Bidding War: How To Win One In A Real Estate Transaction
Carla Ayers14-Minute Read
November 15, 2022
Whether you’re a buyer or a seller, everyone wants to get the best possible price. As a seller, that means getting the highest dollar amount and best terms for your home, which makes a bidding war appealing.
For a buyer however, being involved in a bidding war is a disadvantage. A buyer may have a dream home they’re looking to score, and they don’t want others driving up the price of it.
Your ability to do well in your real estate transaction typically depends on what kind of market your local area is currently experiencing: a seller’s market or buyer’s market. A seller’s market occurs when the demand for housing exceeds the supply. A buyer’s market arises when there are a lot of homes listed but few interested buyers.
As a seller, you’ll ideally want to list your home during a seller’s market. In these conditions, the lower inventory forces buyers to compete against each other, making bidding wars far more common. As a buyer, your chances of getting a good deal are highly improbable when sellers have the upper hand, but there are ways you can beat out your competition.
Continue reading this article, to learn what a bidding war is, as well as the best tips for starting and winning one.
What Is A Bidding War?
A bidding war is a situation that arises when there are multiple buyers who are competing for the same property. Each buyer will make a more attractive offer, often driving up the price beyond what it was listed for, in hopes of winning the home.
Bidding wars are more likely to occur during hot seller’s markets when there is less inventory for buyers to choose from. The quality of the property, the desirability of its location and the strength of its school district can also increase the chances of a bidding war.
How To Win A Bidding War On A House As A Buyer
If you’re a buyer who’s found the ideal house, it can be terrifying to think that there are others who may try to buy it out from underneath you. But don’t worry, if you find yourself competing in a bidding war, there are certain strategies you can use to come out victorious.
However, for these strategies to work, you must make sure you’ve taken appropriate actions ahead of time to ensure you come across as a serious buyer. If you require financing to purchase the home, it’s advisable to get preapproved for a mortgage before you make an offer. Having a mortgage preapproval helps to show you’re serious about buying. You should also try to act as quickly as possible.
Now, here are some more specific tips for winning a bidding war in real estate.
1. Make An All-Cash Offer
When you’re trying to win a bidding war, you can offer more money for the home, or you can alter the terms to make them more favorable to the seller. If you’ve maxed out your budget and have enough cash on hand that you don’t need financing, making an all-cash offer is the best strategy you can use to increase your chances of walking away with the house.
The most common reason that residential real estate transactions fall through is financing, especially during bidding wars. When appraisals come back lower than the offer price, buyers often find themselves in trouble. Lenders will not give buyers more money than the house is appraised for, so buyers either have to make up the difference, get the seller to drop the asking price or pull out of the deal.
Therefore, if you don’t need to obtain a mortgage to purchase the house, your offer will immediately stand out as a safer bet, making the seller that much more likely to choose it. In fact, it’s not uncommon for sellers to choose all-cash offers over higher offers for this very reason. Simply attach proof of funds – in the form of a letter or bank statement – to show the seller you have the cash to do the deal.
So, if you can pay in cash, you should consider it – you can always get delayed financing after you close.
2. Waive All Contingencies
Just as sellers like all-cash offers, they also like to see clean, no-contingency offers. A clean offer is one in which a buyer has agreed to waive all contingencies, making the offer safer for the seller but quite a bit riskier for the buyer.
A contingency is a stipulation included in an offer that specifies that the deal will only close if specific conditions are met. For example, a buyer may include a home sale contingency if their ability to purchase the house is dependent on selling their current home.
When an offer is accepted, the buyer makes an earnest money deposit to demonstrate their seriousness. Typically, if the buyer pulls out of the deal, they must forfeit that money. However, if the buyer backs out because a condition stipulated in a contingency is not met, the buyer gets to keep their deposit and walk away without facing any consequences.
If you want to win a bidding war, waiving all contingencies will show the seller that you plan to purchase the house regardless of what happens. The seller will see your clean offer as a safe bet because if the deal doesn’t go through, you’ve already agreed to let the seller keep your earnest money.
