one is still on the market.
4. Be Flexible on the Move-in Date
First-time homebuyers and those who have already sold their previous home might be in a position to be flexible with the sellers on their move-in date. A seller might ask for more time if they have concerns about potential delays for a new home build. In this case, they could go through the closing and then rent the home back from you for a few weeks or a month. This flexibility could be as valuable—if not more valuable—than a higher bid on the house.
5. Write a Personal Note
Home sellers, especially ones who have lived in a home for a long period of time, can sometimes be swayed by a personal note that explains why you believe this is the home of your dreams. For example, you might know that the current owner raised a family in the home, and you can discuss how you hope to do the same. It might seem a bit over the top, but it’s certainly worth a try when not much separates your offer from others. And yes—sometimes it works.
Source: Forbes
