Summer is typically the busiest season for real estate, and 2020 is no exception, even during the pandemic. Despite a later start to the buying season than usual, Realtor.com’s August housing data release shows that the market is hotter than ever with one concerning trend: a severe shortage of inventory. In fact, the inventory of newly listed properties is 11.8% lower nationally than August 2019, leading to higher listing prices and shorter time on the market.
Many sellers have also postponed putting their property on the market with the threat of an economic crisis as a result of the COVID-19 pandemic. Meanwhile, low mortgage interest rates are encouraging buyers. The lower inventory and higher buyer demand means it’s currently a seller’s market.
If you are trying to buy a property right now, you will likely find yourself in a situation where there will be several offers on the building you want to buy, which may lead to a bidding war. So, how can you make sure that your offer is the winning one?
1. Submit your “highest and best” offer
If you want to win a bidding war, your best bet is, logically, to put in the highest offer. In highly competitive markets, bidding at the asking price is only the start.
Before submitting an offer, do some research on the real estate market in your area to find out how much properties are typically selling for compared to the listing price. Some sellers may actually list their building lower to attract potential buyers and create a bidding war situation.
Before getting sucked into the offer and counteroffer game, make sure you know exactly how much the property is worth and how much you are comfortable spending. You can find different home value estimators online along with other tools, such as tax assessment cards, to find out how high you should be prepared to bid.
2. Increase your earnest money
The earnest money is the cash amount attached to your offer that is used as a deposit – if your offer is accepted. It shows the seller that you are motivated and making the offer in good faith. The money is held in an escrow account until closing and will eventually be used toward the down payment and closing costs if you have the winning bid.
Depending on the market, the earnest money deposits account for 1% to 10% of the purchase price. The more money you are willing to put down, the more serious the seller will take your offer.
3. Wave contingencies
Contingencies are common in real estate. Most offers are “subject to” the property appraising at the contract price, a satisfactory home inspection, buyer financing approval, and so on. Some contingencies make demands on the seller, such as splitting the closing cost or fixing an item before closing. These contingencies typically protect the buyer. If the conditions are not met — if the home inspector uncovers a significant issue during the inspection, for example — then the buyer can renegotiate or walk away from the contract.
If you want to make your offer as attractive as possible, you should remove as many contingencies as possible to alleviate the pressure on the sellers. Beware, however, that if something does come up, you would need to sacrifice your earnest money to walk away from the deal.
4. Pay in cash
There is a reason why “cash is king” when it comes to real estate. Sellers will find an all-cash offer more attractive than any mortgage, even if the offer might be slightly smaller than others. It removes any uncertainty that may be linked to financing and often guarantees a fast closing.
If you are not in a position to make a cash offer, increase your down payment if possible, and make sure you have your ducks in a row to speed up the mortgage process by gathering any documents you may need and getting pre-approved, for example.
Time is often of the essence in hot markets, and you may lose the property if there are any delays in getting your financing approved.
5. Use an escalation clause
In hot real estate markets, multiple-bid situations are the rule rather than the exception. If you want to have the winning offer, you can include an escalation clause in your bid. This shows the buyer that you are serious about buying the property and willing to increase your offer in set increments to beat any other offer up to a specific price (the “cap”).
Beware, though, that some sellers do not accept escalation clauses. It may also encourage them to counter your offer with your highest bid. It is best only to include an escalation clause if you are confident there will be several offers on the property.
6. Work with the seller
Real estate transactions are stressful and expensive for the sellers, too. They may be purchasing a new property themselves, dealing with repairs and closing costs, and abiding by their own timeline. You have more chances for your offer to be accepted if you show the sellers that you are willing to work with them to make the transaction as smooth as possible.
Some buyers include a letter with their offer to sway the sellers in their favor. If possible, let them know you are flexible on the closing date. You can also offer to pay for some of their expenses, such as the seller’s agent real estate commission or part of the seller’s closing costs.
7. Know when to walk away
It is easy to get carried away when dealing with a bidding war. You may be tempted to offer more than you were initially planning because of the fear of missing out due to the limited inventory. It would be a critical mistake, especially if you are purchasing the property as an investment. Remember that the essential part is not to win at all costs — but to make a smart investment.
Never lose track of the maximum amount you are willing to spend comfortably and the property’s value. If things get out of control, it is often best to give up and save your money for the next opportunity that may present itself.
When it comes to bidding wars, the best policy is always to be prepared for all eventualities. Ensure that you are pre-approved before putting in an offer and that your credit score is in great shape to secure financing. You should also have all the documentation you need to act quickly when required — and a responsive team (real estate agent, contractors for bidding if necessary, mortgage agents, etc.) by your side.
You should never forget, however, that the best way to win is sometimes to walk away from a bidding war rather than overpaying for a property.