How to Win If You’re Buying a Home…or Selling One
A few months ago, a simple four-bedroom tract house in Dublin, California, drew 40 offers from would-be buyers. The winning bid was a steep $100,000 above the $399,000 asking price.
Yes—bidding wars are back. Six years after the collapse of the US housing market, prices are rising…buyers are showing up…and in many areas, bidders are competing for homes that are in short supply. More than two-thirds of US homes recently for sale received multiple offers, according to the online real estate brokerage Redfin.com.
Here’s what potential buyers need to know now—plus tips for sellers.
Set a walk-away number in advance. Before you even make your initial offer, decide how high you are willing to increase your offer if a bidding war breaks out. Without this walk-away number set in your mind, it’s easy to get caught up in trying to win and bid more than the property is worth.
Helpful: Focus your home search on just one or two neighborhoods. Visit open houses frequently in these neighborhoods, and use Zillow.com and Trulia.com to track actual sale prices for homes that are comparable to what you’re looking for.
Promise to come up with more cash if the appraisal comes in low. Real estate offers usually are contingent on the property being appraised for at least the purchase price. If the appraisal comes in lower, the buyer’s financing is likely to fall through. Trouble is, appraisers base their judgments on past transactions, so appraisals often fall short of aggressive offers. Agents representing sellers know this and worry that their best offers will evaporate.
One powerful way to make your offer stand out is to include an agreement to pay a larger share of the purchase price in cash, if necessary, to prevent the appraisal clause from quashing the deal. Of course, you can do this only if you can come up with tens of thousands of dollars in a hurry on top of the money you already have set aside for your down payment.
Example: A man bidding $250,000 on a home added an agreement to increase the cash portion of his offer by up to $50,000, if necessary, to obtain a loan. His offer was accepted, even though there were higher bids.
Alternative: If you can afford to make a cash offer on a home rather than take out a loan, you can eliminate the appraisal clause and other mortgage-related contingencies from your offer entirely. That will make you even more attractive to sellers.
If you’re bidding on a house worth less than $300,000, you might be up against big real estate investors offering cash. However, these bidders want bargains and so are not always willing to engage in bidding wars.
Address the seller’s nonmonetary priorities. Have your agent ask the listing agent if the seller has any concerns related to the home sale beyond getting as much money as possible. Address these concerns in your offer.
Examples: The seller might be worried that construction of the new home that he/she is planning to move to won’t be completed on schedule. You could offer to rent back the home that you are buying to the seller for a month or two, if necessary. If the seller is especially proud of his/her garden, you could promise to maintain it with great care. If the seller is downsizing and can’t fit all his old furniture into his new home, you could offer to buy some of the furniture at a relatively modest price.
Write the seller a letter praising his home. State how much you love the home, how perfectly it meets your needs and how well you intend to take care of it. Include this letter with your offer. There’s no sensible reason for sellers to give any weight to such letters, but some do.
Helpful: If the seller’s agent mentioned an aspect of the property that the seller particularly loved, include this feature in your letter.
Consider arranging a preacceptance home inspection if a seller sets an extended window for offers. Would-be buyers who want to stand out from other bidders in competitive markets sometimes waive the home-inspection contingency in their offers—the right to back out of the deal if an inspector finds problems with the home. This may get a seller’s attention, but it’s not worth the risk.
Still, there is one situation when waiving a home-inspection contingency can make sense. Sellers sometimes announce that they won’t choose an offer for a week or 10 days, in hopes of drawing many offers and starting a bidding war. Would-be buyers can take advantage of this delay by having a home inspection done before making an offer. If the home inspection comes back relatively clean, the would-be buyers can safely waive the home-inspection contingency. This home inspection will cost you $300 to $500, however—money that’s wasted if the seller chooses another offer. So use this strategy only in very competitive markets and for a very special property.
Don’t agree to automatically “escalate” your offer. If you’re looking for a house in a very competitive market, your agent might encourage you to include an escalation clause in your offer. This clause is an agreement to increase your initial offer enough to top any other offer that the seller receives by some predetermined amount—say, $1,000 or $5,000.
In practice, such clauses often lead to paying more than a home’s true value. If another would-be buyer falls in love with the home and overbids, your escalation clause might force you to overbid by even more. If another would-be buyer makes a bid that includes a steep purchase price but has other details that make that price worth less than it appears, your escalation clause might force you to bid above the high price without taking these other details into account.
Example: A bidder offers $400,000 but also demands that the seller make $35,000 in repairs to the home or contributions to closing costs. The true value of that offer is just $365,000, but your escalation clause likely would increase your offer above $400,000 regardless—potentially far above the true value of the property.
Of course, you could put a cap on your escalation clause—but such a cap would only tip off the seller to exactly how much you’re willing to spend to obtain the property.
Find a “vest pocket” deal, and skip the bidding wars. Tell a handful (or more) of real estate agents that you’re very interested in a particular neighborhood or type of property—and that you have not signed on with a buyer’s agent. The best agents to approach are the ones who seem to do the most business in your favorite neighborhoods, based on the “Home for Sale” signs. You might find an agent who has a vest pocket property—a home for sale that has not been posted to the Multiple Listing Service (MLS) and thus is unknown to other potential buyers. Agents occasionally keep a choice property or two off the MLS in hopes of finding a buyer themselves. That way, they can claim the whole commission for the sale rather than split it with a buyer’s agent.
5 Tips for Sellers
Home sellers have the upper hand in many real estate markets these days, but that doesn’t mean they should just sit back and wait for the offers to roll in.
Here are five ways that sellers in hot markets can increase the odds that their property will ignite a bidding war and get the most money out of the situation if it does…
- Set your asking price roughly 5% below market. A low asking price usually draws in more bidders and can lead to a higher final sale price in a hot market.
- Hold an open house for agents only. Each agent who learns about your property could tell several potential bidders about it. Mention that free food will be offered, and you’ll get a great agent turnout. Open houses for the general public tend not to attract serious bidders.
- Fix any cosmetic problems. Many more potential bidders will fall in love with a beautiful home than a fixer-upper.
- Don’t accept any offers for 10 to 14 days. This gives as many potential buyers as possible a chance to see the property. Set a deadline for offers after that period ends.
- Tell at least the top three or four bidders that you have received multiple bids. Ask for their best offers.