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Bidding War: How To Prepare And Win

5-Minute Read
08/26/2020
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In these unprecedented times, the housing market isn't immune to the changing societal and economic forces brought about by the global pandemic affecting people across the United States. While the market remains strong for home buying and selling, the supply of houses is low in relation to past years.

What happens when there are plenty of buyers but not enough houses for all of them? It creates what REALTORS® refer to as a seller’s market. This means that multiple potential buyers are put in a position to compete for a specific house, which can often lead to a bidding war.

If you want to avoid a bidding war altogether, consider buying in the winter or other times when the number of buyers looking is usually reduced. Can't wait? Then understanding some tips for buying in a seller’s market, as well as the anatomy of a bidding war and what strategies can help you come out on top, will go a long way toward landing the house of your dreams.

What Is A Bidding War?

In real estate, a bidding war takes place when two or more parties interested in purchasing a property compete for the seller’s acceptance of their offer. This can be a stressful time, as you have already gone through the long and arduous process it takes to know you have found the right house only to discover that it might be the right house for some other potential buyers as well. Here is what to expect next.

Many times when someone makes an offer on a house and the agent (or owner if it is an FSBO) who listed the home knows there’s a lot of interest, they’ll let all the interested parties know they have received an offer. Next, they’ll usually propose a deadline for everyone to submit their highest and best offer.

Everyone is on a level playing field now, unless someone has secured the right of first refusal, and this is when the rubber meets the road in terms of being the lucky buyer who lands the home. Understanding how to prepare for the ensuing bidding war will help you come out on top.

Financially Preparing For A Bidding War

There are many things you can do to make your offer more appealing to sellers. However, one of the most important is to make sure you have your financing lined up. Ensuring your personal finances are in order and having a clear understanding of how much you’re willing and able to spend is the first step.

The next step is undertaking the mortgage application process before beginning to put offers down. This gives the sellers peace of mind that you’re a qualified buyer who’s going to be able to get the necessary financing to ensure your offer will get to the closing table.

Tips For Winning A Bidding War

While having rock-solid financing is important, it’s not the only thing that’ll help you in a bidding war. There are a number of strategies you and your real estate agent should discuss and consider. Here are a few other tips you might find helpful.

Make Sure You’re Approved

Getting approved for a mortgage before you begin house hunting can be a big deal when there are multiple offers on the table for one property. Some lenders call this preapproval, but regardless of what it’s called, you need to make sure your lender is clear with you about what it means. Some lenders are more likely to preapprove buyers without the full loan approval process being done.

While this can get you in the door when it comes to an offer, it can also sometimes lead to not getting to the closing table if the preapproval was done in haste. Make sure your lender explains how they approach the preapproval process and what it means regarding the likelihood that your loan gets fully approved when it’s time to close on your new home.

Drop Contingencies

A clean offer is one with as few contingencies as possible. Sellers are looking to move. They don’t want to have to put their house back on the market because the deal fell through.

A common contingency is an appraisal contingency, because mortgage companies won’t pay more for a property than it will appraise for. However, in a contested battle for a home, it’s common that buyers are willing to pay a certain amount above the appraisal price (e.g. appraisal plus $5,000).

You’re bringing the difference between the appraised price and the agreed-upon purchase amount to the closing table in cash. If you have extra savings, this could be one way to give your offer a leg up. Just be careful not to stretch your budget too thin – you still have to come up with the down payment and closing costs as well.

Another thing you might consider dropping is the home inspection contingency. While you should still have an inspection done if you care to know what potential issues may arise with the house down the line, you might consider not having the sale be contingent on the inspection – a contingency that might make them pass on your offer if the other ones they’re considering have waived it.

The strongest position you can have would be to avoid a financing contingency altogether by being a cash buyer, with or without delayed financing. But not everyone can swing that when it comes to their personal finances.

Consider An Escalation Clause

Another thing that can be helpful in a competitive bidding situation is to insert an escalation clause. Let’s say you put in an offer on a house for $310,000. You then insert a provision in the offer that says you’ll go $1,000 above any offer up to $320,000. That way, your bid doesn’t go above your absolute best offer, but you don’t have to overpay by putting in the super-high bid no one is likely to match as your first offer.

This makes the seller happy as well. Even though they have likely done their homework on how much the house is worth to decide on a price, they’re always pleased to get more than they listed for.

Be Flexible

Flexibility can be important for motivated sellers. For example, they might want to be out of the house by a specific closing date in order to let their children start at their new school rather than transferring. If you can get the appraisal and home inspection done quickly, that can be a plus.

Or it could work the other way around if it’s the spring and they want a month to wait for children to be out of school. Either way, the ability to work with these types of situations is a huge bonus for some sellers.

The Bottom Line

Hopefully by now you have a better understanding of how to approach a bidding war, should you find yourself in the midst of one. Using the strategies offered here can go a long way in ensuring your offer makes it to the top of the heap.

Offer accepted? Yay! Now it's time to learn about the closing process to make sure the deal gets done.

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