3. Make A High Earnest Money Deposit
Clearly, the earnest money deposit is a crucial step in showing that you’re serious about purchasing the house. Although the amount of money included in the deposit differs from state to state, it’s typically around 5%, though it can range from 1% – 10%.
The more earnest money you offer, the more attractive your offer appears. However, you don’t deliver the money until after your offer has been accepted or the purchase agreement has been signed. Therefore, if you’re competing with multiple other offers, you must inform the seller that you’d like to make a higher earnest money deposit when you submit your offer.
4. Include An Escalation Clause
As mentioned, there are only two ways to win a bidding war, offering more money or better terms than the competition. If you’ve made the terms of your offer as lenient as your circumstances can bear, it’s time to think more seriously about your offer price. Including an escalation clause in your offer can be the perfect way to try to ensure you win the house without paying more than it’s worth.
An escalation clause is an article added to the offer that enables the buyer to increase their offer up to a certain point in the event of a bidding war. Basically, the escalation clause says that the buyer will pay $X for the home, but if the seller receives a higher competing offer, the buyer will increase their initial offer by $Y.
Let’s say you find yourself in a bidding war for a home that you think is worth $500,000. You decide to make an offer of $450,000 but include an escalation clause that states you will outbid any competing offer by $5,000 up to $500,000. If another buyer makes an offer of $445,000, your offer will automatically increase to $450,000. However, if someone later offers $500,500, which is over your specified cap, you’d lose the bidding war.
Escalation clauses are a great tool to use in bidding wars because they allow you to compete in a bidding war without constantly having to worry about being outbid. They enable you to determine what you’re comfortable with ahead of time and ensure that you’re not paying more than you need to beat out the competition. Keep in mind that not all sellers are willing to accept offers with escalation clauses, but it’s certainly worth a try.
5. Work With A Seasoned Real Estate Agent
If you’re serious about winning a bidding war, it would be foolish not to work with a seasoned real estate agent. Real estate agents have the experience and skills necessary to help you win that bidding war. They also have market knowledge, which is crucial in determining the fair market value of the home you’re interested in.
It’s common for buyers to get so competitive during bidding wars that they make risky financial decisions. By enlisting the services of an agent, you can feel confident that you won’t offer more than the house is worth or more than you can realistically afford to pay for it. Your agent will approach the deal with a cool head and ensure that all decisions made are in your best interest.
An agent will give you much-needed advice, like whether it’s wise to waive that contingency, and they’ll ensure that the seller and listing agent aren’t taking you for a ride. Based on their connections within the industry, they may even be able to find out information about the competition and the offers you’re up against.
Best of all, agents’ commissions are paid out of the asking price of the home, so representation is free for buyers. The only question should be how you find a good agent, and Rocket Homes Real Estate, LLC can help with that. Rocket HomesSM works to match buyers with highly rated agents in their area.
How Can I Start A Bidding War As A Seller?
As a seller, there are certain strategies that you can use to start a bidding war. However, these strategies must be used in conjunction with the typical actions sellers should take whenever selling their homes. These general practices include cleaning and organizing, staging rooms if the furniture is tired or bulky, including professional photographs in the listing and hosting open houses.
Now, let’s take a look at some of the more nuanced ways that sellers can start bidding wars on their properties. Just keep in mind that these strategies are usually only effective in areas that are experiencing a seller’s market.
1. Hire An Experienced Real Estate Agent
If you really want to start a bidding war on your home, a real estate agent is a must. While the other tips listed below are typically successful in achieving multiple offers, they’ll be challenging to pull off without a real estate agent.
While some sellers scoff at the idea that agents typically walk away with 3% – 6% of the purchase price, seasoned brokers and REALTORS® possess the market knowledge, access to the multiple listing service (MLS), connections within the industry and experience that are often necessary to get multiple buyers to make serious offers at the same time.
According to the National Association of REALTORS®, for sale by owner (FSBO) homes sold at a median of $200,000 in 2018. In comparison, the median price of homes sold by agents was $280,000. Therefore, sellers who enlisted the services of real estate agents grossed significantly more than FSBO sellers. Based on these statistics, those sellers made $63,200 more than FSBOs even after accounting for a 6% commission.
