There’s a good chance for you to be caught in a bidding war when you buy a house. Bidding wars are common in the real estate field, especially in seller’s markets. And it is not that easy to win a bidding war when you’re competing against smart buyers and their agents.
That’s why you must be smart enough to beat them and get the property you dream of. Thankfully, there are brilliant strategies that can help you. And you must carry them along when planning how to win a bidding war today.
How to Win a Bidding War when You Buy a House
Yes, bidding wars are common in the real estate industry. But why do they happen among buyers?
They happen when two or more buyers want to buy a similar property. Each buyer needs to convince the seller to close the deal with them and each doesn’t want competing buyers to win the bid. Of course, when you sell a house, you would choose the best offer from the buyers who are competing for your property.
This scenario is especially common in seller’s markets because of the small number of properties. When only a few properties are available in a locale, a high number of buyers would compete to get a house they want.
But why would you engage in a bidding war instead of just finding another property with less attention? Often, it’s because of some non-negotiables when you buy a house, such as:
- The home is in the ideal location for your daily life
- The features of the home are what your family needs
- The price is not above what you can afford
- Other personal reasons
When you find yourself unable to easily walk away from a home, talk to your realtor about your bidding war options. If you are able to be a strong competitor, you can use the strategies below on the way to a successful outcome.
Strategy #1: Offer the Highest Price You Can
All sellers want to earn the largest possible returns from selling their property, which means bidding wars are always welcome. If you can offer a price that is well above the listing price and far enough for other buyers to lose interest, you’ve likely just won the property.
But, leaving some cash available for bidding power is also a smart way to save it instead of offering all you have at once. This is because if you quickly outbid what the other buyers can afford, you’ve likely saved whatever additional cash you were prepared to use on the property. And in order to arrange automatic bidding in the first place, you’ll need an escalation clause inside your initial offer.
Strategy #2: Escalation Clause Power
Escalation clauses allow a buyer to outbid other offers by a certain amount (say, $5000) repeatedly until their cap is reached.
For example, if you agree to outbid other offers by $5,000, then when someone offers $200,000, you’d automatically bid with $205,000. And when somebody outbids you with a $208,000-offer, you’d automatically bid $213,000 in return. This goes on until the value reaches the price cap that you set in the escalation clause (for example, $230,000 max).
For this strategy to work, you need to have a reasonable escalation amount and cap value. Around $1,000 of escalation is not that compelling for sellers and doesn’t make you a strong competitor. But $5,000 or higher gives them enough reason to take you seriously. Also, do not fix the cap value near the asking price (the higher the better) when you bid to buy a house, such as setting it at $260,000 on a $250,000 property.
Talk about escalation clauses with your agent before deciding it this is best for you.
Strategy #3: Offer to Pay In-Cash
If you can’t bid high enough or if you’re hesitating with escalation clauses, think about paying in-cash. This translates to extra convenience for sellers and all involved in the transaction. Why? Because no one needs to worry about mortgage approval falling through.
When a buyer is unable to secure a loan, sellers lose the sale, and previously interested buyers may no longer be available. The house also needs to go back on the market, which can hurt it’s desirability if it’s been there too long.
Also, since few buyers are able to pay with cash, it can go the extra mile to help you win the house even if you aren’t the highest bidder. The best real estate expert would strongly suggest buying with cash if you can.
Strategy #4: Set Aside the Home Inspection Contingency
This agreement can make certain sellers anxious, and may help you get the house you want if you choose to forego it. The Home Inspection Contingency lets you cancel the transaction if you spot flaws in a house after the inspection, but it also lets you renegotiate the price too.
This is a risky strategy to take and is only recommended in certain circumstances where a lot about the house is known by a previous inspection or other credible means.
Strategy #5: Treat Your Offer Letter as a Hook
When making your offer, a personal letter is required that is meant to convince the seller to pick you as the buyer.
Some of the best things to include are why you love the property and how it will improve your life and goals. For example, you can say that the backyard is the perfect space for your family bonding and dog. Or the house has features that are great for your elderly parents or family member with disabilities.
A seasoned buyers agent can help you write down a list of highlights and convert them into a strong letter.
Strategy #6: Speed Things Up
Staying diligent about moving the transaction along and meeting deadlines gives the impression that you’re a serious buyer.
If you can’t or don’t want to waive the home inspection contingency, you can always shorten the time frame of when it will happen. You can also let the seller choose the closing date or try to stay on track to the one in the initial offer.
This makes things convenient for the seller when you buy a house. And everyone benefits.
Strategy #7: Set Aside the Financial Contingency
As mentioned, there are times when mortgage loans fall through. This hurts sellers, but a buyer willing to forego their financial contingency will compensate the seller for wasted time. This is another method for attracting a seller as it will reduce their risk and only applies when your end of the deal falters.
A financial contingency clause usually requires the “earnest money” check held in escrow for the down payment of the house loan to be returned to the buyer if they cannot get financing. However, a buyer can choose to grant this money to the seller instead, and it is typically 1-5% of the initial asking price.
Sounds risky? It doesn’t need to be. If you already know your financing will be approved, then you risk nothing and simply put the seller at ease. Just the use of a large earnest money deposit can show your strength over other buyers.
Forming the Right Bidding Strategy as You Buy a House
Using all of these strategies at once is likely not possible, nor is it needed. Now that you know what you can do to stand out as a buyer, use only what best applies to your situation and leverage it as best you can. The considerations below can help you determine what the right strategy is for you.
Think of Your Financial Capabilities
What are you honestly financially capable of? If you don’t have enough money to outbid other buyers, focus on leveraging the offer letter and how you can speed up the closing schedule.
Know Some Essential Local Practices
Learn the regulations, rules, and practices in the local area (though a real estate expert will have this covered). The more familiar you are with the locale, the better you also appear to the seller, no matter how financially capable you are.
Communicate Closely with a Seasoned Realtor
First, you should find the best Realtor to help you buy a property. And second, you must keep close communication with your agent when you’re hopping in a bidding war. They’d help you prepare accordingly, choose strategies that are suitable for you, and guide you throughout the process.
Beaten? Don’t Cut Ties with the Seller Immediately!
If someone outbids you, keep an open line of communication with the seller in case the winning buyer ends up unable to secure the property. This could happen for a number of reasons and you want to be the next buyer they think of if their house goes back on the market. Continue searching for other properties as you wait.
Keep These Bidding Strategies in Mind When You Buy a House Today!
Getting caught in a bidding war is a demanding process for any home buyer, but the right strategy will land your dream house. Of course, be sure to keep a dependable realtor at your side along the way!