How to Win a House Bidding War
Published on FEBRUARY 11, 2023 by ROB HASTINGS
CATEGORIES: First Time Home Buyer Tips | Buyer Resources
KEY POINTS: Winning a House Bidding War
• Understanding the process of multiple offers helps gain a leg up on the competition.
• What does a Seller want? Find out how to maximize price and minimize risk.
• 8 Strategies and Tips to win a multiple offer situation
• Should you write a letter to the Seller?
• Your real estate agent's critical role
In a competitive real estate market, when the inventory of available homes is less than buyer demand, house bidding wars are very common. You may also hear this referred to as a "multiple offer situation" or "multiple offers."
As a buyer, this is frustrating because all leverage in negotiation is usually lost, and the seller has all the power in selecting the offer that gives him or her the best terms possible in selling his or her home.
In 2022, according to Redfin, 83% of homes sold in Spokane, Washington received multiple offers. 16 other metropolitan areas in the United States had 70% or more homes sold in house bidding wars. Jacksonville wasn't too far behind.
While the market has softened since the peak of these bidding wars, the fact remains that home inventory is still less than buyer demand. In turn, multiple offers are still being received by sellers.
This listing of ours was a no-frills, basic, all original home that was built in 1994. It received over 120 showings in 3 days, 34 offers, and sold for $41,000 over the asking price to a cash buyer.
The Process of Multiple Offers
Generally, the process of multiple offers occurs when a property listed for sale receives two or more competitive offers to purchase and the seller decides to ask for highest and best offers by a specific deadline. It is important to note that asking for highest and best offers is the seller's decision. The seller does not have to do so; he or she may simply choose from one of the offers received.
For the process of our listings, we often list those properties for sale on Friday of each week. On popular and desirable properties, we usually receive multiple offers by Friday evening or Saturday morning. On Saturday afternoon, we send out a multiple offer notice and also place that notice on the Multiple Listing Service (MLS). We then usually ask for highest and best offers by Sunday evening at 6pm.
This method allows the home to be seen by all serious and potential buyers for 3 days. It also allows buyers who made an initial offer to resubmit their offers to purchase prior to the deadline. It's a process that's fair for all interested buyers.
What Does a Seller Want?
Stated simply, a Seller an offer that "maximizes price and minimizes risk." What does this mean exactly?
An offer to purchase a home is more than price. Certain terms of the offer can add risk to the seller such as when a buyer has to get financing, wants to do an inspection and ask for repairs, wants to tie up the property with a long inspection or due diligence period, or wants to ask for closing cost assistance or a home warranty.
As a result, if you want to know how to win a house bidding war, your offer must mitigate these risks to the seller while maximizing price. Let's discuss the strategies and tools at your disposal as a buyer to win a house bidding war.
Strategies & Tools for How to Win a House Bidding War
1. Use an Escalation Clause to Maximize Price
A real estate escalation clause, also known as an escalatory addendum, is a separate addendum to the real estate purchase contract that automatically "escalates" the price of a buyer's offer to the maximum amount the buyer is willing to pay. The verbiage usually looks something like this:
If prior to the full execution of the Agreement, SELLER receives any competitive bona fide offer(s) to purchase the Property from which Seller would receive higher net proceeds from the sale, then BUYER agrees that the Purchase Price shall automatically increase by $_______ more than any other competitive bona fide offer(s), not to exceed a maximum Purchase Price of $_____________.
I personally like the use of an escalation clause because it allows the buyer to increase his or her purchase price to an amount that he or she feels comfortable while at the same time not losing out on the house for just a couple hundred or thousand dollars.
Of note, not all states allow the use of escalation clauses. Check with your local real estate agent to see if an escalation clause is a tool you can use to win a house bidding war.
2. Increase Your Earnest Money Deposit
A buyer's earnest money deposit (also known as a binder deposit or good faith deposit) is money delivered to the title company, escrow holder, attorney, or even the Seller at the acceptance of the offer. It shows the seller that the buyer is serious about purchasing the home. Generally, standard real estate contracts dictate that the deposit is refundable at any time during the inspection / due diligence period or if the buyer cannot obtain financing.
At closing/settlement, the earnest money deposit is applied to the closing costs, downpayment, or purchase price. In other words, this is your money.
