How to Win a Bidding War

If you have been on the market to buy a house lately, you have likely noticed that properties are going fast, often higher than the listing price. This is especially true in Massachusetts and the Cambridge area. House hunters need to be ready to move quickly if they want to hold the keys to their dream home before long.

We are undoubtedly in a seller's market, driven by high demand coupled with low inventory. This situation often leads to bidding wars, with multiple offers competing for the same property – even if it is priced higher or needs a lot of work. It can be frustrating and stressful for homebuyers, who often see multiple homes escape their grasp before they can finally sign the dotted line. If you do not want to lose against other would-be buyers, you should be prepared to go above and beyond to achieve your goal.

Here is how to win a bidding war in a competitive market.

How to Win a Bidding war in 8 Steps:

Obtain a pre-approval letter from your lender

Buying a house often feels like an endless game of "hurry up and wait." However, the early bird often gets the worm in a fast-paced environment like the current housing market. If you are planning to finance at least part of your home, you will need to ensure that your lender is reactive and can finalize the paperwork rapidly once you find the perfect property. It is also a good idea to have your home inspector on speed dial.

You may have gotten prequalified for a loan when you started the home-buying process. The pre-qualification represents the estimated amount the bank is willing to lend based on verbal confirmation of your income and other financial details. It is an essential tool to stay within budget while house hunting but does not engage your lender.

However, to purchase a specific house, you will need to obtain a pre-approval letter. This document represents a precise loan amount after the lenders check your W-2s, bank statements, credit scores, and so on. Providing a pre-approval letter ensures that the home buying process goes faster and shows sellers that you are in a position to purchase the property. It is also an indication for the seller that you are committed and are ready to move fast if they decide to accept your offer, which gives you an edge against other bidders. Finally, it also ensures that the lender will approve your mortgage request, and the chances that the sale will fall through due to financing are small.

Put in your highest offer

It should come as no surprise that the highest bid often wins a bidding war. Although it is not always true – other factors, such as financing, can sway the balance in favor of lower offers – a higher offer heavily weights in the balance for sellers to decide which bid will win.

In a sellers’ market, some real estate agents encourage their clients to list their property for a lower price in order to attract multiple offers and lead to a bidding war. They may ask interested parties to provide their highest and best offer to be considered, usually within a specific timeframe, before sellers decide on the winning bid.  

Consequently, do not be fooled if you have your eyes on a house that seems to be listed for a very affordable price compared to other homes in the area. If you encounter this situation, the selling price is often significantly higher than the listing price. Therefore, it is always a good idea to check what similar properties are selling for in the neighborhood to get a better idea of the price the property will likely reach. You can also ask your realtor for an estimate of what to bid. For example, it may be typical in some markets to put in offers over $100,000 above the asking price. If you want to stay in the race to get the winning bid in a competitive market, you may need to put in your highest offer from the get-go.

Put in an all-cash offer - if you can 

You have undoubtedly heard the saying: "cash is king." If you are wondering how to win a bidding war, your best bet may be to put in an all-cash offer. Even if your bid may be lower than other would-be homebuyers', the sellers can still judge in your favor if they see that you are well funded and motivated.

Transactions with all-cash offers tend to close faster and go more smoothly than deals involving financing. There are no uncertainties regarding whether the lenders will approve the loan, a factor that could help you win against a higher financed offer. It also eliminates some buyers’ demands and delays – for example, selling another property for closing to go through.

Since cash offers are not subject to bank approval, it also means that the bank will not require sellers to fix specific issues with the property as would be the case for some types of loans, especially government-backed loans such as FHA, USDA, and VA loans.

Without financing approval, transactions involving all-cash offers provide more flexibility for closing. In some cases, they may close in as little as 14 days, which constitutes a strong argument for sellers short on time.

Increase your down payment and earnest money 

Buyers who are in a position to put in an all-cash bid are few and far between. However, you may still have a chance at winning a bidding war while financing the property if you increase your down payment and earnest money. As it would be the case for an all-cash offer, it signals to home sellers that you are well funded and that your lender is more likely to approve the mortgage.

