Bidding Wars: What Home Buyers And Sellers Need To Know

Whether you’re a home buyer or a seller, everyone wants to get the best possible price. As a seller, that might mean getting the highest dollar amount and best terms for your home, which makes a bidding war appealing.

When buying a house, however, being involved in a bidding war is a disadvantage. A buyer may have a dream home they’re looking to purchase, and they don’t want others driving up the price.

Continue reading this article to learn about how to win a real estate bidding war as a buyer, and how to start one as a seller.

What Is A Bidding War?

A bidding war is when multiple buyers compete by making offers on the same property. Each buyer will make a more attractive offer in response to the last; hoping to have their offer accepted and win the home. A bidding war often drives up the home’s price beyond what it was listed for.

Bidding wars are more likely to occur during hot seller’s markets when there’s less inventory for buyers to choose from. The quality of the property, 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, you don’t want others 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.

Here are some specific tips for winning a real estate bidding war.

1. Make An All-Cash Offer

If you have enough cash on hand, you can make an all-cash offer to increase your chances of being the winning buyer.

Financing is the most common reason residential real estate transactions fall through, especially during bidding wars. When appraisals come back lower than the offer price, buyers often find themselves in trouble. Lenders won’t give buyers more money than the house is appraised for. So buyers have to make up the difference, get the seller to agree to a lower price or pull out of the deal.

If you don’t need to obtain a mortgage to purchase the house, your all-cash offer will immediately stand out. Because it’s a safer bet, the seller is much more likely to choose it. It’s common for sellers to choose all-cash offers over higher offers for this very reason. Simply attach proof of funds to show the seller you have the cash to do the deal.

If you can pay in cash, you should consider it – you can always get delayed financing after you close.

2. Waive All Contingencies

Sellers also like to see clean, no-contingency offers. A clean offer means a buyer has agreed to waive all contingencies. This makes the offer safer for the seller but riskier for the buyer.

A contingency is a stipulation in an offer that says the deal will only close if specific conditions are met. For example, a buyer may include a home sale contingency if their ability to buy the house depends on selling their current home.

Waiving all contingencies will show the seller you plan to purchase the house regardless of what happens. The seller will see your clean offer as a safe bet. That’s because you’ve already agreed to let them keep your earnest money if the deal falls through.

3. Make A High Earnest Money Deposit

The earnest money deposit is a crucial step in showing you’re serious about purchasing the house. The deposit amount 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 is accepted or the purchase agreement is signed. So if you’re competing with multiple offers, inform the seller that you’re willing to make a higher deposit when you submit your offer.

4. Include An Escalation Clause

An escalation clause enables the buyer to increase their offer up to a certain point in the event of a bidding war. The escalation clause says 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’re in a bidding war for a home you think is worth $500,000. You make an offer of $450,000 but include an escalation clause that states you’ll outbid any competing offer by $5,000 – with a ceiling of $500,000. If another buyer makes an offer of $455,000, your offer will automatically increase to $460,000. However, if someone later offers $500,500, which is over your specified cap, your offer won’t increase.

Escalation clauses 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. They also ensure you’re not paying more than you need to beat out the competition. 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, 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 housing 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. An agent can help you avoid offering more than the house is worth or more than you can afford. Your agent will approach the deal with a cool head and ensure all decisions made are in your best interests.

The only question should be how you find a good agent, and Rocket Homes Real Estate LLC can help with that. Rocket Homes^SM works to match buyers with highly rated agents in their area.

How To Start A Bidding War As A Seller

As a seller, there are certain strategies you can use to start a bidding war. These strategies must be used along with other typical selling steps, like staging rooms, getting professional photographs and hosting open houses.

Now, let’s take a look at some more ways sellers can start bidding wars, especially in a seller’s market.

1. Use A Listing Agent

If you really want to start a bidding war on your home, a listing agent is a must.

Some sellers don’t love the idea that agents typically walk away with 3% – 6% of the purchase price. However, seasoned brokers and REALTORS^® have the market knowledge and access to the multiple listing service (MLS). They also have connections within the industry and the experience necessary to get multiple buyers to make serious offers.

Therefore, if you want to start a bidding war, your first step should be to hire an agent. With for sale by owner (FSBO) homes, you’ll be unlikely to achieve as much exposure on the market.

2. Price Your Home Just Below Market Value

Before listing your home, an agent will run a comparative market analysis to determine the home’s fair market value. Typically, the agent will suggest 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 worth.

Pricing your home 5% – 10% below the price of comparable homes will get buyers’ attention. When buyers feel they’re getting a good deal, they’re more likely to put in an offer.

3. Begin Marketing Your Home Prior To Listing

In order to start a bidding war, you must have quite a few interested buyers ready to make serious offers around the same time. By marketing your home prior to listing it, you can drum up interest before you’ve shown the property.

This practice isn’t allowed in all states. But it can be beneficial to provide sneak previews of the property when permitted. Your agent might inform their followers on social media, send out email blasts to their contacts or call specific agents or customers they believe may be interested. This can generate more buzz and make a bidding war more likely.

4. Establish A Deadline

To persuade buyers who’ve been on the fence about making an offer, establish a deadline for all offers. This sense of urgency can lead buyers to be 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. Instead of countering any offers, you’ll then have the opportunity to choose the buyer who offers the highest price and best terms.

But you should be cautious about going this route. Before you set a deadline, make sure you’ve had enough interest in the property to warrant such a bold move. You don’t want to set a deadline only to get zero offers. Discuss this option with your real estate agent to help you decide if it’s wise. It usually isn’t if you haven’t already received a few offers.

FAQs About Real Estate Bidding Wars

Let’s go over some common questions about bidding wars 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 I make a backup offer if I lose 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 might accept the backup offer instead of putting the home back on the market.

How do I approach a bidding war as a first-time home buyer?

Bidding wars can be challenging to navigate, especially if you’re a first-time home buyer. Do your research so you have a clear understanding of the process, the market and the home you’re interested in purchasing. First-time buyers should work with a buyer’s agent they trust, and carefully listen to their advice.

When should I walk away from a bidding war?

You should walk away from a bidding war if you’re overpaying for a house. Your agent can steer you away from making an offer that exceeds fair market value or your home buying budget.

Do sellers always pick the highest offer in a bidding war?

Many sellers look to accept the highest and best offer. However, some consider other factors that make the sale favorable for them. Some might pick an all-cash offer that isn’t the highest, but it’s the most convenient. Others might choose an offer that’s flexible so they have more time to find a new home of their own. Or a seller might lean toward a buyer who waived all contingencies in hopes of a quick deal.

The Bottom Line: House Bidding Wars Create Healthy Competition

Bidding wars have grown increasingly common in recent years due to the state of the seller’s market. 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 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, avoid offering a price way over your budget or terms you can’t possibly meet.

Looking to begin your home buying journey? Start the approval process today with Rocket Mortgage^®.