Being a responsible, well-prepared prospective homebuyer is no longer enough to qualify and purchase a home, especially in competitive markets. In the current seller’s market, the buyers need to be swift and savvy to purchase a house. The current low supply of homes and preponderance of buyers are giving rise to increasing numbers of bidding wars. We’ve put together a list of tips you can follow to give yourself the best chance of getting your offer accepted. A financial advisor can also help you determine exactly what you can do financially to prepare for an offer when you find the perfect property.
What Is a Bidding War?
A bidding war occurs when multiple buyers interested in the same property attempt to outcompete each other with offers containing more money and benefits to entice the seller. Bidding wars characterize markets with a low supply of houses and an overabundance of buyers. As a result, areas attractive to potential homeowners and property investors can be particularly rife with bidding wars, intensifying the dynamic of supply and demand.
How Bidding Wars Work
In a steadier housing market, a back-and-forth between the seller and potential buyer is the norm. Negotiations on price, repairs to the home and more are usually on the table and can take weeks to finalize.
Bidding wars, on the other hand, are fast-paced and instead of negotiation, the typical move by potential buyers is to increase their offer. Sellers have the advantage in this environment and usually can sit back and wait for each buyer’s highest, best offer. Bidding wars are often over in a matter of days, with the buyer who can offer the highest price or most expeditious purchase coming out on top.
Buyers in a bidding war may want to consider the following factors when putting an offer together:
- Offer price: It’s a good idea to attach your offer with an escalation clause, which will automatically raise your offer if a competitor beats yours.
- Financing: You’ll need your financing in place before engaging in a bidding war. Otherwise, a buyer ready to close will have greater appeal to the seller.
- Closing costs: As with financing, you’ll need to prepare to pay for your (and possibly the seller’s) closing costs is a must.
- Contingencies: In a calmer market, you could place contingencies on the home inspection that allow you to back out of buying the home without losing your earnest money. In a bidding war, dispensing with contingencies could give you an edge over other bidders.
- Home warranty: A home warranty will likely be up to the buyer in a bidding war. The level of competition means the seller often provides very little to the winning buyer, leaving home improvements and repairs up to the new homeowner.
Tips for Winning a Bidding War
Bidding wars require lightning-quick action and boldness to win. The following strategies can help you come out on top.
1. Get Preapproved for a Mortgage
If you find a home you want but can’t immediately put an offer together, you will most likely lose the bidding war before you start. Preapproval indicates that the seller can be confident that your offer is backed by an actual loan.
It also lets you know how much the lender is willing to loan you, which is crucial because bidding wars often increase the purchase price over the maximum loan amount, leaving you to make up the rest. Preapproval is different than prequalification, which is only verbal communication about a possible mortgage.
2. Identify the Seller’s Wants
It can be easy to assume that the highest offer will simply win, but each seller has different priorities. While some sellers look for the highest number, others might have different conditions that mean more to them. For example, the buyer who can close the fastest (another reason to get preapproved first) or is flexible with occupancy might appeal to a seller. An informed offer is more likely to bear fruit than a blind one.
3. Offer an Earnest Money Deposit
A robust earnest money deposit can demonstrate that you are serious about purchasing the home and consider your financing rock-solid. In addition, the seller may infer that you’re ready to go above the asking price if necessary.
4. Consider an All-Cash Offer
While a lender can provide reliable financing for a home, cash is an advantageous option for the buyer and seller. Cash expedites the closing process and presents less risk to the seller because it’s possible a buyer’s financing could fall through.
If you have the cash available but aren’t comfortable parting with it permanently, delayed financing is a helpful option. Delayed financing allows you to purchase a home in cash and then take out a mortgage within six months. When the process is complete, you’ll have a home with a mortgage and your cash returned to you minus closing costs and fees.
5. Write a Clean Offer
Your highest, best offer that requires no inspection and is free of contingencies can be attractive to a seller, especially if the offer is cash. The cleaner the offer, the less red tape is involved, meaning the transaction will happen quickly and with minimal effort on the seller’s part. The cleanest offer might not be the steepest offer that a seller receives, but it can be the one they select because it is less of a headache.
