Winning a Bidding War and Buying A Home

Before the pandemic, the population growth of many cities in the U.S. with over 1 million people was stagnant or declining. As the pandemic peaked, smaller communities began to experience a growth surge as people, newly working from home, realized that they could live anywhere and chose to relocate away from cities.

As urban populations disperse, smaller metropolitan areas, suburban counties, and rural areas have experienced unprecedented demand for housing. This has caused many markets to heat up and become hyper-competitive.

In a market where supply is low, and demand is high, it's not uncommon to find yourself in a bidding war as multiple offers push prices higher and higher. Add low mortgage rates to the mix, and you may find yourself edged out of the running several times when trying to buy a home!

While no single strategy can guarantee that you'll win a bidding war, there are several steps you can take to make your offer stronger when buying a home and put you in the best position to compete and prevail!

Prepare For War!

When you're competing in a hot housing market like we're experiencing today, most agents agree that it's best to push aside your emotions, regardless of how difficult that might be. After all, much of the home buying process relies on making an emotional connection with a home. However, to succeed in a bidding war, you need to begin your home search with a fully stocked arsenal!

That means, having your finances in order, thoroughly researching potential target neighborhoods, and building a team of trusted experienced professionals well before you need to move a deal along. This team should include everyone from your banker, to your broker, lawyer, and engineer, as well as a contractor.

Getting your finances in order means deciding the maximum comfortable number you're willing to pay for a home, which doesn't necessarily mean what the bank will approve you for.

Along with all of this, you also need to bring a willingness to compromise to the bargaining table. Right now, it's a strong seller's market. Sellers have the option of asking for the world, and more often than not, they're getting whatever they ask for!

Here are some tips for coming out ahead when buying a home in a bidding war.

• Get A Pre-approval Letter

This is one of the first and most important steps of the entire process! A mortgage pre-approval letter shows a seller that you've done your homework, and you're not only a serious buyer, you're also a qualified one. This is an especially effective tactic should you enter a bidding war.

It's important to understand that a pre-approval letteris different than a mortgage prequalification. To get a preapproval letter, your lender evaluates every financial detail, including your credit score and report, then decides whether they will loan you the money to buy a house, and the amount they will loan. Pre-approval is based on documentation which includes W-2 tax forms and bank statements.

• Make an All Cash Offer, or A Larger Downpayment

Sometimes the highest bid does not win. Sometimes money talks when bidding on a house. Paying cash is often much more appealing to a seller because it virtually eliminates the possibility that financing will fall through before closing. Cash deals also typically close faster. Offering a substantial down payment or making a cash offer often go right to the front of the line in a bidding war.

Can't pay cash? Your earnest money deposit can show a seller that you are a serious buyer. The typical earnest money deposit is 1 to 2% of the purchase price, but this varies by location. A higher earnest money deposit can catch a seller's attention and signal that you're serious, especially in a hot housing market.

• Include an Escalation Clause in Your Offer

Including an escalation clause can work to strengthen your offer. if other offers come in that match or beat your initial bid, an escalation clause states that you are willing to incrementally increase your offer up to a fixed limit

For example, say the asking price is $200,000. Your REALTOR® would prepare your office to state:

My initial bid is $200,000 with an escalation of $2000 over any and all competing offers with a cap at $210,000. However, if another bidder offers more than $210,000 you'd be out of the running.

• Limit Contingencies

Contingencies allow buyers to walk away from a deal without losing their earnest money if certain conditions are not met. In a bidding war, you want to carefully choose them.

Try to submit a clean offer without too many contingencies. To be competitive today, you need to do your homework. Know you can obtain financing so you can eliminate a credit review contingency. Understand what to look for when walking through the home before submitting an offer to forego the inspection. Agree to pay a certain amount over the list price, and know you can afford that over the appraised value.

• Be Flexible on the Closing Date

This can be an effective tactic in a couple of ways. For example, let's say you get outbid by a few thousand dollars, but you're willing to give the seller more time to move out. That flexibility can often make you the frontrunner in a bidding war.

Extra closing time might be attractive to a seller who might otherwise have to spend more on moving or storage. Especially if they're crunched for time to find another home in a tight market. Sometimes you can win the bidding war by extending the closing date. For example, if the sellers are in a crunch, offer to rent the home back to them cheaply, for a fixed period. If the home is already vacant, you can sometimes win by offering to close quicker, reducing the seller's expenses of carrying two mortgages.

Even If You Lose the Battle, You Still Could Win The Bidding War!

One final thing to keep in mind...

Just because another buyer was chosen over you doesn't necessarily mean you've lost the war. When buying a home, transactions can often fall through for any number of reasons. If you make a well-thought-out offer, a strong enough bid, and are ready to act quickly, you might be next on the seller's list!

If you're serious about winning a bidding war, work with a seasoned real estate professional with experience in this type of market. A real estate agent or REALTOR® will have the skills to help you prevail in a bidding war. They will also have extensive market knowledge, which is critical for determining the fair market value of any home you're interested in.