Increasing your down payment reduces the loan amount, and, therefore, the chances that the deal will fall through are reduced. Low down payment financing options – for example, government-backed loans like VA, FHA, and USDA – are attractive for buyers since they do not need to wait to be in a position to purchase a property and they can qualify with a lower credit score. However, they can put extra pressure on the sellers since the lenders will demand that the house is in excellent condition before approving the mortgage. The underwriting process is significantly longer, and the mortgage provider may order that the sellers fix some of the issues before approving the loan. Conventional mortgages, which typically require a down payment equivalent to at least 20% of the purchase price, have lower requirements.

Increasing your earnest money is also an indicator that you are committed and are unlikely to back out of the deal at the last minute. It protects the sellers from buyers putting in offers on multiple properties and walking away from the transaction at the last minute. Also known as a "good faith deposit," this sum is presented to the buyers at the same time you put in your offer. It is typically equivalent to 1% to 3% of the purchase price and is applied to the buyer’s down payment or closing costs as long as the transaction goes as planned. If there is an issue with the contingencies (for example, if the house inspection fails), the buyers will get their earnest money back. 

Be flexible on the closing date 

Both buyers and sellers deal with many complications when it comes to changing properties. For example, many sellers need to move quickly for a job or, on the contrary, they may need to stay in the house before they can close on their next property or until the school year is over.

While buyers are typically eager to move in, they may have a better chance of winning a bidding war if they consider the home seller's needs and are willing to change their plans to make the transition as smooth as possible. It may be worth asking the real estate agent if the sellers are under specific time constraints and reassuring them that you are willing to work with their timeline.

Remove the contingencies 

Buying a house is a huge decision – therefore, buyers want to feel as protected as possible. Consequently, most real estate purchase and sale agreements include numerous contingencies that allow the property hunters to back off the contract if specific conditions are not met.

Contingencies may outline the condition of the sale, such as the time frame or requiring sellers to include or remove specific items from the property. They could also ask that sellers repair part of the property. Standard clauses also include an appraisal contingency (the property must appraise at or above sale price) and an inspection contingency (the contract becomes null and void if any issues are discovered during the home inspection. If the buyers are financing their purchase, they may also include a clause allowing them to back off if the lender does not approve the mortgage.

These conditions put extra pressure on the sellers since the sale may fall through. Although it is not recommended that would-be buyers wave the contingencies, it may be a competitive advantage to win a bidding war. However, buyers will need to be prepared to deal with the consequences, including taking a significant financial hit and losing their earnest money if they decide to back off the transaction anyway. If financing falls through or the property receives a low appraisal, you will need to figure out of the bridge the difference.

Include an escalation clause in your bid 

While putting in a high bid can sway sellers in your favor, there is always the risk that your proposal may be unnecessarily higher than competing offers. If you are seriously wondering how to win a bidding war, you may be willing to take the risk – however, including an escalation clause (or “escalator”) in your contract can protect you.

Escalation clauses state that you are willing to increase your offer – and by how much – to outbid other prospective buyers. It will not kick in until the sellers can prove that they have other bona fide offers, therefore saving from the heartache of losing a home you could have been in a position to purchase otherwise. Besides, they allow you to stay within budget and not get caught up in the excitement of a bidding war. Finally, escalation clauses show sellers that you are very serious about buying their home. 

However, keep in mind that it also hurt your negotiation power if you have no competing offers, and there is the risk that sellers may counter with your highest bid.

Write a personal letter to the sellers. 

Real estate transactions often come down to cold hard numbers and business decisions, but you may also win a bidding war by appealing to sellers’ feelings. For many homeowners, leaving the house that has witnessed many memories and significant life events can be very emotional. If you can convince them that you will treasure their property and appreciate the hard work they have put in throughout the years, you may get the winning bid after all. However, keep in mind that not all states allow the practice and keep information that could violate fair-housing laws to yourself.

Need more advice? Let’s talk. Contact Cambridge Sage today.