What To Do If You Enter A Real Estate Bidding War

What To Do If You Enter A Real Estate Bidding War

Buying a new home is one of the most exciting events in life. 

Many people view homeownership as an essential step in investing in their futures, building equity, and putting down roots. 

Unfortunately, the ongoing “hot” housing market is making the process more stressful than joyful for many prospective buyers.

Properties are selling faster than ever at extravagant prices, leaving bidders in a war over who can offer the sweetest deal. 

This article will explain what to do if you enter a real estate bidding war. We’ll show you the steps to take to make a winning offer and hopefully score your dream home.

We’ll go over:

  • What a real estate bidding war is
  • Why bidding wars are happening
  • How to strategize your bidding process
  • When to walk away from a real estate bid battle

What Is a Bidding War?

A bidding war is when multiple buyers make offers on a home simultaneously. 

These bidding competitions occur as potential buyers attempt to outbid one another or close on a house before anyone else can. As buyers bid higher and higher on a home, the price exceeds the original market value – often by tens of thousands of dollars.

Bidding battles are common and entirely expected in the current real estate market.

Bidding Wars in a Seller’s Market

The current real estate scene is a seller’s market, which means the power is in the hands of real estate agents and homeowners looking to sell.

A seller’s market arises when there are more interested buyers than available homes. The low inventory of marketable homes pushes buyers to put down ridiculously high offers.

Homes are selling for more than $100,000 over the asking price in some areas.

North Carolina resident Scott Hemingway bought a house in the Raleigh area in May 2022. In February, he began the house hunt after his apartment rent went up by nearly 30% in under two years. Like many other house buyers, Hemingway wanted to invest in a permanent property instead of paying exorbitant monthly rental fees.

Hemingway says he continuously had to adjust his price limits and must-have features throughout the real estate shopping process. “I was looking for homes at a certain price point but wasn’t finding any in good condition,” he says. “I ended up increasing my price limit for a house by $100,000.”

As home prices continue to skyrocket, the time they spend on the market plummets. According to a February 2022 report from the National Association of REALTORS®, 84% of home listings were on the market for under a month. That’s compared to 74% of homes the prior February.

“Even houses at my first price goal were getting scooped off the market sight unseen,” Hemingway recalls. “They were selling before the listing went live or anyone got to step foot on the property.”

As of February, 11% of buyers purchase homes based on virtual tours only. This statistic shows that homes are more desirable and scarce than ever before – a frustrating combination for first-time homebuyers seeking a painless bidding process.

As for homeowners, the current market is perfect for quickly listing and selling a property.

Austin Paul, a 27-year-old Indiana native, sold his first home last year. Paul put his Indianapolis property on the market in July 2021 and had 13 offers within a day. He sold the two-bedroom, one-bathroom home within three days and closed the deal just two weeks later.

“The market today won’t wait; you get an offer every couple of hours, which allows you to manipulate the bidding war,” Paul says. “People are desperate for homes – so as a seller, you can ask for what you want, and most buyers will deliver.”

How To Strategize Your Way Through a Bidding War

We spoke with a certified realtor and real homeowners to give you the scoop on home buying in 2022.

The following sections will explain essential strategies to consider during a bidding war. 

Prepare a Pre-Approval Letter

A mortgage pre-qualification and pre-approval are vital to the homebuying process.

A pre-qualification, or “pre-qual,” confirms a potential buyer’s creditworthiness and ability to pay off a loan. You can become pre-qualified by submitting a mortgage application to your lender. The lender will assess the information you provided, including your bank account information and credit score, and provide an estimate of how much money you can borrow. 

A mortgage pre-approval takes your pre-qualification to the next step. A pre-approval is confirmation from your bank that it will lend you a certain amount of money. 

The lender will provide this letter after verifying information such as:

  • Credit scores and copies of recent pay stubs
  • Bank account numbers and statements
  • W-2 statements and tax return paperwork
  • Your debt-to-income ratio
  • The mortgage and down payment amounts for the desired purchase

A pre-approval letter shows a seller that you’re serious about buying their home and can afford the given mortgage

REALTOR® Daniela Jewell says pre-approval is essential in the bidding process. “Some realtors won’t show homes until a buyer provides them with a pre-approval letter,” Jewell says. “Even more importantly, some sellers consider an offer incomplete or void if it’s submitted without a letter.”

Give Your Best Offer

Making a higher offer than competing bidders is an excellent way to increase your chances of getting a house. You can also make a higher down payment to better your likelihood of winning. 

However, sellers consider more factors than just price when selecting a winning applicant.

When selling his Indianapolis home, Paul looked for buyers providing the best combination of offers. “I was looking for inspections to be waived, appraisal gaps, and cash offers,” he says. “With today’s market, I wanted someone who would over-offer and allow me to close as quickly as possible.”

In this way, the highest offer isn’t always necessarily the best one.

Jewell says the cash is king mindset is often a winning factor in bid battles. 

Banks and lenders aren’t involved when a buyer pays for a home with cash. This simplifies and accelerates the process for the seller. If no lender is involved in the transaction, the house doesn’t need an appraisal, and the buyer pays for everything at once.

