The housing market in many regions of America has been a seller’s market for well over a year now. Homes nobody considered “hot property” just a few years ago are now being sold in bidding wars in the current housing market. Interestingly, the COVID-19 pandemic has only contributed to this frantic seller’s market.
So, if you are a buyer, how do you win a bidding war?
Watch our video below to find out how to win a bidding way even in a hot real estate market:
Mashvisor has 13 tips to help you win a bidding war. Not all of the 13 tips below will work for all scenarios, but in many cases, they will help you get your real estate offer accepted. If you are a seller, knowing these strategies can also help on your side of the negotiations. I’ve both bought and sold properties in the past 18 months that resulted in bidding wars. Throughout the article, I will interject some first-hand observations on how a bidding war can be managed.
The very first aspect of winning a bidding war is to define what win means. One thing that winning is not is paying too much for a property. Sure, you can offer a sky-high amount beyond what others will and take ownership of that hot property, but have you really won?
Like any business endeavor, knowledge is power. If you are interested in a property, dig deeply. Know that property’s true assessed market value and how much you are willing to pay based on return on investment analysis. Before you start making offers, understand the home’s conditions and possible risks. Will it need rewiring? Will it need significant plumbing or HVAC updates in order to work for you? The only way you can truly win a bidding war is to pay a fair price that allows you to meet your financial objectives. So be sure you know what they are.
Ask If the Seller Will Accept a Bold Offer
One mistake I recently made on a property was to assume that if I met all of the seller’s goals, the seller would agree to sell me the home. To my surprise, I was mistaken. Despite offering above asking, in cash, with just one contingency, the seller opted to sit on my offer waiting for a better one.
I won’t ever make that mistake again. Do not be the bidding war “benchmark” offer from which the seller then bids up other offers. One way to avoid this is to ask the seller if they will accept an offer. It may seem silly, but you have nothing to lose. By asking what the seller truly wants, you may be enlightened.
It turned out that the seller I was dealing with was an older couple, and one of the two was seriously ill and headed towards a serious surgery that may or may not go well. The seller’s primary goal was to quickly sell the house with no loose ends. The seller did not have the luxury of a failed or delayed closing. The final sale price was secondary to their primary goal of a trouble-free closing.
So never be afraid to ask the seller what terms they are most concerned with. You may be surprised to find that they will answer you and make the bidding war less likely, to begin with.
Send a Personal Letter
Our above suggestion about asking a question is really just part of the information sharing one should engage in. In addition to asking, tell your story to the seller. I sold my primary residence this past summer after having lived in the home with my family for a quarter of a century. I had made significant updates to the property and I knew and loved the neighbors and neighborhood. In my heart, I hoped that the buyers would see these aspects of the home as valuable.
One of the 20 offers my agent received on the first day we listed the property came with personal communication. The seller told me in that letter that they were local and also loved the neighborhood. Their daughter in a nearby school system was having difficulty and she needed a fresh start in a new school. This personal offer letter made a big difference in how I viewed that offer. While I still complied with all fair housing laws in that transaction, I will say that the letter was hard for me to ignore. Tell your story to the seller, particularly if it is going to make an impact.
Rocket Mortgage advises its customers to use a personal letter, particularly if your offer is low. They suggest going so far as to explain your own financial situation. For all you know, the seller may relate to that situation.
According to the Wall Street Journal, a cash offer doubles your chances of winning a bidding war. If you can pay cash on a property that you know is likely to end up in a bidding war, find out if that is to your advantage. Communicate via the agents if necessary, but find out if the seller sees a cash sale as an advantage. I’ve paid cash for three properties. With two of those sales, my cash offer made a big impact and closed the deal. Those were distressed properties, and the banks didn’t want to deal with added contingencies. My cash offer sealed the deal both times.
However, on a recent second home purchase, cash had less of an advantage. It turned out that the other offers the seller received were also cash. So my offer of cash only put me in the running. It didn’t close the deal.
No Mortgage Contingency
One surprise our research turned up was that, according to the Wall Street Journal, dropping a mortgage contingency increased a buyer’s chances of winning a bidding war by 58%. That’s more than paying cash. It would be nice if we all had the luxury of buying a home without having a mortgage contingency, but it is not always possible. However, if it is possible, ask your seller if it matters to them. They will likely say it does.
If you have a backup plan if your pre-approved mortgage falls through, avoid a mortgage contingency. It only makes sellers worry that if they accept your offer, the deal will fall through later or be delayed. Just remember, if you can’t do the deal, you risk your deposit.
Offer a Large Deposit
One sure signal to a seller that a buyer is scraping by to make a deal is a weak down payment or deposit. If you are serious about buying a property, a large deposit does you no harm. Ask your realtor what the traditional deposit is given your circumstances and make your deposit stronger. It shows the seller that you are serious.
If you must have a mortgage contingency, at a minimum, be pre-approved. Work in advance with your lender to ensure that you have a letter ready saying you are pre-approved for a mortgage. If you end up in a bidding war, this can keep you in the game.
