What Is A Bidding War, And How Does It Work?
When more than one buyer is interested in a property, a bidding war may break out. To win the bidding war and become the property’s new owner, these bidders typically offer more money than the home is actually worth.
However, the winner of a bidding war isn’t necessarily the one who submitted the biggest offer. In addition to offering a higher price, many purchasers would forego inspections or other contingencies in the hopes of convincing the seller to take their offer.
When there is a shortage of available homes for sale, known as a seller’s market, competitive bidding ensues. They can also occur when purchasers have a strict deadline they must adhere to in order to close on a house. A listing’s price may be artificially low in order to spark a bidding war.
Perhaps you’re curious as to the mechanics of a bidding war. When numerous interested parties make bids on the same home, a “bidding war” ensues, and the asking price rises. Usually, bids are submitted in a short amount of time.
An escalation clause is common in offers submitted by homebuyers in today’s competitive real estate market. The buyer’s willingness to pay greater than the next highest offer is stated in an escalation clause.
Many potential buyers of real estate may publicly declare the highest price they intend to make in an attempt to secure the property. An escalation clause in the proposals of numerous purchasers will likely lead to a bidding war.
In some cases, sellers would even invent a fake offer to try and jack up the asking price. Thus, you should exercise caution if you decide to place an offer that includes an escalation provision and enters into a bidding war.
Pros And Cons Of Escalation Clauses
An escalation clause gives you more leverage in a bidding battle by allowing you to increase the amount of your offer. It’s an amendment to the contract that indicates you’ll raise your bid by a particular percentage if another bid comes in at the same or a higher price.
Take $200,000 as an example of the seller’s desired price. It is recommended that you have your real estate agent draft an offer that reads something like, “My initial bid is $200,000 with an escalation of $2,000 above competing offers up to $210,000.” On the other hand, you wouldn’t be the winning bidder if someone else offered more than $210,000.
Although an escalation clause is often advantageous, it is not always prudent for a buyer to propose one.
If you don’t put a cap on the escalation clause, you could end up paying more for the property than you can reasonably afford. The inclusion of a final price, however, weakens your negotiating position and increases the likelihood that you will miss out on the property to another bidder.
Examples Of Bidding War
Consider the following scenario: you are interested in a home that is advertised at $300,000. You put in an offer for the asking price, but someone else immediately outbids you with a $310,000 offer. When there are several interested parties, the asking price of a home tends to rise rapidly until one of them gives in.
Another case of competitive bidding. Both Lalice and Slater are interested in a $250,000 home. Slater counters Lalice’s asking price of $399,000 with a $260,000 offer. Lalice, intent on purchasing the home, make a bid of $270,000. Slater comes back with a new offer of $280,000. I
Lalice knows her maximum bid is $300,000, so she only offers to increase it by $20,000 this time. Slater gives in, and Lalice buys the house for $50,000 over the asking price, much to the delight of the vendor.
Few Simple Ways To Win A Bidding War
You should expect a bidding war if you’re a homebuyer in today’s market, especially if you’re searching in a popular area or for an affordable starter house.
Avoid giving up hope; there are strategies for succeeding in a multi-bid situation. A real estate agent is another resource for navigating the home-buying process.
If you really want your offer to stand out from the competition, consider these seven tips.
- Obtain pre-approval before you apply. A seller will have more faith in you as a buyer if you can demonstrate that you have the financial means to purchase the home they are selling.
Remember, though, that preapproval and prequalification aren’t the same things. Getting pre-approved is usually preferred over getting prequalified. Loan approval is a formal notice indicating the creditor has previously assessed your finances and accepted you for a set amount,
On the other hand, a loan pre-approval is just a hint that you might be approved for a loan. However, neither of these things is a guarantee, which is why most real estate contracts include a financing clause.
- Raise the price of your current offer. One of the best strategies to have your offer accepted is to be willing to spend more money than other purchasers. Get advice from your real estate agent as to how much of an increase is necessary given the current market conditions and the specifics of your home’s location.
If you want to increase your offer, you should be prepared to pay for it out of your own pocket. Conventional mortgage lenders often won’t lend more than a home’s fair market value. Raising your initial deposit can provide you with bargaining power.
Make sure your offer has a quick cutoff time, preferably 24 hours or less. This forces the seller to make a rapid decision on whether or not to accept the offer.
- Boost Your Initial Investment. A lower amount of financing will be required if a larger down payment is offered. In the event that the property’s price increases due to a bidding war above what it is expected to be appraised for, this can be a very helpful outcome.
