If you’re a buyer who’s found the ideal house, it can be terrifying to think that there are others who may try to buy it out from underneath you. But don’t worry, if you find yourself competing in a bidding war, there are certain strategies you can use to come out victorious.
However, for these strategies to work, you must make sure you’ve taken appropriate actions ahead of time to ensure you come across as a serious buyer. If you require financing to purchase the home, you must get preapproved for a mortgage before you make an offer. You should also try to act as quickly as possible. Now, here are some more specific tips for winning a bidding war.
1. Make An All-Cash Offer
When you’re trying to win a bidding war, you can offer more money for the home, or you can alter the terms to make them more favorable to the seller. If you’ve maxed out your budget and have enough cash on hand that you don’t need financing, making an all-cash offer is the best strategy you can use to increase your chances of walking away with the house.
“All-cash offers are as good as it gets. They aren’t contingent on any sort of loan or financing needing to go through, and they aren’t subject to an appraisal,” says Blum. “Cash offers can also close in as little as 7 days (sometimes sooner), so the turnaround period to getting a quick deal done with no hassle is hugely successful.”
The most common reason that residential real estate transactions fall through is financing, especially during bidding wars. When appraisals come back lower than the offer price, buyers often find themselves in trouble. Lenders will not give buyers more money than the house is appraised for, so buyers either have to make up the difference, get the seller to drop the price or pull out of the deal.
Therefore, if you don’t need to obtain a mortgage to purchase the house, your offer will immediately stand out as a safer bet, making the seller that much more likely to choose it. In fact, it’s not uncommon for sellers to choose all-cash offers over higher offers for this very reason. So, if you can pay in cash, you should consider it – you can always get delayed financing after you close.
2. Waive All Contingencies
Just as sellers like all-cash offers, they also like to see clean offers. A clean offer is one in which a buyer has agreed to waive all contingencies, making the offer safer for the seller but quite a bit riskier for the buyer.
What is a contingency? A contingency is a stipulation included in an offer that specifies that the deal will only close if specific conditions are met. For example, a buyer may include a home sale contingency if their ability to purchase the house is dependent on selling their current home.
When an offer is accepted, the buyer makes an earnest money deposit to demonstrate their seriousness. Typically, if the buyer pulls out of the deal, they must forfeit that money. However, if the buyer backs out because a condition stipulated in a contingency is not met, the buyer gets to keep their deposit and walk away without facing any consequences.
“Eliminating many, if not all, of these contingencies shows the seller that this buyer is serious about purchasing this home and is giving themselves no outs whatsoever,” says Blum.
If you want to win a bidding war, waiving all contingencies will show the seller that you plan to purchase the house regardless of what happens. The seller will see your clean offer as a safe bet because if the deal doesn’t go through, you’ve already agreed to let the seller keep your earnest money.
3. Make A High Earnest Money Deposit
Clearly, the earnest money deposit is a crucial step in showing that you’re serious about purchasing the house. Although the amount of money included in the deposit differs from state to state, it’s typically around 5% – though it can range from 1 – 10%.
The more earnest money you offer, the more attractive your offer appears. However, you don’t deliver the money until after your offer has been accepted or the purchase agreement has been signed. Therefore, if you’re competing with multiple other offers, you must inform the seller that you’d like to make a higher earnest money deposit when you submit your offer.
In particularly hot markets, buyers may even choose to take their deposit to the next level. “In Seattle’s marketplace, we are seeing not only high earnest money deposits but also non-refundable earnest money deposits,” says Blum. “These nonrefundable earnest money deposits range anywhere from 3% all the way up to 10% of the purchase price.”
Blum explains that a willingness to risk your own money is one of the best ways to show the seller you fully intend on purchasing their home “because no one just gambles money in home buying without knowing for certain they will come out on top.”
4. Include An Escalation Clause
As mentioned, there are only two ways to win a bidding war, offering more money or better terms than the competition. If you’ve made the terms of your offer as lenient as your circumstances can bear, it’s time to think more seriously about your offer price. Including an escalation clause in your offer can be the perfect way to try to ensure you win the house without paying more than it’s worth.
An escalation clause is an article added to the offer that enables the buyer to increase their offer up to a certain point in the event of a bidding war. Basically, the escalation clause says that the buyer will pay $X for the home, but if the seller receives a higher competing offer, the buyer will increase their initial offer by $Y amount.
Let’s say you find yourself in a bidding war for a home that you think is worth $500,000. You decide to make an offer of $450,000 but include an escalation clause that states you will outbid any competing offer by $5,000 up to $500,000. If another buyer makes an offer of $445,000, your offer will automatically increase to $450,000. However, if someone later offers $500,500, which is over your specified cap, you’d lose the bidding war.
Escalation clauses are a great tool to use in bidding wars because they allow you to compete in a bidding war without constantly having to worry about being outbid. They enable you to determine what you’re comfortable with ahead of time and ensure that you’re not paying more than you need to beat out the competition. Keep in mind that not all sellers are willing to accept offers with escalation clauses, but it’s certainly worth a try.
5. Work With A Seasoned Real Estate Agent
If you’re serious about winning a bidding war, it would be foolish not to work with a seasoned real estate agent. Real estate agents have the experience and skills necessary to help you win that bidding war. They also have market knowledge, which is crucial in determining the fair market value of the home you’re interested in.
It’s common for buyers to get so competitive during bidding wars that they make risky financial decisions. By enlisting the services of an agent, you can feel confident that you won’t offer more than the house is worth or more than you can realistically afford to pay for it. Your agent will approach the deal with a cool head and ensure that all decisions made are in your best interest.
An agent will give you much-needed advice, like whether it’s wise to waive that contingency, and they’ll ensure that the seller and listing agent aren’t taking you for a ride. Based on their connections within the industry, they may even be able to find out information about the competition and the offers you’re up against.
And best of all, agents’ commissions are paid out of the purchasing price of the home. So, representation is free for buyers. The only question should be how you find a good agent, and Rocket Homes Real Estate, LLC can help with that. Rocket HomesSM works to match buyers with highly rated agents in their area.