How to Win a Bidding War
Low supply and high demand create the perfect conditions for a seller’s market, and buyers looking to buy their first home or their next perfect home may find themselves in a bidding war competing against other buyers with the same idea.
To stand out from the crowd, you’ll need some proactive strategies to set yourself apart and stay one step ahead of your competition while you navigate your way to winning a bidding war.
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Get a preapproval letter
Note that prequalification and preapproval are not the same thing. Prequalification is an early step in the home buying process, which provides an estimate of the loan amount you may receive based on basic financial information you supply.
Preapproval is the first step to getting a home loan that involves a more thorough review of your income, bank statements, assets and credit history. The lender provides a letter that states the anticipated loan amount and interest rate.
A preapproval letter indicates to the seller that you’re serious about buying and have the financial backing to do so. You still need to complete the formal mortgage application process if your offer is accepted, but a preapproval letter speeds the process and reassures the seller that your financing is unlikely to fall through.
Make an offer over asking price
When your offer is one of several on the table, it’s almost inevitable that most, if not all, of those other offers will be higher than the seller’s asking price. Although there are any number of reasons a seller doesn’t always go with the highest bid, money certainly plays a role.
You don’t necessarily need to offer a sky-high bid to grab a seller’s attention. In some cases, offering even a few thousand dollars over may be enough to catch a seller’s attention, but not enough to strain your monthly mortgage payments. Your real estate agent can help you determine the right bid amount based on conditions in the local market and information provided by the seller’s agent.
It’s important to keep your emotions in check during this process and resist bidding past your comfort level. Know your budget and the price at which you’re willing to let a home go. Although it’s frustrating to lose a bid (in some cases multiple times when the market is tight!), there will always be other homes that fit your needs and budget. Like the song says: You’ve got to know when to fold ‘em and when to walk away.
Limit the contingencies
Contingencies in a property transaction are typically connected to inspections, appraisals, financing or insurance. An example is if a buyer needs to sell their current home before closing on the new one. Other contingencies include clauses that allow a buyer to back out of the transaction due to an inspection issue, a low appraisal or an inability to secure financing.
A willingness to forgo some contingencies may score points in your favor with the seller if it means they can sell their house quickly and smoothly. Keep in mind that contingencies protect buyers, so think carefully about which contingencies you can forgo and which ones might be good to merely modify.
If you’re in a position to make an all-cash offer, you might jump to the front of the line, as the purchase is not contingent upon your selling an existing home or securing mortgage financing from a lender. An all-cash sale speeds up the timeline for everyone.
You might also consider lifting the appraisal contingency, meaning if the home is appraised for less than you offered to pay for it, you’re telling the seller you’re willing to come to the closing table with extra cash to make up the difference between the appraised value and the purchase price. Waiving the appraisal contingency is not the right answer for everyone, however. Work with your real estate agent to determine if yours is a situation where waiving the appraisal contingency could work in your favor or if it’s a better choice to keep it in place.
It may be tempting to waive the inspection clause, but you might be putting yourself at risk for buying a home that has serious (and expensive) issues, whether it’s a compromised foundation, a leaky roof, mold, or anything in between. Consider modifying the inspection contingency instead, which puts the inspection on a pass/fail system. In this scenario, a buyer might not negotiate with a seller to make repairs based upon the outcome of the inspection report but still has the opportunity to walk away from the deal with some or all of their earnest money.
Add an escalation clause
Buyers are often asked to submit their “best and highest” bid, but although you might be willing and able to pay over the seller’s asking price, nobody wants to feel they overpaid, especially if they didn’t have to.
Your real estate agent can include an escalation clause allowing you to make a higher offer up to a stated maximum but only if there are competing bids from one or more other buyers. For example, on a $300,000 home, you might be willing to incrementally outbid competing offers by $1,000, up to a maximum of $325,000.
Make sure your clause includes a provision that a seller must provide proof of a higher bid from another buyer if in fact you do end up the winning bidder.
Write a personal letter
A personal letter to the seller explaining why you think yours should be the winning bid might seem odd to some people, but time and again, experienced real estate agents have seen the tactic tip the scales in favor of their client.
To leave a lasting impression on a seller, you can introduce yourself and your family in your letter and let them know why you think their home is your perfect fit. Let them know what you love about their home, and what excites you about the prospect of living or raising a family there.
Be aware that some sellers, in the interest of fair housing practices, won’t accept personal letters, preferring to keep offers from buyers neutral. Don’t ignore a seller’s request and submit a letter anyway, as it will likely have the opposite of the desired effect.
Consider your own goals
Consider the market conditions carefully, and make sure they can accommodate your own goals. For example, let’s say the market in New York is a strong seller’s market, and you’re an investor. A bidding war might not be the best conditions for you if you’re hoping to execute 1031 exchange, which defers capital gains tax if you use the proceeds from the sale of one home to purchase a “like-kind” within a strict time period.
While it’s great to win, you won’t enjoy feeling buyer’s remorse if you regret getting swept up in a bidding war and overpaying for your new home. If the conditions don’t feel good, don’t be afraid to take a step back. There are always other homes, and the right one for you is out there.
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