6. Consider an Escalation Clause
An escalation clause can be a helpful tool in a bidding war because it automatically increases your offer up to a certain amount if another buyer tries to outcompete you. For example, let’s say you’re offering $200,000 for a house. You know other buyers are interested but don’t know whose offer is the highest. You can bolster your offer with an escalation clause according to what you can afford. In this scenario, you decide on an escalation clause that will raise your offer by $1,000 as needed, up to a maximum of $210,000.
An escalation clause is beneficial because it helps you edge out other buyers with a better offer, and you can limit the maximum you’re willing to bid. Additionally, since an escalation clause is automatic, you waste no time upping your offer. It also tells the seller you’re committed to buying the home.
However, an escalation clause could also cause you to throw away money that you need for closing costs and other expenses. Additionally, some sellers refuse offers containing escalation clauses, and some states disallow them. Lastly, if you’re not willing to let go of all contingencies, an escalation clause might require you to do so.
7. Offer an Appraisal Gap Guarantee
Bidding wars often result in offers going above the home’s appraised value. Since the lender will only give you a mortgage for a home’s appraised value, you can include an appraisal gap guarantee with your offer. This option lets the seller know that if your offer surpasses the appraisal by a certain amount, you’ll make up the difference with cash.
For example, if you offer $200,000 with a $5,000 appraisal gap guarantee and the house appraises for $195,000, you’re committed to spending $5,000 out of pocket to fulfill your offer.
8. Write the Seller a Personal Letter
An excellent way to connect with sellers is through a personal letter. By letting the seller get to know you and your family, you can separate yourself from other bidders. Chances are that the seller has a lot of fond memories of their home and wants the next owner to have the same. A letter can help them envision your family enjoying time together in the house.
In addition, talk about what you like most about the home. Whether you can imagine yourself relaxing on the cozy patio or your children chasing each other in the backyard, make sure the seller knows how much you appreciate their house. Best of all, unlike most of the other tips, this one is free.
9. Be Flexible
Keep yourself in the running by remaining flexible. Let the seller know they can communicate with you at any time. If they do reach out to you with a question, answer promptly. Stay abreast of the seller’s choice by having your agent reach out consistently to the seller’s agent.
Furthermore, adapting to the seller’s needs is crucial to winning a bidding war. For example, perhaps the seller realizes they would like 60 days occupancy instead of the originally stated 30. Or, they decide to leave the repair of a faulty appliance up to you. By handling changes and less-than-ideal situations with grace and an open mind, you will show the seller that you’re easy to work with and determined to buy the home.
Next Steps if You Lose in a Bidding War
If the seller decides to go with another buyer, it is undoubtedly a blow to your house-hunting efforts. However, not all is lost. If you have your heart set on a particular property with a contingent offer from another buyer, you can ask your real estate agent to see if the seller has a kick-out clause. A kick-out clause means that another buyer could win the seller over with a higher offer while the inspection and appraisal take place.
If you can beat the current offer, the seller will give the first buyer the chance to raise their offer again or sweeten the deal in another way. It’s possible that the first buyer backs out in this situation.
Additionally, you could make a backup offer in case the original buyer backs out after inspection or their financing falls through. While winning with a backup offer isn’t likely, it’s an option for a house you can’t get out of your mind.
If you lose a bidding war but linger with an offer waiting for the situation to change, you cannot put an offer in for another home. Therefore, while giving up rarely feels good, moving on enables you to look at other homes you might have a better chance at buying. Conversely, clinging to a house you have little chance of buying keeps you from seeing other options.
The Bottom Line
Bidding wars can be very common based on the market you’re buying in, especially in today’s hot market. Understanding how you can be prepared for a bidding war is key to helping you win and get the property you want. By lining up your financing in advance, making bold offers and staying flexible, it’s possible to obtain the home of your dreams even amidst a sea of other buyers.
Tips to Win a Bidding War
- Knowing what kind of mortgage fits with your financial plan will help you in your home search. A qualified financial advisor can help you construct a financial plan and set goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- The housing and mortgage market has been a source of volatility in recent years. Don’t go in blind – use SmartAsset’s mortgage rates table. With it, you’ll better understand the market’s climate.
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