Table of Contents
- Bidding wars explained
- Strategies for winning a bidding war
- Offer the most dollars
- Avoid government loans and increase your down payment
- Use cash
- Waive contingencies
- Throw in an escalation clause
- Increase your earnest money deposit and waive any refund
- Compose a letter
- Accommodate the seller
- When is engaging in a bidding war worth it versus not worth it?
- What happens if you lose a bidding war
When two or more buyers compete for the same home for sale, a bidding war can erupt, resulting in multiple offers. Winning a bidding war can be difficult unless you are ready to raise your price, make concessions and compromises as a buyer, and act quickly.
Learn what’s involved in a bidding war, the best tactics for emerging victorious in a bidding war, what happens if your bid loses, when it’s worthwhile to participate in a bidding war, and when it’s best to walk away.
Bidding wars explained
A bidding war occurs when two or more prospective purchasers submit competing offers for the same listed property at the same time.
“This can occur when a home is underpriced or when there is very limited inventory for home buyers,” notes Robert Taylor, owner of The Real Estate Solutions Guy. “They often happen in first-time home buyer neighborhoods, such as areas like Sacramento where inventory is low and almost any home that is in fair condition and within a certain price range will have multiple offers.”
A bidding war typically involves multiple rounds of bidding, with the home usually selling for more than its asking price. Bidding wars don’t only involve paying more; often, a buyer will agree to waive certain contingencies, pay with cash, and make other compromises to impress a seller and outdo a rival for the same home.
“Typically, a bidding war deadline will be set and all interested parties will have until that time to submit their highest and best offer,” says Adie Kriegstein, a licensed real estate salesperson in New York City. “Once this occurs, the seller and their agent will examine all the bids and usually decide on a single buyer party to move forward with.”
Bidding wars aren’t as common today as in recent years, but they occur a lot more often than you might think. According to Redfin’s most recent data, the bidding war rate was 44.6% in August, based on home offers written by Redfin agents that faced competition on a seasonally adjusted basis that month.
That represents the lowest bidding-war rate since the start of the pandemic and a decrease from 63.5% one year earlier, marking the seventh consecutive monthly decline. The typical residence in a bidding war garnered 3.2 offers in August versus 3.5 offers in July and 5 offers a year earlier.
Strategies for winning a bidding war
If you are determined to own a particular home, especially in a competitive market, be prepared to fight hard for that property and participate, if necessary, in a bidding war. Here are several top or recommended ways to win.
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Offer the most dollars
“Making the highest offer is not a guarantee that you will win a bidding war, but it’s definitely a prerequisite,” says Martin Orefice, CEO of Rent To Own Labs. “Unless a buyer can offer something highly valuable, like agreeing to close on short notice with an all-cash offer, sellers will almost always choose the highest bid and make distinctions between those bids based on things like waived contingencies and other factors.”
Indeed, you stand the best chance of vanquishing your competitors if you pledge the most cash. You can do this in increments, such as first offering $5,000 above the list price and then seeing if another buyer tops that, in which case you can escalate your bid amount.
But you can also avoid further escalation entirely by making a generous first offer well above the asking price.
Avoid government loans and increase your down payment
Sellers are often less inclined to choose a buyer preapproved for government-backed financing like an FHA loan, USDA loan, or VA loan. Many of these loans require zero to 3.5% down and are at greater risk of not closing or taking longer to close than conventional loans that often require 20% down.
The more money you put down, the less risky of a prospect you appear.
Use cash
Better yet, avoid financing altogether and pay in cash if you can afford it. That means the transaction can close much more quickly without anyone having to worry about loan approval.
“Cash is always the best offer. It eliminates appraisal and bank contingencies and means you can shorten your inspection and escrow to allow for a faster closing,” suggests Taylor.
“If you lack the full funds, consider asking a family member or friend to lend the remainder of the money you need and protect them with a deed of trust or a mortgage to your home so that they’re safeguarded if you have financial trouble. Have your cash readily available in your local bank account to speed up the process.”
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Waive contingencies
Want to really wow that seller? Consider waiving the appraisal contingency.
If you believe the home is not likely to appraise for its list price value, and you can afford to pay the difference between the appraised price and the purchase price, waving this contingency can make your offer strongly stand out.
Another way to incentivize the seller to say yes is to waive a professional home inspection contingency. That can relieve a lot of pressure on a seller who may worry about defects that could be uncovered.
