Bidding war strategies for homebuyers (and sellers)
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Not so long ago, when the housing market was so frenzied that homes would sell almost as soon as they were listed, bidding wars were a common occurrence. Things have calmed down significantly now, but housing inventory is still very low — just 2.6 months of supply as of January 2023, per the National Association of Realtors, compared to the 5 or 6 months needed for a balanced market. So bidding wars do still happen, especially in popular markets.
Inventory levels are still at historic lows. Consequently, multiple offers are returning on a good number of properties.— Lawrence Yun, Chief Economist, National Association of Realtors
What is a bidding war, and how does it work?
In real estate, a bidding war can happen when multiple buyers are vying for the same property. These buyers compete to become the new owner of the property by incrementally increasing their offers — often pushing the price higher than the asking price.
It’s not always simply the highest bid that wins in a bidding war, however. Many buyers also use non-financial strategies to convince the seller to accept their offer, such as waiving inspections or certain contingencies.
Bidding wars most often happen in a seller’s market, when there is more demand from buyers than there is supply of homes for sale. They can also happen when homebuyers are under some sort of constraint, like a certain deadline they need to meet. In some cases, too, a listing might be purposely underpriced in order to incite a bidding war.
How to win a bidding war: 7 strategies to try
If you’re a homebuyer looking in a sought-after location or for an entry-level property, you may well face some competition. Don’t be discouraged — there are ways to help ensure you come out on top in a multiple-bid situation. Your real estate agent can help guide you through the process, as well. Here are 7 tactics to try if you want your offer to stand out from the rest.
1. Have your preapproval ready
Getting preapproved for a mortgage shows a seller that you are able to afford their home, and have the financing to do it. Take note, however, 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 means the lender has already reviewed your finances and is very likely to approve you for a certain amount. Neither constitute a guarantee, though, which is why there is usually a financing contingency in real estate contracts.
2. 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 it 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 you may need to come up with the extra cash yourself. Lenders mostly finance loans in the amount the home appraises for, not more. You might also have more of an advantage if you can up your earnest money deposit. When making an offer, be sure it has a short expiration date, ideally 24 hours or less. This way, the seller has to decide quickly whether to accept or move on.
3. Up your down payment
Offering a higher down payment means less financing will be needed from a lender. This can be particularly beneficial if the bidding war pushes the price of the property higher than what it’s likely to 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 account balances.
4. Pay in cash
While this option obviously isn’t feasible for everyone, a cash offer is very appealing to a seller. There’s no need for a lender to be involved, helping to eliminate the risk with financing and speeding up the closing process. Be sure to have the property appraised and inspected before finalizing the purchase, though. There are even some companies out there that will help you make a cash offer (for a fee, of course).
5. Waive contingencies
Contingencies in a real estate transaction, or certain conditions that need to be met in order for the deal to go through, are common. Usually, the buyer has the right to back out of the purchase if these aren’t met. Waiving some or all of these contingencies could show the seller you really want to move forward with the purchase. However, this can also cause issues in the future, so be sure to consider carefully — especially if you’re thinking about waiving the inspection contingency.
6. 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 matches yours. In other words, you’re promising that you’ll raise your offer incrementally up to a maximum amount, if necessary. This tactic can prove to the seller how serious you are about the home right away — but tread carefully. You might find you’re simply playing a game for the benefit of the seller, especially if the home has been intentionally underpriced.
7. Write a personal letter
Humanizing your efforts with a letter could convince the seller to accept your offer over another, even if it’s not the highest bid. Sometimes referred to as a buyer “love letter,” these can explain why you feel strongly about buying the home, including sentimental reasons: If the seller feels an emotional connection to their property, knowing that someone will take care of it like they did could mean you’ll luck out. Be very cautious here, though. There could be Fair Housing implications if you reveal personal information in the letter that influences the seller to either accept or reject your offer. In fact, the National Association of Realtors frowns upon such letters and actually prohibits Realtors from delivering them to sellers.
How to handle multiple offers as a seller
If you’re on the seller side of a bidding war, congratulations — you’re in the driver’s seat. Picking the best offer can help the closing process go more smoothly and ensure you receive the highest possible 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, as the seller, won’t have to worry about any potential hiccups with a lender.
- Look at the buyer’s overall financial strength. Don’t look solely at the offer price. 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 process all over again with someone else.
- Review “extras.” Look for factors like contingencies and escalation clauses to see if any of these extras help sweeten the deal for you.
- Know your home’s value. Consider whether your home might appraise for less than the selling price, which would require the buyer to spend more of their own money. You’ll want proof that the buyer has the additional funds available, and the track record of the buyer’s lender. You may even want to get your own appraisal before you list your home on the market, so you can benchmark that against other valuations.
- Compare closing dates. If you want to move out as soon as possible, for example, a buyer who is willing to close on a faster timeline may be a major deciding factor for you.
Bidding wars can happen in hot real estate markets, where multiple buyers are competing for the same property. They are a boon for sellers, as they typically mean the home will fetch top dollar. But they can be frustrating and stressful for buyers, who are under pressure to make their offer as appealing as possible, as quickly as possible. An experienced local real estate agent can help guide your decisions to give you the best chance of winning — without breaking the bank.