Congrats! After months of searching, you finally found your dream home. But, in this persistent seller’s market, other buyers may be the one thing standing between you and your dream home. A record shortage of homes for sale and strong demand from buyers are sparking bidding wars and sending home prices to new records. Because of this, it’s more important than ever to understand how bidding wars work and what buyers can do to help strengthen their position.
Tactics to win a bidding war:
- Flexible dates/terms: Selling a property is much easier than buying in this market. A buyer with flexible dates and terms will be favored by a seller who still needs to find a new home. This includes closing dates, allowing a seller to remain in the property after the closing for a period of time (under what is called a “rent-back” or a “use and occupancy agreement”), or allowing the transaction to be contingent on “the seller finding suitable housing” can be advantages for a buyer.
- Inspection contingency: Buyers can waive the inspection completely or put an amount of money in their inspection contingency to show the seller that the buyer will not try to back out or negotiate over minor issues.
- Inspection for “information purposes only”: Sellers favor this because there is no negotiation over inspection results, it also gives the buyer a chance to walk away if something unexpected turns up – and they don’t risk much (besides their initial offer deposit).
- Pay cash: Depending on the market, paying in cash may not be the most typical option but it certainly represents the strongest edge a buyer could have in a bidding war against other buyers who most likely have financing contingencies.
- Provide a “pre-commitment” rather than a “pre-approval”: Some lenders underwrite a loan at the time of pre-approval so the buyer is already approved at the time of offer submission (except for an appraisal). This gives a buyer a leg up on most buyers with regular pre-approvals.
- Appraisal waiver: When a buyer is paying over asking-price, they can offer to bridge the gap if a lender appraises the property lower than the purchase price. In the current market where paying over asking-price is becoming “the norm,” this has become more common and is appealing to sellers who are apprehensive about accepting an offer that is 10% or more over asking.
- Waiving contingency: Waiving the financing contingency strengthens a buyer’s position. It’s comforting for a seller to know that unless the buyer backs out (and risks forfeiting their 5% down payment) the deal is proceeding the moment the purchase and sale agreement is signed.
- Utilizing an escalation clause: An escalation clause is a useful tactic a buyer can use to demonstrate that they are prepared to offer a certain amount over the next competing offer. A piece of advice to note for a buyer in this scenario is to make sure they have specified a maximum price/cap that they are willing to go to so they do not compromise their true budget.
Bidding wars can be stressful, especially if you don’t have a clear understanding of what you’re getting into. Luckily, there are several tried and true tactics buyers can utilize to get a leg up in today’s ever-changing market. As you navigate the bidding war process, it’s important to work with an experienced real estate attorney to answer any questions you may have along the way.
About the Author
Matthew Arakelian is an attorney at Ligris + Associates. He focuses his practice on the representation of individuals, developers, and lenders in all facets of residential and commercial real estate transactions, including purchases, sales, and refinances. Matt can be reached at firstname.lastname@example.org.