In housing markets teeming with buyer demand, it’s not uncommon to put an offer on a home, only to be outdone by a competing offer. If two or more potential buyers want a property badly enough, they may find themselves locked in a bidding war.
Here’s what you need to build your toolkit to increase your chances of winning the war.
Know How It Works
Bidding wars usually take place in seller’s markets, when demand outpaces supply. They also typically occur when there are multiple interested parties and when there is some other sort of constraint, such as timing.
When a real estate agent receives an offer for a property that has attracted a lot of interest, the agent will usually contact other interested parties to let them know. The agent may then set a date by which would-be buyers should make their highest and best offer.
Often the highest offer is the winner, but there are other factors a seller may take into account.
Line Up Your Financing
One of the best things you can do to be prepared for a potential bidding war is to line up your finances ahead of time.
Be sure to know how much mortgage you can afford, including a down payment and monthly payments. Talk with lenders to see if you qualify for a mortgage and to familiarize yourself with what types of loans that are available to you.
Look into the things you can do ahead of time to help you qualify for a home loan, such as improving your credit score and maintaining a good debt-to-income ratio.
Show Your Preapproval Letter
Getting preapproved for a mortgage shows that you are a serious candidate to buy a home and signals that you’re willing to see the process through to the end.
The preapproval process is more rigorous than prequalifying for a mortgage. Lenders will take an in-depth look at your income, employment history, assets, and debts. They will also make a hard inquiry into your credit history to determine whether they are willing to give you a loan.
Preapproval shows that you will be able to borrow enough money to cover the cost of the home. Just be sure that the preapproval documents are for the home you want to buy specifically.
Your chosen lender can customize a preapproval letter for you.
Contingencies are certain conditions that must be met before a real estate deal becomes binding. Potential buyers can back out of a deal without penalty if these contingencies aren’t met.
A common contingency is the inspection clause, which allows a buyer to have a home professionally inspected to determine whether any repairs need to be made.
That contingency gives the buyer a chance to renegotiate the sale price. For example, if an inspection uncovers cracks in the home’s foundation, a buyer might request a reduced price to cover the cost of repair.
Waiving the contingency shows your willingness to move forward with the deal, but it also comes with risk. If you do discover that the home needs repairs, you may be on the hook to cover the costs yourself.
Be Quick About Your Appraisal and Inspection
Sellers want to avoid spending too much time with a potential buyer, only to have the deal fall through. Do what you can to have your appraisal and inspection done right away. Being prompt gives sellers less cause to worry that they’re taking the home off the market and potentially missing out on better offers.
Use an Escalation Clause
Perhaps unsurprisingly, one of the best ways to win a bidding war is by offering more money. Before you up your offer, be sure that your lender is OK with the plan.
You may want to include an escalation clause in your real estate contract. The clause asserts that if another buyer makes a competing offer, your bid will automatically increase by a certain amount, up to a predetermined limit, to exceed the new offer.
Say you put a $300,000 offer on a home, with an escalation amount of $5,000 and a ceiling of $330,000. If someone else then bids $310,000, you will automatically bid $315,000, up to your ceiling.
Escalation clauses are usually added when buyers assume there will be multiple offers on a property.
A willingness to be flexible can give you a leg up in the eyes of a seller.
For example, a seller might be moving across the country for work and need to close by a specific date. So if you can get the appraisal and inspection done swiftly, that could be a huge plus.
Alternatively, sellers may need to stay in the house for a little bit of extra time. Working with them on their specific needs could give you an edge.
Pay With Cash
If you are able to do it, paying with cash can be very attractive to sellers.
The cash-buying process is typically much faster than going through a lender, and sellers don’t need to worry about financing issues that might hold up the deal or cause it to fall through.
It’s even possible that a seller would choose a cash offer over a slightly higher offer backed by a mortgage.
Increase the Size of Your Deposit
A buyer puts an earnest money deposit down to secure the real estate contract. It tells the seller that you are serious about buying the house—so much so that you’re willing to put your money where your mouth is.
Increasing the size of the deposit can emphasize this point. Be sure that you meet all your deadlines and contingencies so you have a better chance of retrieving your deposit if the contract were to fall through.
Write a Personal Letter
When sellers are choosing a buyer during a bidding war, they’re often just looking at numbers on a page. Consider writing an offer letter to humanize the transaction.
You may want to note things you have in common with the sellers. You’re a ceramicist and noticed an artist’s studio in the backyard. You have dogs; they have a dog door. That big elm reminds you of one you had at your childhood home.
Be complimentary about the things you like about the house and how it has been maintained. And be sure to keep the letter concise.
What to know when buying a house? For one, how to anticipate and win a bidding war. With a few simple tactics, you can tip the odds in your favor.
As noted, getting prequalified and preapproved for a mortgage are essential prep in a hot market, when homes often have many suitors.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
This article is originally on SoFi.