Wondering how to win a bidding war on a house? You’re in the right place.
Let’s say you’re a first-time homebuyer who’s been looking for a dream home and you’ve finally found it after attending an open house. Congratulations!
Unfortunately, once you make a bid, you discover another potential buyer has also submitted one. In the blink of an eye, you find yourself in a real estate bidding war.
Many buyers have found themselves in this situation due to the housing market trends over the past year. Demand for housing has far outpaced supply, creating a seller’s market where many homes sell above asking price and many buyers make cash offers. That’s why most homes end up in bidding wars.
Yet, even with all the obstacles that may come your way, it’s still possible to get your best offer accepted despite other buyers bidding on the same home. You can win a bidding war on a house by making your offer stand out in today’s real estate market by implementing a few strategies.
1. Have your pre-approval letter in hand
Getting a mortgage preapproval from a lender before you begin home shopping is possible if you qualify. It is important to understand the difference between prequalification and preapproval. Often, prequalification is based on self-reported information about your personal finances and your income.
By contrast, a preapproval is based on your W-2s, bank statements, credit score, and other official documentation. This approval of your finances is just a first step; underwriting, which is a more comprehensive vetting process to determine your mortgage rates and how much you can borrow will still be required before you can close on your home loan.
If you’re pre-approved and are going up against bidders who aren’t, sellers may be more interested in working with you, even if your purchase price offer is slightly lower.
2. Be negotiable with contingencies
In home purchase contracts, contingencies allow buyers to back out of the sale if certain conditions aren’t met. However, you’ll want to be careful when using them during a bidding war — even if your bid is over the list price.
Don’t add too many conditions or demands to your offer. In order to be competitive, you might want to forget about any home inspection contingencies. While you certainly want to inspect the home to make sure it’s in good shape after you put down an earnest money deposit and have a tentative deal, you shouldn’t expect that the seller wants to cover fixes.
3. Use an escalation clause
An escalation clause is a clause that allows you to increase your offer’s price can ensure that you win the house without overpaying.
If there’s a bidding war, an escalation clause enables the buyer to increase their offer up to a certain point. The escalation clause specifies that the buyer will pay a certain amount for a home, but if the seller receives another offer letter from a competing homebuyer, the buyer will raise their highest offer by a certain amount.
Let’s say you find yourself in a bidding war for a home in upstate New York that costs $200,000. You make an offer of $150,000 with an escalation clause stating you will outbid any competing offer by $5,000 up to $200,000. As soon as another buyer makes a $150,000 offer, your offer will automatically be increased to $155,000. In contrast, if someone later offers $200,500, you’d lose the bidding war.
With escalation clauses, you can compete in bidding wars without having to worry constantly about being outbid. You can determine ahead of time what you’re comfortable with and make sure you don’t pay more than you have to in order to beat your competition. The most important thing is to keep in mind that not all homeowners are willing to accept offers with escalation clauses, but you should certainly try.
4. Write a personal letter
Adding a human touch to your offer price may convince the seller to accept it over another, even if it is not the highest one. These are sometimes called buyer “love letters” and often include an explanation of why they’re passionate about buying the home.
It’s common to use love letters to win a home sale in a competitive housing market. If a seller feels an emotional connection to their property, knowing the person they sell it to will take good care of it could make the deal go your way.
You should, however, be very cautious when writing a personal letter. In your letter, revealing personal information could have a negative impact on fair housing if it influences the seller’s decision. In fact, the National Association of Realtors forbids Realtors acting as buyer’s agents from delivering such letters to sellers.
5. Work with an experienced real estate agent
Working with a real estate agent to help you win your bidding war is a smart move. They have the experience and skills necessary to help you succeed. Additionally, they have market knowledge, which is crucial when it comes to determining a home’s fair market value.
When bidding wars happen, buyers are prone to making risky financial decisions. When you hire an agent, you can rest assured that you will not offer more than the house is worth or more than you can afford. Throughout the process, your agent will remain level-headed and ensure that all decisions, including when to schedule the closing date, are made for your benefit.
You can get crucial advice from an agent, — such as whether you should waive a contingency — and they’ll ensure that the seller and listing agent aren’t taking advantage of you. Through their connections within the industry, they may even be able to find out what your competition is offering.
The best part is that agents are paid out of the sales price of the home. For buyers, representation is free.
6. Be flexible on the move-in date
Homebuyers who are new to the market and those who have already sold their previous home might be able to negotiate with the sellers about their move-in date.
When a seller is concerned about potential delays for a new home, they may request more time.
If this is the case, they could go through the closing and then rent the house back from you for a few weeks or months. It may be more valuable to have this flexibility than to submit a higher bid for the property.
7. Increase your down payment
Increasing how much you’re putting down on a home can be extremely helpful if you’re up against another buyer. In the event that a bidding war takes place and the price exceeds the appraisal value, a higher down payment will reduce the amount the bank will need to lend.
Be sure to back up your claim with financial proof in addition to a verbal promise to increase your down payment. You can demonstrate your financial readiness by presenting documents such as pay stubs, tax forms, and your 401(k) balance.
The bottom line
In today’s competitive, fast-paced real estate market, there are no guarantees. But that doesn’t mean you should sit back and wait. Instead, take control of your fate and ensure that your offer is as aggressive and attractive as possible. With the right approach, you’ll be in your dream home before you know it.