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The process of buying a home can differ depending on the market conditions. In a buyer’s market, you might be able to get a home below the asking price, and there may even be seller’s concessions. You’re more likely to get into a bidding war in a seller’s market.
A bidding war is defined as two or more parties repeatedly outbidding each other for a purchase. The classic example is buyers bidding against each other at an auction, raising their card for higher and higher prices as the auctioneer yells, “Going once, going twice.”
It works a bit differently in real estate, but the underlying principle is the same. Multiple parties bid on a house and drive the price higher. We’ll go over how to prepare for a bidding war and strategies for winning one.
How Does a Bidding War Work in Real Estate?
In real estate, a bidding war can occur when multiple buyers compete for the same property. The difference between a bidding war and a property receiving multiple offers is if buyers have the opportunity to submit increased offers.
Bidding wars tend to happen in markets where there’s low inventory. Because there aren’t many houses, when a good one becomes available, there’s more competition for it.
How do you know if a house will start a bidding war?
You can’t know with 100% certainty whether a house will get multiple offers. But if you know the market, you can get a sense of when a bidding war might happen.
A common tactic some listing agents use is to purposely underprice a house in the listing. This generates excitement and makes it more likely to get multiple offers.
One thing you can do as a buyer is to find out if there’s a deadline to submit offers. If a house becomes available Thursday afternoon and the deadline is set for that weekend, that’s a pretty good indicator you’ll have to outbid other offers to get the house.
How To Prepare for a Bidding War
Preparation is key to winning any competition. To give yourself the best chance of winning a bidding war, there are steps you should take before you’re even in a position to submit an offer.
The importance of a great real estate agent can’t be overstated. They’ll advise you on the market and what your offer needs to include to be competitive. Their experience in your corner can make all the difference in hot markets.
The bigger your down payment, the smaller your loan will be and the less you’ll owe in monthly payments. Aside from those perks, sellers also look at your down payment as part of the offer. A larger down payment is more appealing because, in their eyes, it makes it more likely the deal will go through.
Getting preapproved strengthens any offer you make because it shows that you’re a financially credible buyer. You can also submit offers quickly and if you do win the property, the underwriting process will be streamlined.
Ways To Win a Bidding War on a House
Getting excited about a property, while knowing there are competing buyers eyeing the same one is a disconcerting feeling. Here are some strategies to make sure your offer stands out from the rest.
1. Make a cash offer
Cash is king. If you can make a cash offer, it’s one of the best things you can do to strengthen your chances.
This isn’t an actionable tip for most people, but the point still stands. With a cash offer, the seller doesn’t have to worry about your financing, there’s also potentially no need to worry about what the house appraises for and you can close faster than with a mortgage.
While cash might be the strongest type of offer, don’t lose heart if you can’t afford to do that. The other tips on this list can help you compete even in the hottest markets.
2. Make a higher offer
If you know you’ll be competing against cash offers, one thing you can do is offer above asking. At the end of the day, the seller doesn’t get more money from taking a cash offer, so the overall price can move the needle.
This is where knowing the market and leaning on your real estate agent will be crucial.
3. Make a large due diligence payment
Due diligence is money the buyer gives the seller to compensate them for taking their house off the market. It’s non-refundable, and the seller gets to keep the money even if the deal falls through. The seller also gets those funds immediately if the offer is accepted.
The good news for the buyer is that the due diligence fee gets applied to the sale of the home if the deal goes through.
In ultra-competitive markets, a high due diligence has become a negotiating tactic. A strong due diligence shows the seller that you’re serious about the offer and likely won’t walk away due to appraisal or inspection issues.
It’s common to see due diligences of $10,000 or higher in competitive markets. But be warned: if the home inspection reveals major issues with the home, you’ll either need to proceed with the sale anyway or lose your entire due diligence payment.
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4. Include an escalation clause
The name of the game is to get the home you want for as little as possible. That might mean making an offer that’s less than your maximum budget. Adding an escalation clause to your offer means you’re willing to increase your bid if someone else submits a higher one.
With an escalation clause, you need to specify how much you’ll spend above other bids and what your cap is.
For example, say you submit a $325,000 offer with an escalation clause. Your escalation clause states you’ll outbid any competing offer by $7,000 up to $400,000.
If another buyer offers $333,000 for the house, your offer automatically ups to $340,000.
However, if the other buyer offers $401,000, you’ll no longer be obligated by your purchase agreement because the offer exceeds your limit.
Setting a limit with your escalation clause can be a great way to stop yourself from getting caught up in the heat of the bidding process and making an emotional decision.
5. Be flexible on the closing date
Some sellers want to close on a deal as quickly as possible. Others might need to rent back the home for a few months while they sort out their next living situation.
Being amenable to closing when the seller wants to could be a competitive advantage, especially if other buyers have limitations on when they can close.
6. Waive all contingencies
Waiving contingencies is risky for the buyer, but it does show the seller you’re serious about the deal and streamlines the closing process. Waiving the appraisal contingency and inspection contingency are the two that tend to have the most impact in the eyes of the seller.
Be sure to consult with your real estate agent so you understand the risk you’re taking on and how it will affect you should you win the bid.
Should You Enter a Bidding War?
The cons of entering a bidding war are fairly straightforward. As the buyer, you’ll likely spend more for the property and may have to take on more risk.
Before stepping into the fray (or during it), here are some questions to help you decide if you should be competing for the property in the first place.
- What’s the market doing? Is inventory low or are there plenty of houses available? If you find yourself in a situation with low inventory, you might be facing a bidding war on any prospective property. Alternatively, if there are plenty of houses, it might be best to let a house go.
- What is the property’s true value? Winning a bid can feel like a short-term victory once the first mortgage payment comes due. If you have to significantly overpay to get the property, that decision will continue to impact you throughout the life of your mortgage and when (or if) you have to sell your home.
- What is your risk tolerance? Are you willing to put down a large due diligence or waive an inspection? Some of the tactics that make your offer more appealing to sellers will burden you with more risk. Decide beforehand how much you’re willing to take on.
Final Thoughts on Bidding Wars
Depending on your market, you may or may not have to compete in a bidding war. If you find yourself in a hot market, it’s crucial to be well-prepared and strategic. Don’t be afraid to lean on real estate professionals, like your agent or mortgage lender, for advice.
The Short Version
- In a bidding war, multiple parties bid on the same property. Often, buyers keep upping their bids, driving the home to sell above the asking price
- You can prepare for a bidding war by finding a great real estate agent, saving up for a large down payment and getting preapproved
- Cash offers are considered the strongest. But you can compete with them by offering above asking, putting down a large due diligence and waiving contingencies