Making a cash offer will undoubtedly sweeten your offer to the seller. The only downside is that you, as the buyer, must have enough cash savings on hand for the house itself and closing costs.

If making a cash offer isn’t an option, you can still improve your offer with a due diligence fee or earnest money deposit. A due diligence fee is similar to a down payment in that it’s money you put toward a house before moving in.

You’ll make the payment directly to the seller to show them you’re a serious buyer. If the seller accepts your due diligence offer, they’ll take the house off the market and begin the closing process.

Before making a due diligence offer, the most important thing to consider is that these fees are non-refundable. If you decide to back out of the real estate contract for any reason, the seller gets to keep the due diligence money you paid.

Earnest money is similar to a due diligence fee, except it’s refundable. An earnest money offer solidifies your commitment to the offer and will go toward your home payments. However, you’ll get the fee back should you cancel the deal before closing.

Consider an Escalation Clause

An escalation clause is an addition to a buying contract that says the buyer will increase their offer price above a higher offer should one come in.

At face value, these clauses are a tool interested buyers can leverage to sweeten an offer. However, they’re not always a good idea.

Here’s an example of how escalation clauses work.

Say you offer $300,000 on a home. You add an escalation clause to your application stating that your final sale price will be $1,500 higher than any other offer. This tells the buyer that you’ll go $1,500 above that amount no matter what someone else offers. 

If another buyer makes an astronomical offer, you’ll be stuck paying $1,500 more.

You could combat this scenario by including a maximum offer value in your escalation clause – but then, you’ve told the seller your price cap. With your maximum amount in mind, the seller could then counteroffer using that price or use it to raise other offers in a multiple-bid situation.

In either case, you’ll pay far more than you anticipated for the property.

If getting a particular home is important to you, you can try adding an escalation clause to increase your chances of winning. 

However, know that some listing agents aren’t comfortable with these clauses and won’t consider them in the selection process. Just know that if you can add a clause, you might be agreeing to a much higher purchase price.

Prepare To Waive Contingencies

You can strengthen your offer by waiving a contract’s contingencies.

Contingencies are conditions that must be met before a contract legally binds you. If the seller cannot meet your needs, you can back out of the deal unscathed. 

By waiving these conditions, you show the buyer you’re “all in” on the house, no matter what arises before the closing date. 

Waiving your contract’s appraisal contingency is one way to do this. 

This condition allows you to back out of the deal if the house doesn’t appraise for the amount you offered. If you waive this contingency, your bank will only loan what the home appraised for, and you’ll have to cover the difference out-of-pocket.

Waiving a home inspection contingency is another way to stand out against competing offers. However, it’s also a risky move. A home inspection contingency allows the buyer to have the home inspected before finalizing a real estate purchase. 

If the home inspector finds problems – such as structural unsoundness or termite damage – the prospective buyer can leverage the sale price or back out of the home purchase altogether. By dropping the inspection contingency, you agree to buy the house even if issues surface during the inspection.

As of February 2022, 46% of interested buyers waived their home inspections or appraisal contingencies.

Jewell says the biggest downside of waiving an inspection contingency is the buyer’s risk of ending up in a bad situation. Even buyers who keep these contingencies still go through with offers if inspections go poorly.

“Oftentimes, regardless of what the buyer finds during an inspection, they’ll go through with the contract,” she says. “After offering such a high due diligence amount, they feel like they would lose too much money by backing out.”

Hemingway reflects on this consideration from his own homebuying experience. “I went and saw the house, put in an offer, and wrote a check for due diligence,” he says. “At that point, I just had to hope the inspection came back well because, otherwise, that money is gone.” Although Hemingway didn’t waive the home inspection contingency, he intended to go through with the purchase regardless to avoid losing his due diligence investment.

When To Walk Away from a Bidding War

Even if a house checks all your boxes, the last thing you want to do is offer more than you can realistically afford. 

Jewell encourages buyers to start the bidding process with a maximum offer number in mind. No matter what kind of bidding war ensues, they should refuse to exceed that final offer price. 

“This hot market can become very emotional – especially if a buyer has offered on many homes only to be repeatedly outbid,” she says. “They get to the point where they offer far more than they ever would have under normal circumstances.” 

The reality of the current market is that you’ll pay more than the asking price for a house. However, if you’re stuck in a bidding war that’s truly pushing your financial limits, it’s time to walk away.

Final Thoughts

In the current real estate market, it’s incredibly easy for buyers to become mentally and emotionally drained.

We suggest finding a good realtor and remaining flexible to combat this exhaustion. A good realtor will be communicative, steadfast, and ultimately your biggest advocate in the home buying process. 

You’ll undoubtedly have to attend many open house appointments and meetings, but staying organized and knowing your limits is critical.

Take a break from house shopping if you find yourself discouraged and disconnected from your wants and needs. You can start again with a fresh perspective and alignment on what you’re seeking in a new house.

Then, if you enter a bidding war on your dream home, you can employ top strategies for a winning offer.

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