Everything You Need To Know To Survive A Homebuying Bidding War

You have probably heard stories of friends or family, desperate to buy their dream home, finding themselves locked in that most dreaded of real estate scenarios: the bidding war. Unfortunately, in today's ultra-hot real estate market, bidding wars are becoming more and more common. But, despite their scary-sounding name, they are not the worst of situations you can find yourself in as a homebuyer, though they can be quite intense.

Investopedia defines a bidding war as a scenario in which multiple prospective homebuyers compete for a home's seller to accept their offer by submitting higher and higher bids. It is not ideal for a homebuyer to become involved in a bidding war as, by definition, a bidding war drives up the overall purchase price of a property, often beyond its original listing price or appraisal value. Bidding wars are more common in a seller's market, in which demand for housing outstrips the supply of available homes, which is the case in much of the United States, according to Fortune. Other factors that can increase the probability of a bidding war are related to the property itself, such as the property's location, the quality of its school district, and the residence's condition, including whether it will need significant work or renovation.

Win a bidding war by offering more favorable terms

If you find yourself in a bidding war for your dream home, you should remember that there are only two ways to win it. The first is to offer more favorable selling terms than your competitors. If you make selling the property as smooth as possible for the owner, they may accept your offer even if other prospective buyers promise more money. According to Rocket Homes, there are several ways to accomplish this task.

First, make your offer in all cash if you can do so. Avoiding mortgage financing means you and the seller will not have to deal with loan processing, making the process less complicated. A cash offer also lowers the possibility of your proposal falling through because of an appraisal issue. Many mortgage lenders will not grant a loan for more than a property is appraised to be worth, but if you are not working with a lender, you will not have to worry about a low evaluation tanking your offer.

Another method is to waive all contingencies on your offer. A contingency, as Forbes explains, is a stipulation included in a purchasing offer that specifies the proposal will proceed only under certain conditions. For example, a typical contingency in real estate is the sale contingency, in which a buyer won't commit to buying a new home until they've sold their former property. Eliminating contingencies will make your offer much more appealing to a seller.

Win a bidding war by offering more money

The second way to win a bidding war is, of course, to offer more money than your competitors. Rocket Homes explains that while your first move should always be to assess what concessions you are willing to make the situation more favorable for the seller, sometimes, you don't have any other option but to dig deeper into your pocket for more cash.

One way to impress a seller is to offer a high earnest money deposit. According to U.S. News, earnest money is a deposit you submit along with your home purchasing offer to demonstrate your sincere interest in buying the property. It can range in size, but a typical earnest money deposit is around 5% of the home's total purchasing price. So, to catch a seller's eye and stand out from the competition, you could offer an earnest money deposit higher than average, up to around 10% of the total price.

Another method of laying more money on the table can come in the form of an escalation clause. My Home by Freddie Mac defines an escalation clause as a section of a real estate offer that empowers the buyer to increase their proposal to a certain point if a bidding war occurs. So, for example, you can say that you're offering to pay $375,000 for a home, but if someone else submits a higher offer, you will increase your offer by $10,000 more than theirs, up to $400,000 in total.

Work with an experienced real estate agent

Bidding wars are a high-stakes scenario. Especially if you are a first-time homebuyer, it can be difficult to separate your emotions from the situation and be able to remain clear-headed and make objective choices. If a homebuyer is too invested in a prospective property, their judgment can become clouded, and they may make poor financial decisions that they will regret later.

One of the most helpful factors in this scenario is working with an experienced real estate agent, notes Rocket Homes. A professional, seasoned agent will understand the market much better than you ever will. They can tell you when you are offering more than what a home is worth, more than what you may be able to sell the house for in the future, or simply more than is affordable for you to pay. They can talk you off the cliff of making bad decisions in the heat of the moment in a bidding war. And they may also have connections within the industry, so they could get the inside scoop on your competition and the details of the offers you are going up against, which could ultimately help you win the bidding war without going bankrupt in the process.

How bidding wars end

When you are in the throes of a bidding war, it may seem as though it will go on forever, but remember: The property seller has an incentive to get the property off their hands as soon as possible, so bidding wars will eventually come to an end. A bidding war is formally concluded when a seller accepts one of the buyer's offers, explains Rocket Homes. Then, the seller and the chosen buyer will sign a sales contract, transitioning the property's status from being considered active on the market to being listed as pending.

But, pending offers can still fall through. A variety of situations may prevent a buyer from being able to close on a property. For example, their financing may not work out for whatever reason, the buyer may be unsuccessful in the process of selling their current home and thus become unable to buy a new one, the appraisal may come back lower than expected and the buyer's lender may back out, or the home inspection might reveal damage that the seller is not willing to address and the buyer is not willing to spend money on. If one or more of these situations occur, the house will be placed back on the market, which could reignite a bidding war.

What to do if you lose a bidding war

It can be a disheartening feeling to lose a bidding war, especially if you have been deeply invested in the process of buying what you thought would be your dream home. However, suppose you have had your eyes on multiple properties and are open to the possibility of potentially finding something even better than the house you had submitted an offer for. In that case, it is probably best to cut your losses and walk away. But, if you really believed that this property was the one, it may be worth it for you to submit what is known as a backup offer.

As explained by Rocket Homes, a backup offer is a secondary offer made by a prospective homebuyer in hopes that the first offer on a property falls through. The alternative buyer and the home's seller agree that if the existing deal with the primary buyer does not work out for whatever reason, the seller will accept the alternative buyer's backup offer instead of putting the house back on the market. A backup offer can be a great way to ensure that you are the seller's second choice and that you won't end up in yet another bidding war if the house does become available again.