In housing markets teeming with buyer demand, it’s not uncommon to put an offer on a home only to be outdone by a competing offer. If two or more potential buyers want a property badly enough, they may find themselves locked in a bidding war.
The tea leaves indicate that 2023 will throw cold water on many bidding wars, but certain markets in the country could remain competitive.
Here’s how to increase your chances of winning a bidding war so you don’t have to bid adieu to a home you really want.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
1. Know How a Bidding War Works
Bidding wars usually take place in a seller’s market, when demand outpaces housing inventory. They also typically occur when there are multiple interested parties and when there is some sort of constraint, like timing.
When a seller’s agent receives offers for a property that has attracted a lot of buzz, the agent may set a date by which would-be buyers should make their “highest and best” offer. Sellers can accept the best offer, counter one offer while putting the others to the side while awaiting a decision, or counter one offer and reject the others.
This brings up a salient point: It’s true that you can buy a house without a Realtor® or real estate agent, but an experienced agent can guide you through offers and counteroffers, contingency snags, and more.
2. Line Up Your Financing
One of the best things you can do to be prepared for a potential bidding war — or really any time — is to get your finances, and financing, in order.
Be sure to know how much house you can afford, including a down payment and monthly payments.
Determine if you qualify for a mortgage and familiarize yourself with the types of home loans that are available: government-backed loan or conventional loan, fixed rate or adjustable rate.
Getting preapproved for a mortgage will give you a specific amount that a lender is tentatively willing to let you borrow.
And a preapproval letter shows sellers that you are a serious candidate to buy a home. Many experts recommend getting at least three preapproval letters from three lenders.
3. Lessen or Drop Contingencies
Contingencies are certain conditions that must be met before a real estate deal becomes binding. Potential buyers can back out of a deal without penalty if the contingencies aren’t met.
A clean offer, one with as few contingencies as possible, is attractive to sellers in a competitive market.
In a typical real estate market, a common contingency is the mortgage contingency, or financing contingency, which allows homebuyers to exit the deal and have their earnest money returned if they cannot secure financing by the agreed-upon deadline.
Another is the inspection contingency. Based on the findings of a professional inspection, the buyer may be able to negotiate repairs or the price, which are known as seller concessions if the sellers are agreeable, or cancel the contract.
Waiving contingencies shows your eagerness to triumph, but it comes with risk. The biggest is losing your earnest money deposit if you hit a snag.
4. Be Quick About These Contingencies
Sellers want to avoid spending a lot of time with a potential buyer only to have the deal fall through. If you’re including appraisal and inspection contingencies, do what you can to expedite them.
The real estate purchase contract includes any contingencies, the sales price, the closing date, and the date of the title transfer and possession. The contract is considered a working document until both parties agree on the terms.
5. Use an Escalation Clause
Unsurprisingly, one of the best ways to win a bidding war is by offering more money.
You may want to include an escalation clause in the contract if you assume there will be multiple offers.
The clause asserts that if another buyer makes a competing offer, your bid will automatically increase by a certain amount, up to a limit, to exceed the offer.
Say you put a $400,000 offer on a home, with an escalation amount of $10,000 and a ceiling of $430,000. If someone else bids $410,000, you will automatically bid $420,000, up to your ceiling.
6. Stay Flexible
A willingness to be flexible can give you a leg up in the eyes of a seller.
For example, a seller might be moving across the country for work and need to close by a specific date. So if you can get the appraisal and inspection done swiftly, that could be a huge plus.
Alternatively, sellers may need to stay in the house for a while. Working with them on their specific needs could give you an edge.
7. Pay With Cash
If you are able to do it, buying a house with cash can be very attractive to sellers. The process is typically much faster than going through a lender, and sellers don’t want to worry about financing issues that might hold up the deal or cause it to fall through.
It’s even possible that a seller would choose a cash offer over a slightly higher offer backed by a mortgage.
8. Increase Your Deposit
There are timeless standards for how to make an offer on a house. One is determining the size of your earnest money deposit.
The deposit, held in escrow by the title company, secures the real estate contract. It tells the seller that you are serious about buying the house.
Earnest money is typically 1% to 3% of the purchase price but can be more in a competitive market. If you close on the home, the deposit will be applied to your closing costs.
9. Write a Personal Letter
When sellers are choosing a buyer during a bidding war, they’re often just looking at numbers on a page. Consider writing a real estate offer letter, aka love letter, to humanize the transaction.
You might want to make a case for why you’re the ideal candidate to buy the home, and note commonalities: You’re a ceramicist and noticed an artist’s studio in the backyard. You have dogs; they have a dog. That big elm reminds you of the one at your childhood home.
Be complimentary about the things you like about the house and how it has been maintained. And be concise.
The Takeaway
Whether you’re buying in a time of burgeoning bidding wars or not, it’s good to know how they work. The tactics help homebuyers understand the lay of the real estate land: contingencies, earnest money, escalation clauses, love letters.
If you’re gearing up for a bidding war or a peaceful purchase, see what SoFi Mortgages are all about. The rates are competitive. A number of repayment terms are offered. And qualifying first-time homebuyers can put as little as 3% down.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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