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You’ve found the home of your dreams and are about to make an offer — but there’s only one problem. Other people have their sights set on the property, too, and are willing to offer a pretty penny. This is when you have a bidding war on your hands.
You might be wondering what to do if you find yourself in this position. First off, it might be easier said than done, but don’t let emotions get in the way. Bidding wars, like auctions, can escalate rapidly and result in buyers making decisions that aren’t always logical. Here’s some advice on how to keep your cool and even come out ahead in a bidding war:
What Causes Bidding Wars?
A bidding war is a faceoff between two or more potential homebuyers for the same property. Buyers offer increasingly higher amounts of money and other perks to position themselves as more attractive. This happens when a certain condition is present. Bidding wars are fueled by a lack of available housing. As more and more buyers enter the market but inventory is scant, they find they have to compete — hence a bidding war.
How a Bidding War Works
In a neutral housing market, when neither side has the upper hand, an offer to purchase a home usually consists of the following elements:
- Offer price: The amount you are willing to pay
- Financing: How you plan to pay for the property, i.e., cash, conventional mortgage, VA mortgage, etc.
- Deposit: Also known as earnest money
- Closing costs: How they are divided up or who pays what
- Closing date: When the buyer would like to complete the purchase
- Contingencies: Conditions under which the contract would be null and void
- Home warranty: To guarantee appliances and systems in the house are in good condition (not always included)
In a bidding-war environment, things are different and buyers might have to rethink what they’re willing to put on the proverbial table. Here are a few points they’ll have to keep in mind:
- Offer price: It may have to include an escalation clause.
- Financing: If cash isn't an option, go conventional with a preapproved loan.
- Closing costs: Don't expect the seller to pay any of your closing costs. You may even need to pay some of theirs.
- Closing date: Find out what the seller prefers and try to be flexible.
- Contingencies: While you want to protect yourself, such as making the sale contingent on financing, your options may be limited.
- Home warranty: More "as is" sales occur in a bidding war, fewer repairs (other than major defects revealed by inspection) are offered, and seller-provided home warranties are less common.
How to Win a Bid on a House with Multiple Offers
Beyond these elements, a potential buyer would be wise to keep the following tactics in mind to sweeten the deal for the seller:
Find Out What the Seller WantsDon’t forget that the seller decides which offer to accept. Do they want a quick closing? Do they want to occupy the home for longer than normal (30 days)? Are they concerned the appraisal won't support the selling price (appraisal gap)? Do your due diligence to uncover the answers and plan accordingly.
Get a Preapproval for a Mortgage
Looking at inventory without a preapproval is the quickest way to lose the bidding war. However, preapprovals give you some clout because they say that the lender has physically verified what was verbally discussed. It shows that you've done the work and you’re serious about the endeavor.
Be Flexible with the Timing
Selling a property is much easier than buying in such a hot market, so a buyer with flexible dates and terms will be more appealing to a seller who still needs to find a new home.
Offer a Large Earnest Money Deposit
If taking out a loan, put more money down for the deposit. For instance, instead of 10%, put 20% down. This sends a message to the seller that you’re willing to risk more of a deposit should something happen with your financing and bolsters the strength of your offer.
Be a Cash Buyer
If you have cash, use it to your advantage. There is no risk to the seller in terms of you not moving forward with a cash purchase.
Offer Concessions to the Seller
There are a few other ways you can make the seller’s life easier. One is to offer to pay a portion of their closing costs. Another is to allow them to choose the attorney and/or be open to a joint decision on the inspector and contractors if repairs are part of the equation. There’s also the decision to accept the home `as-is' and waive the right to ask for repairs. Last, one move that can tip the scales is to allow the seller to remain in the home after closing for a set period of time rent-free.
Offer an Appraisal Gap Guarantee
In such a situation if the negotiated price exceeds the home's appraised value, you have to make up the difference. This might not be as big of an inconvenience as you might think, however. If you’re making a 10% down payment, for example, but your loan program allows as little as 3% down, you could take some of that cash you’d saved for the down payment and put it toward the appraisal gap. You’d end up with a bigger mortgage loan, but it could help you secure the home you want.
Another tactic that doesn't require any money is to keep yourself available. Leave your information with the seller and invite them to contact you or your agent with any questions about your offer.
Respond to requests quickly and have your real estate agent regularly check in with the listing agent to monitor the seller’s progress. Be as flexible as possible and stay top of mind. You’ll want to be the first to know when the seller decides.
The Bottom Line
There are several factors that help or hinder you when in a bidding war on a house. Getting preapproved for a mortgage, making the highest offer on the home and making the deal as seamless as possible are a few ways you can show the seller that you’re a serious buyer and, hopefully, encourage the seller to accept your offer.
Want to show sellers you’re ready to buy a home? Talk to one of our loan officers in your area about pre-approval.