We’d all like our homebuying experience to be as simple as possible. However, things don’t always go according to plan. For Americans living in one of the nation’s hottest real estate markets, home buying complexities are likely to include a bidding war.
Bidding wars happen when two or more potential buyers want a property and are willing to pay more than the asking price for it. A bidding war situation requires quick thinking both from the potential buyers as well as the seller. Still, there’s an opportunity for both parties to come out ahead — if they’re prepared.
As a buyer looking for a new home this summer, be aware that the competition is stiff. Inventory across the country is low yet more buyers are entering the market. Now is not the time to make a lowball offer and see if a seller will take it. Should you find yourself in a bidding war for a property, follow these five steps to maximize your chances of winning the battle.
Look at homes priced slightly below your budget
If you know homes in your desired neighborhood are likely to receive multiple offers, choose properties that leave you room to negotiate. Real estate agent Suzy Thomas told Chicago Magazine that a good rule of thumb is five to eight percent below the price you’d feel comfortable paying.
This also goes for pre-approval. You won’t be able to compete with other offers if the home is listed at the top of what you’ll be able to pay.
Be organized and follow directions
If the seller has asked for a “best and final” offer from a group of interested buyers, make note of the deadline and follow any offer submission directions. If the seller asks for an offer in a specific format, follow suit. It will make it easier to compare the offers received.
Submit an offer that’s easy to understand and that doesn’t leave room for misinterpretation. Also, offer up your pre-approval documentation.
Ask the right questions
You can also sometimes gain an advantage by asking the right questions. Does the seller want a speedy closing? Would they be interested in a rent-back agreement while they look for their new home? An offer that makes selling their home and moving less of a burden may well be worth more to the buyer than the few thousand extra dollars offered by another buyer.
Offer appealing terms
When you are competing with several other buyers, it can help to offer better terms. Cash can have a winning edge over financing.
Cash offers can be very appealing to buyers who want a quick sale and less risk of financing falling through. Beyond even full-cash offers, making a larger down payment reduces the chance that loan approval problems surface later in the buying process. A robust earnest money offer in excess of one percent can also add to an offer’s appeal.
Buyers can also rise to the top of the pile by offering few or no contingencies, or agreeing to pay closing costs.
Stay engaged in the process
Sharon Voss, an Orlando-area Realtor, told Realtor Magazine it’s important a seller stay by their phone during a bidding war, because the situation can develop at any moment. “Be prepared to make decisions very quickly and respond very quickly to questions about your offer,” Voss noted. Otherwise, you may lose your chance at taking the lead.
Experts give similar advice to sellers engaged in a bidding war. As sellers need to make quick decisions about their available offers, they should also keep in close contact with their agent during a multiple-offer situation. Being clear and direct about requirements or submission directions is also a must. Two other bidding war considerations apply specifically to sellers.
Determine how you will manage multiple offers
Sellers have a few options when it comes to working through multiple offers. The first option is to simply choose the best initial offer received and negotiate the final sale. This can be an easy route, but may leave money on the table from other buyers.
Often sellers will choose to go back to a group of buyers to ask for their “best and final” offer. This lets the buyers know they’re in competition and can often yield a better deal for the seller.
Evaluate offer terms, not just price
When a seller does receive multiple offers, he should take care to look at the whole offer package, not just the final number. After all, a higher number that comes with no pre-approval guarantee, average earnest money deposit, or low down payment, is much more likely to fall through during financing than a lower cash offer.
Consider what contingencies, closing cost arrangements, or rent-back agreements would make a deal stand out for you. Every seller’s situation is different and some extra perks thrown in may be worth a slightly lower offer price. You might even get an offer of pizza for life, which would certainly be hard to refuse.
With the right preparation, both buyers and sellers can handle a bidding war. Be aware of your local market and ask your real estate agent if you can expect heavy competition and prepare accordingly. Both buyers and sellers have the opportunity to win in such situations. Well-prepared buyers can come away with the home of their dreams while sellers can choose the most favorable terms and price to suit their selling and moving needs.