Bidding Wars: 7 Tips for Winning
Battle-tested and bidding war approved
Consumers and real estate investors face greater competition today due to higher home prices and a tight housing inventory. Bidding wars are a common occurrence in the real estate market, with buyers competing to secure the property they desire. In this situation, competition between multiple buyers can often result in sales prices that exceed list prices. This is because each buyer wants to be the highest bidder and outbid their competition.
As more sales are financed, there are more potential buyers for any particular home-making a bidding war has more likely given that fewer homes are available. A report by the National Association of Realtors in November 2014 showed that all-cash sales dropped nationwide to 25% of all existing-home sales, which means that 75% were financed.
A bidding war moves to the high end
Many low-priced properties became the subject of bidding wars after the Great Recession, as cash-flush investors and hedge funds snapped up the best deals.
However, as inventory dwindled at lower price points, bidding wars broke out at higher price points, including homes worth millions of dollars.
Brandon Carey, a sales associate at Ascent Real Estate in San Diego, represented clients in bidding wars ranging from $350,000 homes in El Cajon to million-dollar mansions in La Jolla and Del Mar toward the end of 2014.
In addition to the limited inventory out there, Carey said “there are people seeking to purchase. Prequalified buyers are in the market now, and they are serious about buying. Offers are being written by the people I am working with. It’s about getting into a property.”
Be prepared for more searching and persistence
To find a property to invest in, serious, motivated buyers must consider all possible resources. Whether they are competing with other buyers on a multiple listing service for traditional listings, or they are tapping into websites like Auction.com, where they may be expected to compete in an online bid process.
Buying properties in a market like this requires intense searching and an ability to compete in multiple-offer situations with other buyers who may be just as qualified as you. The executive vice president of Auction.com, Rick Sharga, said that when other buyers quit, they have an advantage because they’ll keep submitting offers. One advantage of purchasing at an auction is that it is transparent, so there are no hidden multi-offer scenarios, and there aren’t long delays where you wonder if you have won.”
If you face multiple offers, how will you succeed? If you’re determined to have the property, your decision will be based on your level of desire.
According to Scott Mednick, an agent with Marblehead Realty in San Clemente, Calif., buyers must put on their best face, make the best offer, and have everything in order.
As a buyer, how can you ensure that your offer looks attractive to the seller if you want to win the bidding war?
1. Funding
When it comes to purchasing a home, buyers in highly competitive markets may end up in bidding wars. In situations like these, buyers who offer all cash tend to have an advantage over those who need to obtain financing. Cash offers are attractive to sellers because they can be finalized quickly due to the lack of a loan approval process. Furthermore, cash offers often to avoid issues with appraised value and other contingencies that could potentially impede the sale.
Due to the growing number of buyers financing their purchases, the smart buyer should obtain pre-qualification before beginning the home search. It shows the seller that you are ready, willing, and able to deliver your offer when you come to the negotiation table with the pre-qualification letter in hand.
2. Make a strong offer
If there is a bidding war, the winner usually is the buyer who gives the seller the relief of not having to find another buyer later on by presenting a strong offer that reduces the chances of the deal falling out of escrow.
It is possible for a particular offer to stand out from the competition because of a variety of factors.
According to Mednick, brokers get clients to submit close to or at asking prices or offer their best and highest prices based on their budgets. The price of the house depends on how much you want it and what you’re willing to pay for it.”
3. An earnest money deposit or a larger down payment is recommended
When it comes to buying a new home, offers can be made more attractive with a larger down payment. Instead of offering the usual 10 to 20 percent, going above and beyond can make your offer stand out from the rest. Not only does this demonstrate to the seller that you are financially capable of purchasing the property, but it may also help reduce their risk by showing them that you are serious about owning the home.
Additionally, you can offer the seller more cash upfront as an earnest money deposit
4. Contingencies should be reduced or eliminated
During a bidding war, shortening or eliminating contingencies can also help you seal the deal. The sale of another property or the approval of a loan are common conditions of a real estate deal. Other conditions may include an appraisal to support the purchase price, or a building or termite inspection.
In order to make it as simple as possible for a seller to get out of under the property, you can eliminate these contingencies altogether or reduce their duration after the seller accepts the offer.
5. Provide a short or fast escrow period
In particular, if the seller is an investor, he or she may need to sell the property as soon as possible so that he or she can get started on another one. Ideally, sellers prefer buyers who can expedite escrow, since time is of the essence in real estate.
6. Prepare for counteroffers
A seller still has to decide whether to accept a particular offer among many that have been submitted and the one offering the highest price may not be the one accepted. It is still possible for a seller to make a counteroffer if they like a particular offer for various reasons, but want to further refine it.
According to Carey, “the seller is looking at the overall net he or she wants. In the event a seller counters because he wants a certain price, but you wish to stay with your price, you can change the terms of the deal to offer a faster close or a faster sale, or to not ask the seller to pay for repairs such as termite damage.”
7. Personalize it
There is also the situation where the seller is undecided about which offer to accept after reviewing more than one offer submitted. If the property is really important to you, consider writing a personal letter to the seller.
Be sure to mention your reasons for wanting to purchase the seller’s property, whether it be for family reasons, proximity to your workplace, etc. To make your situation more personal to the seller, Carey suggests including pictures of your family, your children, and your dog.
“If the sellers live in the property and are emotionally attached to it, the letter of recommendation means more to them because they want it to go to a good family,” Carey explained. Another family who will take care of their home is what the sellers want.
In contrast, a personal letter is much less crucial if the seller is a bank or an investor who flips properties professionally.
“They want to make as much money as they can,” Carey said. It’s not their home.”
You might be better off looking for other investment properties instead.
At the end of the day, it is up to the seller to pick the winning bid if there are multiple offers. It’s all about offering the highest, the best price you can afford, making a larger deposit, minimizing contingencies, and submitting a personal letter to put your best foot forward.
If you follow these steps, you’ll at the very least have better chances of winning the bidding war, even if the package you submit doesn’t beat out competitors.