As a real estate investor, I usually have the properties I purchase inspected by a professional. However, having now seen how that process works, I have learned what they do and why. In some cases, I am now more confident in my own abilities to inspect a home. Also, many sellers will have the home inspected and provide a formal report of its condition based on that inspection. Finally, some houses are a hot mess. The seller discloses the many problems, and further inspections are unlikely to reveal more.
During a recent bidding war on a home I was selling, my realtor and I separated the offers into three piles. The pile titled “requires inspections” was not a pile we needed to turn to. We had too many great offers that did not require the hassle. Make it easy for your seller to say “yes” to your offer. Inspections make saying yes harder.
Do Your Homework Up-Front
When a bidding war starts, the seller’s mind is focused on accepting an offer. The seller is unlikely to be interested in answering a lot of questions about the property. That time has passed. If you want to ask questions, do it prior to making an offer on a house, and get moving. In this seller’s market, there is no time to delay. Getting all the info you require may be necessary on the first day of the listing.
Don’t Say “Final Offer”
When I was shopping for my first residence, I made a blunder that a more seasoned negotiator would have avoided. During a bidding war, I was dumb enough to tell the sellers that my updated offer was my “final offer.” Without any basis for doing so, I felt that this would somehow cause the seller to take special notice. They didn’t. The seller had other smarter bidders and they simply asked them if anyone could beat my “final offer.” My realtor was informed days later that the house had sold. When I asked why I was not given a chance to meet or beat other offers, the seller honestly replied, “Because you told us you had given us your final offer.” If you plan to make a final offer, keep that fact to yourself. It only hurts you to tell the seller when you are done negotiating.
Set Up a Personal Meeting or Call
Realtors do everything they can to keep buyers and sellers from meeting one another. After all, if the buyers and sellers can do a deal themselves, the realtor’s value is diminished.
Before I started in real estate, I was an on-the-road salesperson in the high tech industry. My job was to fly to a customer’s location and show them – in person – why the products and services that my company and I could provide were a good solution to the customer’s problems. It wasn’t long before I learned the power of an in-person conversation. Before and after the coronavirus, the human touch of a handshake and looking a person in the eye goes a very long way.
Find a way to meet the sellers. Here are two ways. First, when you know a showing is scheduled, show up 20 minutes early. You will very likely “accidentally” meet the sellers on their way out. Introduce yourself. Tell them you see the special value in the property they are selling. Let them know you are a serious buyer, not an amateur that will waste their time.
A second idea is a drive-by. Realtors hate drive-bys because they know deals can result from them! Stop in front of the house and stand out front taking pictures. When the seller comes out to ask you to leave, apologize and agree, but add your name and say that you are a serious buyer and you needed a few images to be sure you were making the right decision in preparing a cash offer and skipping the inspections. Add that you see the special value in the seller’s property. Are you starting to get the picture?
Use a Buyer’s Agent (Realtor)
In most traditional sales, a buyer’s agent is paid from the selling agent’s commission. These agents all know one another and usually play nice. Adding a team member on your side cannot hurt as long as you stay tuned in and involved. I have used a buyer’s agent on many occasions and in a few, I would not have gotten the property without them. A good realtor knows every “trick” in the book and they also know a lot about real estate bidding wars. Why not take free help? Just one note; A buyer’s agent may not be “free” in cases where the property is a short sale, pre-foreclosure sale, foreclosure sale, or auction. Best to always check.
Use an Escalation Clause (If Your Agent Recommends It)
We saved the topic of an escalation clause for last because it is a formal negotiation technique that usually requires a realtor or lawyer on the seller’s side. If you already know about escalation clauses and can use one without help, you could have written this story. In a nutshell, an escalation clause is part of a written offer that says you will match or beat any other formal written offer up to a pre-determined level. Nerdwallet ranks an escalation clause as its second-best tip for managing bidding wars in real estate. Of course, if three other bidders in the price war also have this clause, it gets a little silly. We suggest this works best in certain circumstances that your realtor will recognize.
How to Win a Bidding War – Highest Offer Always Wins, Right?
You may be surprised to find out that the highest purchase price offer does not always win a bidding war. In both cases, as a seller and as a buyer, the deal I was involved in did not get done with the highest price offer. As a seller, I prioritized a clean trouble-free closing. A higher offer from a buyer who needed to obtain a mortgage (wasn’t even pre-screened) and also wanted three different inspections went out the window. As a buyer, my offer was not the highest, but my realtor and I were able to communicate why I was the right buyer to help the seller with a quick closing. Your offer needs to be among the highest, but as our list above shows, a bidding war is not only based on price.
Mashvisor can be a big help in a bidding war. Our tools can help you analyze cash flow and rate of return quickly to let you know what your final offer can be. Mashvisor is also a great source of comparable properties and market trends so you know the true value of a property. It’s easy to get started with Mashvisor. Just click here.