Increasing your earnest money deposit to beyond what is standard in your real estate market shows the seller you are very serious. It gives him or her confidence in your offer and added protection if you decided to back out of the contract after the inspection period for buyer's remorse.
Also, because it's your money, it's a term of your offer that is cheap to you and valuable to the seller.
3. Lower the Risk of Inspections
Inspections are a large risk of the purchase contract for sellers. Inspections can uncover issues in which a buyer wants to renegotiate the sales price of the home or ask the seller to perform expensive repairs.
As a result, mitigating these inspection risks to the seller is attractive as sellers are reviewing offers to accept. How can you do that?
The first option is to waive the inspection completely. This is a large risk for the buyer, and I typically don't recommend this approach unless the is confident in the property's condition or has done a pre-inspection.
This listing of ours was priced at $1,265,000 and sold for $1,415,000 with 6 offers. The winning buyer brought in an inspector to quickly look at the home while doing the showing. As a result, the buyer waived the inspection completely, which was a major factor in our sellers selecting the buyer's offer.
The second option is to complete an inspection but agree to purchase the home "as is." In other words, the buyer is saying, "Mr. and Mrs. Seller, I want to do an inspection, but it's for informational purposes only; I will not ask for any repairs or concessions for repairs." I like this approach because it makes the buyer's offer more attractive for the seller while protecting the buyer.
The third option is to decrease the number of days for the inspection / due diligence period. Most real estate contracts have a standard length for this period. In Northeast Florida, the standard length is 10 days. As mentioned previously, a buyer can be released from the contract at any time and for any reason during this period, so by decreasing this inspection period length, risk is lessened for the seller. In combination with the second option above to purchase the home "as-is," I recommend reducing the inspection to 5-7 days in our Jacksonville market.
4. Waive the Financing Contingency or Appraisal Contingency
For buyers submitting offers in which they intend to use financing to purchase a home, the element of financing adds risk for the seller if for some reason the buyer can't get financing. The type of mortgage financing matters too.
According to Rocket Mortgage, a buyer's inability to get financing is the number one reason that home purchase agreements are terminated. So, if the financing risk can be mitigated for the seller, this will help a buyer in trying to win a house bidding war, especially if competing with cash offers.
If you feel confident in your ability to get financing, and you have worked closely with your lender ahead of time to ensure your loan won't have any problems in underwriting, waiving the financing contingency may help you win a multiple offer situation.
So what's the risk?
If you waive the financing contingency, the seller could be entitled to your earnest money deposit if you can't ultimately get approved for a loan. Likewise, if the home doesn't appraise for the contract price, and you can't or don't want to make up the difference between the appraised value and contract price, the seller could also be entitled to your earnest money deposit.
Alternatively, a buyer could only waive the appraisal contingency or offer appraisal gap coverage to improve his or her offer.
When waiving the appraisal contingency, this means that regardless of the appraised value, you as the buyer will make up any difference between the appraised value and the contract price. Remember, the lender will only give you a loan for the appraised value of the home, so any difference would require additional cash out of pocket if you waive the appraisal contingency.
A less risky approach for buyers is to offer appraisal gap coverage. This means that you agree to pay a certain amount over the appraised value but not to exceed the contract price. Let's look at this option in a scenario:
Suppose your offer price is $500,000, and you agree to agree to cover any appraisal gap up to $50,000.
If the home appraises for $500,000, great - no additional money is required from you.
If the home appraises for $475,000, you would be required to bring $25,000 to the closing table to make up the difference between the appraised value and the contract price.
Finally, if the home appraises for $400,000, the full $50,000 gap would apply, and you would be required to bring $50,000 to the closing table. However, the good news is that the purchase price (because the seller agreed to $50,000 appraisal gap coverage) is now reduced to $450,000.
5. Buy the Home with Cash
As you can see from the last section, financing complicates things for a seller. Cash is king because it eliminates the potential problems with financing. Cash buyers can also close more quickly since there is no underwriting of a loan.
In a competitive multiple offer situation, cash buyers will often win, even if the cash offer isn't the highest price. According to the National Association of Realtors, all-cash offers are four times more likely to win a house bidding war than financing.
If you can, buy with cash in order to win a house bidding war for your dream home. Then, if needed, you can do a cash-out refinance after closing.
