Q: I’ve lost several bidding wars for homes. Could you provide a few tips to help me win in a competitive situation?
Falling in love with a home only to lose it in a bidding war is certainly disappointing. But going through it repeatedly in today’s ultracompetitive housing market can be devastating.
I recently experienced similarly painful losses. Last year, my partner and I lost three bidding wars on homes we believed were The One before we succeeded in closing on our home in November in the New York City suburbs.
What I learned was that cash may be king, but “terms matter too,” as my real estate agent would often say.
It’s a seller’s market right now because the housing shortage has hit a crisis point. There just aren’t enough homes for the legions of folks seeking to become homeowners, relocate, trade up into larger homes, or downsize into smaller ones. That supply and demand imbalance has allowed prices to swell to epic proportions. It’s a battlefield out there for buyers with sellers calling most—if not all—of the shots.
Cash is king in today’s hot real estate market
It’s true that in most bidding wars, the highest offer will prevail. And all-cash offers might trump the largest bid as sellers don’t have to worry about a buyer securing financing. A cash sale could also close quicker than one dependent on a mortgage.
This is understandably frustrating for buyers without sizable inheritances, piles of cryptocurrency, or lottery winnings.
To reassure sellers that they can afford the home, buyers should make sure to be pre-approved for a mortgage. They should also try to put at least 20% down if they can. However, coming up with such a large down payment is no small feat with today’s record-high prices. It’s hard to save as fast as prices are rising. But in some of the nation’s hottest markets, sellers won’t seriously consider anything less than 20%—something my partner and I learned the hard way.
One thing buyers can offer right now is an escalation clause, which has become popular in some real estate markets. If the home a buyer bids on gets multiple offers, the clause states that the buyer will increase the offer price up to a specified limit. This can help buyers win the bidding war without getting in over their heads.
It’s worth noting that many sellers aren’t fans of this clause as they believe the buyers should have initially offered their maximum bid.
Watch: Just How Much Are Closing Costs—and Who Pays for Them?
Terms matter when buying a home
Cash isn’t the only way to win a bidding war. There are other, more extreme tactics that buyers can try in order to sweeten their offers. Proceed carefully, readers: These strategies can be risky.
Waiving an appraisal contingency might help buyers get into the good graces of sellers. This makes bids more attractive because buyers are promising that they’ll still pay what they offered on the home—even if the abode appraises for less. If that happens, the buyers are on the hook for coming up with all of that additional cash.
But this can be a financially perilous move for buyers, even those who know the local market and have carefully studied the comps (what similar homes recently sold for in the area). If a contract has already been signed, then they often can’t back out of the deal without losing their earnest money deposit—typically anywhere from 1% to more than 10% of the price of the home. That means they could be out a substantial sum of money no matter what they do.
Sellers also love it when buyers offer to waive home inspections—this means they don’t have to worry about fixing anything before moving out. They don’t have to repair a broken stove burner or patch a few holes in the walls where pictures were hung. But it also means that buyers can’t get out if an inspector discovers more serious problems, such as a leaky roof that needs to be replaced, cracks in the foundation, or a severe termite infestation. These kinds of problems can cost thousands—if not tens of thousands—of dollars to remedy.
Forgoing an inspection can certainly help buyers to make more attractive offers on the homes of their dreams. But is this really the home of your dreams if it needs $150,000 in repairs?
My partner and I waived a traditional inspection on the home we bought last fall to make our offer stand out. But we wanted to make sure the house was in good condition if we were going to buy it. So we made our offer contingent on a structural inspection. This meant we weren’t going to nickel and dime the sellers on the little things, but we could back out of the deal if there were any big, expensive problems. So if there were issues with the electrical or plumbing systems, foundation, roof, or boiler, we could walk.
Fortunately, our inspector assured us that everything looked good. And my partner and I were able to address most of the minor issues with a screwdriver, a few swabs of spackle, and some paint.
Less risky perks homebuyers can include in their offers
Not every perk is a costly one. Buyers can offer sellers flexibility on the timing of the sale. A seller may want a buyer who can close immediately, like ours did. But other sellers might still be hunting for their own next homes and need additional time in their current property. So buyers who can offer longer closing times can make their offer stand out. Some will even purchase the home and rent it back to the sellers for a fixed period of time at a reduced cost.
Another popular way buyers attempt to win over sellers is by writing letters. They give buyers the opportunity to express why they should be chosen to buy the property. This might give them a slight advantage over a deep-pocketed investment company with a sentimental seller.
However, it’s become a controversial practice that could inadvertently lead to fair housing violations, and it has even been banned in some areas. (Ask your real estate agent whether it is permitted where you are looking.) Often buyers innocently share information about their family, sexuality, religion, or even race in these missives written to tug on the heartstrings of sellers. Denying or accepting an offer based on personal information gleaned from a letter can open the seller and the real estate agent up to a fair housing complaint. (Read more about fair housing laws here.)
I’ve heard of buyers throwing in tickets to theme parks and ritzy events, vacations, and even a year’s worth of free frozen yogurt. If you have something unique to offer, great. Creativity could help you win the bidding war. Just please don’t be creepy.
The housing market may cool off, giving buyers a little more power
This hopped-up seller’s market isn’t going to continue forever. It is likely to cool off, and home prices could even dip, due to mortgage rates exceeding 5% in April—their highest point in over a decade. When rates go up, so do monthly mortgage payments. That will have the effect of pricing many buyers out of the housing market and limit how high others can offer. Bidding wars are expected to die down.
While the seller’s market is expected to remain, due to the dearth of homes for sale, buyers will likely regain a little more leverage when there are no longer 15 buyers vying for the same fixer-upper on the edge of town. Buyers will likely still wind up paying more for a home than they did a year ago due to the higher rates. But home inspections could return and buyers might be able to laugh about the days when they included a brand-new PlayStation 5 with their offers.
So buyers, keep saving, practice some self-care if you lose out on a home, and don’t lose hope. You might soon be able to buy a home without throwing in free frozen yogurt.
Follow Hashtags: #DRE01091418 #realtorlife