To make this tactic work, you’ll need to show that you have access to the necessary funds, such as a healthy bank balance.
- Use hard currency only. While not possible for everyone, a cash offer shows the seller that you are serious about purchasing their home. As an added bonus, a lender is not required, which can reduce the associated financing risk and shorten the closing process. Before you commit to buying a property, it’s a good idea to have it inspected and assessed.
- Drop all conditions. Conditions, or contingencies, that must be met for a real estate transaction to go through are widespread. In most cases, if these aren’t met, the customer can cancel the purchase.
Since you are risking your earnest money by committing to the purchase without these protections in place, waiving any or all of them may convince the seller to accept your offer.
In any case, this is something to think about thoroughly, especially if you’re contemplating dropping the inspection proviso.
- Include a clause for escalation in the contract. Your purchase offer can include an escalation clause if you’re willing to increase the price you’re willing to pay if another buyer matches it. That is, you’re making a commitment to increase your offer by a predetermined amount at regular intervals.
This strategy can show the seller right away that you are serious about purchasing the home, but it should be used with caution. If the home has been purposefully underpriced, you may discover that you are only playing a game for the seller’s profit.
- Jot down a personal note. A letter can humanize your efforts and increase the likelihood that the seller will choose your offer above others, even if it isn’t the highest. A buyer “love letter” can be used to convey the depth of your feelings for the property and the reasons you have decided to purchase it.
Writing a seller a love letter to show them how much you care about their home and that you’ll treat it with the same tenderness they have can be a winning strategy in a hot real estate market.
However, extreme caution should be taken while writing an individual letter. If you include private information in the cover letter that the seller uses to decide whether to accept or reject your offer, you may be in violation of fair housing laws.
The National Association of Realtors discourages its members from sending such letters to home sellers.
What To Do If You Lose a Bidding War
In a seller’s market, bidding wars are inevitable, and there can be only one victor. So, what steps do you take if defeat eventually comes?
Real Estate House International’s COO Jenna Richardson recommends submitting a counteroffer. She said that the second buyer is the backup buyer in case the first one can’t close on the sale of the house. Buyers should think about submitting backup bids in case the property they’re interested in goes back on the market and sparks yet another bidding battle.
Grossman of Avenue 8 thinks the greatest approach to winning a bidding war is to prevent it from happening.
Grossman explained that they worked with a client who fell in love with a home in the East Village, but the seller wasn’t going to reply to bids until after the first open house had taken place. In that case, they requested a “reprice” from the seller’s agent, a price at which they would remain firm regardless of any subsequent offers that might be made.
When they countered with a price 10% higher than asking, their customer accepted it and they were able to rapidly enter into a contract, leaving other potential purchasers puzzled why they were shut out of the bidding process.
How To Win a Bidding War On A House in 2023
When buying a home, how do you ensure that your bid will win the bidding war? It’s common knowledge that the highest bidder usually takes the prize at auction. Thus, you have to be prepared before you Join a bidding war.
Bidding war preparations include being pre-approved for a mortgage, saving up for a down payment, writing a competitive offer, and waiving contingencies like a house inspection. Even if your price is lower than the competition’s, you still may win the bidding war if you can pay for the home without a mortgage and in cash.
Final Words
The fierce competition that exists amongst prospective buyers of real estate is often referred to as a “bidding war.” A bidding war is when two or more entities compete with one another to acquire ownership of a certain property or enterprise.
This kind of competition may be found in property markets all around the United States as well as in other countries. During housing booms, when there is a shortage of available properties, bidding wars are a regular occurrence.
A bidding war, much like an auction, typically moves at a rapid pace, which leaves the players open to the possibility of making ill-advised choices regarding their investments.
Homebuyers frequently add an escalation clause in their offer during a competitive bidding process for a house. This provision states that the buyer is willing to pay a higher price in order to win the bidding battle.
Because speculators frequently include an escalation clause in their offers, this might cause the bid to automatically increase by a predetermined amount if a rival offer is made, up to the maximum limit that was previously agreed upon.
A seller’s market almost always results in a bidding battle, which is always to the seller’s advantage because the seller often ends up with a price that is far higher than the one they first asked for. In a nutshell, sellers benefit from bidding wars since it increases the likelihood that they will receive the highest possible price for their homes.
Last but not least, if the property market is particularly competitive, there is a good risk that you will come out on the losing end of more than one bidding war. Even while that is discouraging, it does not mean that you should give up trying.
