After months of searching, you finally found your dream home! But if you’re searching for a home in a seller’s market, there’s one thing standing between you and the home of your dreams: other buyers.

Trying to buy a house right now is harder than it’s ever been and the process can be emotionally draining. A record shortage of homes for sale and strong demand from buyers are sparking bidding wars and sending home prices to new records. Because of this, it’s important to understand how bidding wars work and what buyers can do to help strengthen their position.

How does a bidding war work?

With real estate inventory at historic lows both nationally and locally, the competition between buyers and sellers remains fierce. Relatively speaking, it’s a numbers game – when there are more buyers than sellers, a bidding war typically ensues. This is defined when there are multiple buyers/bids on the same property, which leads to a rise in the price of the home. For example, Buyer A submits an offer at $500,000 for a home and Buyer B quickly submits a competing offer for $510,000. The listing agent then advises both buyers (and their agents, if applicable) and the “war” begins, resulting in countering at higher prices, subtracting contingencies or adding other clauses.

Utilizing an escalation clause

When knowingly submitting an Offer to Purchase in a bidding war situation, the buyer must do everything in their power to make it stand out from others, but at the same time, not over-leverage themselves financially. One way to do this is by adding an escalation clause to the offer. An escalation clause is a useful tactic a buyer can use to demonstrate that they are prepared to offer a certain amount over the next competing offer. An important piece of advice for a buyer in this scenario is to make sure they have specified a maximum price/cap that they are willing to go to so they do not compromise their true budget. The buyer should present it as follows: “In the event of multiple offer presentations for the property located at 123 Main Street, Buyer hereby increases his/her offer to purchase by $X above any alternative competing offer, provided Buyer’s maximum offer shall not exceed $Y. Seller to provide proof of alternative competing offer.”

Tactics to win a bidding war

There are other tactics buyers can use to strengthen their position and help win a bidding war:
 

1. Flexible dates/terms: Selling a property is much easier than buying in this market, so a buyer with flexible dates and terms will garnish considerable favor with a seller who still needs to find a new home. This includes extended closing dates, allowing a seller to remain in the property after the closing for a period of time (under what is called a “rent-back” or a “use and occupancy agreement”), or allowing the transaction to be contingent on “the seller finding suitable housing” can all be advantages for a buyer.
2. Inspection contingency: A buyer can waive the inspection completely or put a high amount of money in their inspection contingency to show the Seller that the buyer will not try to back out or negotiate over minor issues.
3. Inspection for “information purposes only”: Sellers favor this because there is no negotiation over inspection results, but it also gives the buyer a chance to walk away if something unexpected turns up – and they don’t risk much (besides their initial offer deposit).
4. Pay cash: Depending on the market, this may not be the most typical option but it certainly represents the strongest edge a buyer could have in a bidding war who most likely have financing contingencies.
5. Provide a “pre-commitment” rather than a “pre-approval”: Some lenders underwrite a loan at the time of pre-approval so the buyer is already approved at the time of offer submission (except for an appraisal). This gives a buyer a leg up on most buyers with regular pre-approvals.
6. Appraisal waiver: If a buyer is paying over asking-price, they can offer to bridge the gap if a lender appraises the property lower than the purchase price. In the current market where paying over asking-price is becoming “the norm,” this has become more common and is appealing to sellers who are apprehensive about accepting an offer that is 10% or more over asking.
7. Waiving contingency: Besides a cash offer, waiving the financing contingency strengthens a buyer’s position tremendously. It’s comforting for a seller to know that unless the buyer backs out (and risks forfeiting their 5% down payment) the deal is proceeding the moment the purchase and sales agreement is signed.

Bidding wars can certainly be stressful, especially if you don’t have a clear understanding of what you’re getting into. Luckily, there are several ways buyers can get a leg up in this ever-changing real estate market. As you navigate the bidding war process, it’s important to work with an experienced real estate attorney to answer any questions you may have along the way. Please contact Matthew Arakelian to learn how Ligris + Associates can help.

Posted In: Articles, Real Estate