“You want to make your deal as clean and easy as possible so that there’s no hesitation by the seller. Imagine the seller gets two identical price offers. If your offer includes the best terms with no contingencies, for example, they’re more likely to choose you,” says Nancy Alperin, president/CEO of Maxwell Realty Company.
However, Bruce Ailion, a real estate attorney and Realtor, doesn’t recommend waiving a professional home inspection, as you will have no recourse if you later discover flaws or defects, which could result in significant buyer remorse.
“I would instead prefer that you have the home inspected before making your offer. Yes, you could lose money if you conduct an inspection and ultimately lose out on the home, but it’s better than getting stuck with the house that requires a $10,000 repair you didn’t know about,” Ailion cautions.
Throw in an escalation clause
An escalation clause involves terms written in your purchase offer that increase your offer price automatically in the event someone offers more than you.
“Let’s say your escalation clause states that the purchase price will be $1,000 more than the highest verifiable written offer received by the seller up to a maximum of $500,000, for example,” explains Taylor.
“In this case, if you were to write an offer for $450,000 and were competing against offers of $470,000, your escalation clause would automatically increase your offer to $471,000 without any back-and-forth between you and the seller. Here, while you may be willing to pay more, you are not blindly paying $500,000 for the home.”
Increase your earnest money deposit and waive any refund
“Cash offers with a significant deposit will always garner the attention of a seller’s agent. Your earnest money deposit tells the agent you are serious about the home. You can sweeten your offer if you make your earnest money deposit non-refundable in the event you cancel,” recommends Taylor.
Compose a letter
Attempt to appeal to the seller on a personal level by writing a well-composed letter that, for example, states why you love their home and any unique circ*mstances motivating you to purchase.
“Submitting a letter is a simple way to give your offer a little bit of tie-breaking power,” Orefice continues.
“If the seller chooses between two very similar offers, their decision may boil down to which buyer is more appealing to them on a personal level. That’s where an offer letter can make a big difference, and it won’t cost you anything compared to other bidding war strategies.”
Accommodate the seller
Try to make things as easy for the seller as possible to sway their decision. For instance, shorten the timeline to closing; let the seller know that you are willing to close quickly, such as within two to three weeks instead of longer.
“Also, if you learn that the seller prefers a delayed closing, it would be in your interest to consider mentioning this in your offer letter,” suggests Kriegstein.
Additionally, offer a leaseback option in case the seller needs more time to move out.
“A seller may have a lot of stuff and nowhere to go. Offering them a longer possession of the property after closing can present a great value,” Ailion says. “Remember that understanding what motivates the seller is the key to success.”
When is engaging in a bidding war worth it versus not worth it?
Participating in a bidding war may be worth it if you have fallen in love with a home and it checks off the most boxes on your list.
“In a market with tight inventory, bidding wars often become the norm, so embrace them and figure out a strategy with your agent to ensure that you win, if you are determined to land that house,” advises Kriegstein.
Orefice agrees.
“If there is some daylight between the asking price and your budget ceiling and you really love the house you are considering,” he says, “a bidding war is a good way to get a home you are happy with and get on with your life.”
But it’s crucial to set a price ceiling long before you end up in a bidding war.
“Ultimately, you can only afford a mortgage that’s so big and you can only swing so much of a down payment. If a bidding war is going to push you beyond these limits, it’s time to step away,” recommends Orefice.
It’s best to back out of a bidding war if you don’t stand a financial chance or if you aren’t prepared or comfortable to do what’s needed to obtain the property.
“If you are questioning at all whether the home is worth it, I would advise not moving ahead because you want to be sure it is what you absolutely desire,” Kriegstein adds.
What happens if you lose a bidding war
If another buyer ultimately succeeds in claiming that home, don’t sweat it. Learn from the experience and move on, the experts agree.
“Sometimes, buyers have to lose out a few times in a bidding war to fully understand the process and trust their agent. It’s unfortunate, but it often occurs,” says Kriegstein.
Ailion seconds that sentiment.
“Remember that it’s only a house. It’s never a good idea to feel you must have this particular house and only this house, which is a recipe for paying too much and regretting it later,” he adds.
Taylor’s advice? Don’t get too emotionally attached too early or you’ll pay too much.
“If you make several offers but don’t get your dream home, you can get very discouraged. Your emotions can cause you to ignore important factors and repairs that you might have later regretted,” he says.
“Be careful about just loving a house that you are willing to do anything to buy. In the meantime, understand that you might have to kiss a lot of frogs before you find your prince.”