6. Find out What's Important to the Seller
An offer is more than price. Therefore, your real estate agent should ask the listing agent about terms of an offer that are important to the seller. This could be a variety of things. Perhaps the seller wants to close as quickly as possible. Maybe the seller wants to lease back the home for a couple months before moving to start a new job. Or maybe the seller wants to sell all the furniture with the home so they don't have to move it.
We have seen a multitude of things that are important to sellers. All you have to do is ask and incorporate that seller's desire in your offer in order to get a leg up on the competing offers.
7. Pay Some of the Seller's Closing Costs
The seller has closing costs for the sale of the home. In Northeast Florida, it is customary that these closing costs include deed stamps (transfer taxes), owner's title insurance policy, survey, real estate commissions, property tax prorations, and HOA estoppel fees. In total, these costs normally add up to approximately 6-8% of the sales price.
In turn, if you offer to pay some of these traditional seller closing costs (traditional in our local market) for the seller, it's obvious this will increase the attractiveness of your offer.
This strategy can be useful, but in essence, it's just adding more money to the seller's bottom line. I recommend just increasing the offer price to lessen the number of terms and keep things simple.
8. Keep the Offer Clean
As mentioned previously, a multiple offer situation removes almost all negotiating power and leverage for the buyer. Therefore, it's important to keep the offer clean.
What does that mean?
It means that it is unwise to ask for the seller to pay any buyer's closing costs, ask the seller to pay for a home warranty, include a home sale contingency, or attempt to write other things in the offer that just muddy the waters for the seller.
Should I Write a Letter to the Seller?
In an attempt to understand how to win a house bidding war, many buyers are advised to write a letter to the seller to accompany their offer. The purpose of the letters is to try and pull at the heartstrings of a seller. That's why they are often called "love letters."
Here's an example:
Dear Mr. and Mrs. Jones,
We are so excited about your home on 123 Maple St! After having our “surprise” daughter 3 years ago, we quickly outgrew our starter home (a family of 4 in a 2/1 has been very interesting). We have always loved this neighborhood and have been dreaming of a home with a fireplace and a backyard where our kids can play in.
This house checks off all of our boxes and even has a few extra! We love the upgrades and improvements you did with your home.
We have been looking for over a month now and put a couple of offers in on homes, and unfortunately, we were not the chosen ones on those properties. We can picture ourselves in this home, and we knew it the minute this home came on the market. We would be absolutely grateful if you were to choose our offer!
Thank you again for allowing us to see your beautiful home.
Davide, Alicia, Savannah, & Connor McGraw
Like other strategies, "love letters" to sellers can be useful, but in the recent competitive market, they became overused. All the love letters said the same thing. Sellers got tired of them.
Instead of writing a "love letter," have your real estate agent call the listing agent and make a personal connection. Your agent should be able to create rapport, and in doing so, communicate why you are the perfect buyer for the listing and the seller.
Your Real Estate Agent
Your real estate agent has a very big part in your offer standing out above the others. This is where the best agents rise to the top, so choose wisely who represents you in any house bidding war.
Good agents know how to communicate effectively with the listing agent. As mentioned previously, professional rapport with the listing agent is essential. The listing agent is the link between your offer and the seller. You want the listing agent to advocate for your offer to be accepted.
Good agents also know how to write and present an offer that wins. If an offer is incorrectly completed on the standard contract or leaves out important information that should be checked, written in, or completed, this unprofessional work reflects poorly on your offer (even if it has good terms).
A buyer's agent that communicates well, builds rapport, and shows professionalism in all aspects of his or her business goes a long way in getting your offer accepted.
With the real estate market constantly changing, it can be difficult to know what to do as a buyer when you hear the dreaded term "multiple offers." While the competition can be fierce in these situations, it's important to be prepared and know the strategies and tools for how to win in a house bidding war.
The best advice is to consult with your local real estate agent and lender; they are the professionals to help you make the best decisions.
But if you use even just a few of these strategies, it's likely that your current title of "home buyer" will soon change to "home owner."
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ABOUT THE AUTHOR:
Rob Hastings is a top-producing real estate agent in Jacksonville, Florida and helps buyers, sellers, and investors of homes and property throughout all of Northeast Florida. He works with his wife Nancy as a husband-and wife-team with Keller Williams Realty Atlantic Partners. When not helping his clients navigate the real estate process, Rob enjoys working on old Corvettes and playing music (guitar and piano). A U.S. Naval Academy graduate and former Naval Officer, he also loves boating and simply spending time on the water.