How to Win a Bidding War on a Home
Cities across the country are experiencing a high demand for and a shortage of affordable housing. Low interest rates, the upsurge in the economy as COVID recedes, an increase in the cost of building materials, and people who saved down payment money during the pandemic are just a few of the contributing factors. Even if you are able to find a house that you feel is perfect for your family, the probability that you will be out-bid is high. There are no guarantees, but in this seller’s market, there are things you can do to help make your offer stand out from the competition.
Before we get into the somewhat standard advice, consider one of these innovative ways to construct an offer that appeals to the seller:
- Include peculiar numbers. Rather than rounding-off numbers, be specific in an odd way. An offer of $425,239 instead of $425,000 registers as a higher number, when it’s a difference of less than $300. If you say you’ll cover $1,603 of the seller’s legal fees instead of $1,500, the odd dollar amount may attract the attention of the seller.
- Appeal to the seller’s emotions. If the seller reveals a sentimental attachment to the property, write a personal note that humanizes your offer. Say why you love the property and think you’re the right buyer for it. Especially sellers who have lived in a home for a long period of time might be swayed by your desire to raise your family there. It’s worth a try when not much separates your offer from others
- Be flexible on your move-in date. A quick closing date for someone who is moving out of state, or a little more time for someone who is worried about whether or not their new home will be completed can be more valuable than a higher bid on the house. If you can be flexible, let the seller know you are willing to meet their needs.
10 Tips from Lenders and Agents
1. Have a pre-approval document from your lender. It must clearly state that you are able to borrow enough money to purchase this specific property. The seller wants to go with a sure thing. Preapproval is a step most buyers will take, but it’s absolutely essential in a competitive bidding situation.
Prequalification is not enough. 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.
- Submit an offer as soon as you’re sure you want to buy. In a market where there are few available properties compared with the number of active buyers, even if you move quickly, there’s a chance you’ll have to compete with other offers.
- Up your offer. If you’re set on winning a bidding war on a house, your best bet is to offer more money than the other person. Depending on the home’s price, location, and how high the demand is, sometimes, even going up just a few thousand dollars can make the difference between getting a property and losing out on it. However, be aware that, when it comes to your mortgage, you’re only going to be able to get a loan for up to what the house appraises for. If your higher offer gets accepted, that extra money might have to come out of your own pocket.
- Waive all or most of your contingencies. Contingencies are certain conditions that must be met in order to close a deal on a property. If they’re not met, the buyer is allowed to back out without losing any money. But if you’re in a close bidding war, this might give you an edge. For example, if you wave your inspection contingency, it shows how badly you want to quickly move forward with the deal. It is still possible to back out after waiving your contingencies, but you’ll lose your earnest money. You have to be sure the risk is worth it.
- Increase the amount you’re willing to put down. If a bidding war is pushing the price above what the property might appraise for, a higher down payment means less money will be required from the lender, increasing the seller’s confidence in your offer. Back up your verbal promise with financial proof, such as pay stubs, tax forms and your 401(k) balance.
- Pay in cash. Obviously, most people cannot do this, but if you have the cash to cover the purchase price, offering to pay it all up front shows the seller that you mean business and that there is no risk of the mortgage falling through before closing..
- Include an escalation clause. An escalation clause is an addendum to your offer that states you’re willing to go up by X amount up to a certain limit, if another buyer matches your offer. It ensures you can instantly counteract any other bid. It may be that an escalation clause will show your hand in a way that you might not want to do as a buyer, informing the seller of just how interested you are in the property. However, if winning a bidding war on a house is the result you’re looking for, you can ask your realtor to help you come up with an escalation clause that fits your strategy and your budget.
- Offer to do your inspection ASAP. A home inspection has to be done before a deal can close. As a way to get ahead of another buyer, call your inspector to ensure that he or she will be available right away. You can do this in conjunction with waiving your inspection contingency if you’re really confident you want the house no matter what, or you could agree to a shortened contingency period. The goal is to speed up the process as much as you can, thereby benefiting both yourself and the seller.
- 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. If you put down more than the typical earnest money, it will tell the seller that you’re determined to follow through to the closing, because if you withdraw from the contract without citing a contingency, you will lose even more.
- Avoid these two questionable tactics:
- Bidding against yourself, or increasing your bid even if you aren’t sure someone else matched it, is usually not a smart negotiating tactic. If you haven’t heard back from the seller and are eager to buy the home, ask your Realtor if it makes sense to offer more, as a preliminary strike to block other potential bids.
- Making offers on multiple properties at the same time is a strategy that can backfire if you don’t let the listing agents of any homes you bid on know what you are doing. It’s not always legal and rules vary state by state. Some states have what’s called a “good faith and fair dealing” covenant that applies to contract law, which could make bidding on multiple properties at the same time (that you couldn’t afford to buy at once) illegal.
Winning a bidding war on a house can take both strategy and luck. Your realtor will help guide you through each step so that you make the right decisions at the right times. Even if you lose out to competing buyers a few times, eventually your offer will be the right one. Don’t shy away from making an offer on a house because you think you might lose out to another buyer. It doesn’t cost anything to make an offer, so listen to your realtor and take your best shot.