How to Win a Home-Bidding War When Competition Is Stiff

How to Win a Home-Bidding War When Competition Is Stiff

The national supply of homes for sale recently dropped to a 20-year low. That’s great news for home sellers, who now have fewer homes on the market to compete with — but what if you’re buying? What happens when there’s a housing shortage?

Two words: bidding wars. “Right now, demand is so high and inventory is so tight that it’s just simple economics,” says Seth Lejeune, a real estate agent with Berkshire Hathaway in Collegeville, Pennsylvania.

Afraid of a little competition? Don’t be. These smart strategies can help make your offer the most attractive one on the table.

Gather Your Intel

Before making an offer, arm yourself with as much information as possible. Have your real estate agent talk to the listing agent to find out whether there’s a deadline for offers, how many offers you’re going up against (this information may or may not be available) and what factors are most important to the seller.

In many cases, the seller isn’t squarely focused on how much money you’re offering, says Chris Dossman, a real estate agent with Century 21 Scheetz in Indianapolis. For example, does the seller want to close in 30 days because she’s already purchased her next home? Does she need help with closing costs? Gauging the seller’s motivation can help you craft a competitive offer.

Line Up Your Financing in Advance

Naturally, figuring out how you’re going to pay for the house is crucial for you, but it’s also an important factor to the seller. “The seller wants to know that your financing is going to come through,” Lejeune says. One way to ease that concern is to obtain pre-approval from a mortgage lender before you make an offer. In fact, “I try to get pre-approval before I even start showing clients houses,” Lejeune adds.

Dossman recommends using a local mortgage lender rather than a national bank or credit union. Why? “Loan officers at large banks typically only work 9 to 5 during the weekdays, but a lot of times you need a pre-approval letter drawn up on a night or a weekend,” Dossman says, adding that you often get better service with a local lender. Also, “communication just isn’t as good if your lender is in another state.”

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Make a ‘Clean Offer’

When you’re competing with other buyers, you should make an offer with as few contingencies as possible to reassure the seller that you’ll reach closing. Lejeune often recommends homebuyers waive a radon contingency, for example, since it can be relatively cheap to address on your own.

Also, if possible, you may offer to buy the home without making the purchase contingent on the sale of your current home, since you could be competing with first-time homebuyers who don’t have that constraint, Lejeune says.

Granted, some contingencies are worth keeping. A home inspection contingency is crucial because it gives you the ability to negotiate with the seller if you uncover structural issues with the home. Weigh the outcomes, financial or otherwise, if you plan to include or remove certain contingencies from your offer.

Price It Right

“If a home is priced well and it’s going to be snatched up, I would offer a little bit over asking price to distinguish yourself,” Lejeune says. Of course, you’ll want to rely on your agent to run a comparative market analysis, a process that involves finding similar properties (“comps”) that sold within the past 90 days. This helps ensure you don’t overpay.

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Consider an Escalation Clause

This basically shows how much you’re willing to outbid another offer, up to a certain limit. For example, if there are three bids on a property listed for $400,000, you can write a full-price offer with an escalation up to $420,000 that increases in $5,000 increments. So, for instance, if a higher offer comes in at $410,000, you would up yours to $415,000. Lejeune recommends using an escalation clause if the home is priced aggressively (as in, slightly below fair market value).

What size increments you should use will depend on the price range you’re buying in. For instance, $15,000 to $20,000 increments may be appropriate if you’re bidding on a $1 million home, but $5,000 to $10,000 increments may be more suitable for a $300,000 house.

Offer Another Financial Incentive

One lesser-known way to sweeten an offer is to increase the size of your earnest money deposit (EMD), which is the sum of cash you put down to prove you’re serious (or earnest) about buying the home. If you back out of the deal for no good reason, you’ll most likely lose the deposit.

The standard EMD is 1% to 2% of the home’s sale price, but offering a larger deposit shows you won’t be quick to walk away if there’s a small issue with the house, Dossman says. Hence, offering a 3% to 4% deposit could make your bid all the more attractive.

Tug On the Seller’s Heartstrings

Writing a personal letter to the seller can give your offer an edge, Dossman says. Your letter — which should be no more than a page — should include what you love about the home (“the garden you built is beautiful”), why you’d be an easy buyer to work with (“we’re already preapproved and eager to become homeowners”), and what the house means to you (“we couldn’t find a more perfect home to start a family”).

As Lejeune puts it: “You’re trying to evoke an emotional response, so talk from the heart.”

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