What is a bidding war? Strategies for homebuyers and sellers
When purchasing a home in a seller’s market, buyers have to ensure their offer stands out from the rest. In many cases, multiple buyers vying for the same property end up in a bidding war. Some homebuyers many even include an escalation clause to increase their chances of winning.
What is a bidding war?
A bidding war can happen when there is more than one potential buyer making an offer on a home. These buyers end up competing to become the new owner of the property by increasing the price of their offer, often pushing the price higher than the original property value. In a bidding war, buyers might also use other strategies such as waiving certain contingencies to convince the seller to accept their offer.
Bidding wars most often happen when the housing market has limited inventory — a seller’s market — and when homebuyers are under some sort of constraint, like a certain deadline they need to meet.
8 ways to win a bidding war
If you’re a homebuyer today, especially if you’re looking in a sought-after location or for an entry-level property, chances are you’ll face a bidding war. Don’t be discouraged — there are ways you can come out on top in a multiple-bid situation. Your real estate agent should be able to help guide you through the process, as well.
1. Increase your offer
Simply put, being willing to pay more money than other buyers is one of the best ways to get your offer accepted. You may not have to increase your offer by a lot — it’ll depend on the area and other factors — so look to your real estate agent for guidance.
Keep in mind that when increasing your offer, you may need to come up with the extra cash yourself. Lenders mostly finance loans in the amount of what the home appraises for, not more.
2. Up your down payment
Having a higher down payment means less financing is needed from a lender, which can be beneficial if the bidding war pushes the price of the property higher than what it’ll be appraised for. For this strategy to be effective, it’s important to prove you have enough additional cash to put down with evidence such as your account balances.
3. Pay in cash
While this isn’t feasible for everyone, paying in cash proves to the seller that you’re serious about the property. Plus, there’s no need for a lender to be involved, helping to eliminate the risk with financing and often speeding up the closing process.
4. Get preapproved
Getting preapproved can help show the seller that you’re able to afford their home and have the financing to do it. Ideally, the preapproval letter will mention the home you’re looking to buy.
Note that there’s a difference between being preapproved and prequalified. Generally, a preapproval carries more weight than a prequalification — the latter is simply an indication that you could be approved for a loan, while the former is an official notice that the lender has reviewed the borrower’s finances and approved the borrower for a certain amount.
5. Hire a home inspector
The home inspection process can present issues in a transaction. Depending on what the inspector finds, there could be additional negotiations, such as repairs or seller credits, that can change the terms of the deal. If you offer to complete the home inspection quickly, this could show the seller that they’re not going to waste their time worrying about delays when they take their property off the market.
If you’re willing to take the risk, you might also consider waiving the inspection contingency altogether, although not knowing what the condition of the home is upfront could have ramifications down the road.
6. Waive contingencies
Like the inspection, there can be other contingencies in a real estate transaction, or certain conditions that need to be met in order to for the deal to go through. Usually, the buyer has the right to back out of the purchase if these aren’t met.
Waiving these contingencies could show the seller you really want to move forward with the purchase, since you’re risking your earnest money. Again, however, this can also cause issues in the future, so be sure to carefully consider this option.
7. Add an escalation clause
An escalation clause is an addition to your purchase offer that formally states you’re willing to increase your bid by a certain amount if another buyer ends up matching yours. In other words, you’re saying you’ll raise your offer incrementally up to a maximum amount if someone else makes a bid.
This tactic can prove to the seller how serious you are about the home right away. Work with your real estate agent to craft a strategy that’ll work with your budget.
8. Write the seller a personal letter
Humanizing your efforts could convince the seller to accept your offer, even if it’s not the highest bid. Your letter can explain why you feel strongly about buying the home, including sentimental reasons. If the seller feels a connection to their property, knowing that someone will take care of it like they did could mean you’ll luck out.
How to handle multiple offers as a seller
If you’re on the other side of the transaction, picking the best offer can help the closing process go more smoothly and ensure you receive the best price for your home. Here’s what to consider when reviewing multiple offers:
- Prioritize cash offers. A buyer that offers to pay in cash means you don’t have to worry about any potential hiccups with a lender, even if someone is preapproved.
- Look at the buyer’s financial strength. Don’t only look at the offer on paper. If the buyer isn’t likely to get a mortgage approved for that amount or put up more of their own cash, you may have to start the closing process all over again with someone else.
- Review “extras.” Look at factors like contingencies and escalation clauses to see if any of these extras help sweeten the deal for you.
- Think about your current home value. Take into consideration that your home may be appraised for a lower value than the selling price, because it means the buyer will need to spend more of their own money. Here’s where you’ll want to look at proof the buyer has the additional funds available, and the track record of the buyer’s lender.
- Compare closing dates. If you want to move out as soon as possible, a buyer who is willing to close on the deal faster may be a major deciding factor for you.
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