Choose Your Battles, Win the War.
In today’s housing market, many buyers are finding themselves putting an offer only to learn other prospective buyers have put an offer in too. When you’re completing a real estate transaction, you want to be on the winning side. As the seller, you want the best price and terms for your property, which can often happen when they find themselves in a bidding war. As a buyer, you want your bid to be the perfect amount – not too low and certainly not too high.
Getting involved in a real estate transaction with multiple offers or involved in a bidding war doesn’t have to be a disadvantage for the buyer or the seller. It all depends on the market and the knowledge you have on your side.
Here’s everything you need to know about real bidding wars, how they work, and how you can win against the competition.
What is a Real Estate Bidding War?
In real estate, a multiple offer situation or “bidding war” occurs when more than one party has made an offer on a property. This typically happens within the 1st few days of the new listing hitting the market but can also happen days or weeks later.
Bidding wars tend to be more common in hot seller’s markets. In the abnormally hot housing market of 2020, the transaction of buying and selling homes came with more challenges and opportunities. Nationwide housing shortages led to a supply and demand due to low housing inventory. Due to the limited supply of homes, properties with desirable locations, school districts, and amenities had fierce competition, leading to an increase in bidding wars. Even the way sellers staged their homes made the bidding war rates go up!
What Happens During a Bidding War?
In a bidding war, the listing agent will typically designate a “highest and best” deadline. At the deadline, all offers must be submitted. For example, a listing may hit the market on Wednesday. Several buyers’ agents submit or indicate they will be submitting offers on their buyer’s behalf. The listing agent will then set a deadline of Sunday at 5 pm for everyone to submit their highest and best offers.
The bidding war is complete once the seller accepts an offer. After-sales contracts are signed, the list is changed from active to pending. (Just because the deal is pending, doesn’t mean it will certainly close!) The buyer might not be able to finance or secure their loan, the appraisal could return too low, or it might not pass an inspection. In these cases, the home may return to the market for others to purchase.
How to Win a Bidding War Before It Starts
While the best way to win a bidding war is to not enter one in the first place, there are still ways for you to win. Many strategies you can start planning for before you even submit an offer. Here are 4 ways you can win a bidding war before it even starts.
#1: Work with an Experienced, Local Realtor
As a Buyer, you want to make sure you are being represented by an experienced Realtor in order to navigate real estate bidding wars wisely and win your dream house. Your realtor will help you evaluate whether the price is in line with market prices, if there is room to go up in price, present you with the facts so that you can keep your emotions in check when evaluating the best course of action. He or she will recommend the best course of action if you decide to move forward and “win” the bid.
Don’t know what to look for in your Realtor? Here are 4 characteristics you should look for when choosing a real estate professional.
#2: Make a Cash Offer
There are many approaches that can give you the advantage when up against other buyers. Of course, cash is king to sellers so if you are able to make a cash offer this will make your offer very strong. Some buyers are getting home equity lines of credit in place or moving funds from retirement accounts to have the most cash on hand to make their offer when the perfect home comes up for sale.
If you are not willing or able to pay cash, you must be pre-approved/pre-qualified with a mortgage lender. Your lender should supply a letter that should show the seller that you have had your credit score pulled, provided the documents required, and are ready to move forward with a loan to buy the property. It will also indicate how much your lender has approved you for and the terms. The more money you put down, the stronger your offer so consider putting 20% or more down if you’re getting a loan.
#3: Make an Offer Over Asking Price
If you have room in your budget to offer more than the asking price, ask your realtor for advice as to what you should offer. Sometimes just $2-$3,000 over the asking price is enough to show the seller that you are serious about purchasing the home. Other times it will take tens of thousands to win the bid. Be careful to keep any offer or counteroffer within your budget. In addition, higher due diligence money, the money the seller gets to keep should you not move forward to closing for any reason, is very enticing to the seller. We’ve seen as high as $10,000+ in due diligence money offered when a buyer is certain they want to purchase the home no matter what may come up along the way.
#4: Waive Contingencies to Entice the Seller
Removing contingencies can also help you to entice the seller to choose your offer. Though not recommended by realtors, some buyers will waive the home inspection or agree to pay cash for the difference between the appraisal price and the contracted price should the home not appraise as high. The more contingencies you remove, the better chance you’ll have of winning the bid. However, each removed contingency puts you at higher risk so consider these options carefully. If you have contingencies included in your contract, you might have a bigger chance of your deal falling apart, especially during a bidding war.
Ask your realtor to find out the real needs of the seller and determine whether you can help them meet their needs. Maybe they have not found their next home and need more time to close or would want to rent back from you until they find one. Or a quick close could benefit them the most if they’ve already moved. Perhaps you’re willing to replace the flooring yourself rather than accept their flooring allowance or you’re willing to dispose of furnishings they are not to move. I have a friend who bought a $4 million home in Marin Country, CA because he promised to keep the home the way it was and allow the seller to visit from time to time after she moved into a nursing home. Your experienced Realtor will help research the sellers’ needs and make the best recommendations for you.
What Not to Do During a Real Estate Bidding War
There will be some deals that just are not meant for you during a real estate bidding war. Does the home need major repairs? Typically repairs will turn into more than meets the eye so this may be one to walk away from. IS the home out of your budget and you made the best offer you could right off the bat? This is a good time to walk away rather than fall into the bidding war trap that will cause you to spend more than you’re comfortable with. Do you have time to find the perfect home for you? If this is a second home or an investment purchase, consider waiting for another great home for you to come on the market.
Bidding wars probably won’t be going away anytime soon with 2021’s housing market trends. Being involved in a multiple offer situation can be very stressful and it’s not something you’ll want to navigate alone. With the right experienced Realtor and some common sense, you’ll be able to understand the process and know when it’s time to move forward or back away. Come prepared, keep emotions in check and you will eventually find the perfect home!