Therefore, if you want to start a bidding war, your first step should be to hire an agent. Without one, you’ll be unlikely to achieve nearly as much on the market regardless of whether you’re able to find multiple interested buyers.
2. Price Your Home Just Below Market Value
Before you put your home on the market, an experienced real estate agent will run a comparative market analysis to determine the fair market value of your property. Typically, the agent will then suggest that you list your home for that price. However, if you want to start a bidding war, it’s best to list your home just below what the property is thought to be worth.
Pricing your home just 5% – 10% below the price point of comparable homes will get buyers’ attention and motivate more of them to see it. When buyers feel that they’re getting a good deal, they’re more likely to put in an offer. And when buyers realize there are other offers on the table, they naturally become more competitive and thus willing to increase their offer to prevent themselves from losing.
3. Begin Marketing Your Home Prior To Listing
In order to start a bidding war, you must have quite a few interested buyers who are all ready to make serious offers around the same time. By marketing your home prior to listing it, you can drum up interest and get the ball rolling in that direction even before you’ve shown the property.
Although this practice is not allowed in all states, it can be extremely beneficial to provide sneak previews of the property by having your real estate agent inform their followers on social media, send out email blasts to their contacts or call specific agents or customers whom they believe may be interested.
Just as competition is a motivating force, so is withholding. If you show buyers a home that they’re not allowed to see for a while, they’re going to be far more preoccupied with seeing it. So, give your buyers a tease to make a bidding war more likely.
4. Establish A Deadline
To persuade buyers who’ve been on the fence about making an offer, you may want to establish a deadline for all offers. The sense of urgency that a deadline fosters can lead buyers to get more aggressive about the offers they make.
Once your agent sets a deadline, they can ask all interested buyers to submit their best and final offers. Then, instead of countering any of the offers you receive, you’ll have the opportunity to choose the one buyer who offers the highest price and best terms for your circumstances.
But you should be cautious about going this route. Before you set a deadline, you must make sure that you’ve had enough interest in the property to warrant such a bold move. You certainly don’t want to set a deadline only to find you don’t get any offers. Discussing this option with your real estate agent will help you decide if it’s advantageous. It usually isn’t if you haven’t already received a few offers.
House Bidding FAQs
Bidding wars can certainly be stressful, especially if you don’t have a clear understanding of what you’re getting into. Let’s go over some common questions, so you’re prepared for the road ahead.
When do bidding wars end?
Bidding wars come to a halt when the seller accepts an offer. Once both the seller and buyer have signed a sales contract, the listing will change from active to pending.
Should you make a backup offer if you lost a bidding war?
If you’re disappointed about losing the bidding war, you can submit a backup offer. This is a secondary offer made by the buyer in hopes that the existing offer will fall through. If a problem arises with the current deal, the seller will accept the backup offer instead of putting the home back on the market. Backup offers won’t hurt your prospects with other properties, either, so you may as well submit one.
What advice would you give to a first-time home buyer entering a bidding war?
Bidding wars can be challenging to navigate, especially if you’re a first-time home buyer. It’s vital to do your research so you have a clear understanding of the process, the market and the home you’re interested in purchasing.
Finding representation is the best way to ensure a smooth transaction. If you’re a first-time buyer – or any buyer – you should work with a buyer’s agent whom you trust, and carefully listen to their advice.
The Bottom Line: Bidding Wars In Real Estate Create Healthy Competition
Bidding wars have grown increasingly common in recent years due to the state of the seller’s market, so whether you’re a seller or a buyer, it’s important to know how to navigate them to have the best chance at success.
If you’re a seller hoping to receive multiple offers on your home, make sure that you don’t get too greedy. The last thing you want to do is alienate potential buyers to start a bidding war.
If you’re a buyer who’s trying to win a bidding war, make sure you don’t get too carried away. As a buyer, you need to make sure that you don’t get so caught up in the competition that you offer a price that’s way over your budget or terms that you can’t possibly meet.
Looking to begin your home buying journey or start pricing the home you’re selling? Check out homes for sale in your area.
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