In real estate, when the demand for homes in a particular area exceeds the available supply, you have what's known as a seller's market. This can be very difficult for buyers, who might find themselves competing with several others who are all interested in purchasing the same property. These situations frequently lead to bidding wars, which can push the final sale price much higher than what the seller was initially asking.
A bidding war is a competition between two or more potential homebuyers for the same property. Buyers offer increasingly higher amounts of money and other perks for the right to purchase the home.
"Bidding wars are fueled by a lack of available housing," says Doug Wagner, a Realtor in Dayton, Ohio.
"Although first-time homebuyers historically make up 40% of the market, builders, who put up $300k+ homes, don't cater to them," Wagner says. "As more and more buyers vie for fewer and fewer houses, they find they have to compete — hence a bidding war."
The combination of a lack of housing stock, multiple buyers, a desirable location, and a growing number of real estate investors who can pay cash help foster a bidding-war environment. Bidding wars are common during seller's markets and in markets with certain traits such as low turnover, or where the home is significantly undervalued.
Statistics from the Feb. 2022 Realtors Confidence Index Survey supported the notion that a bidding-war environment existed nationwide at that time. It found:
In a neutral housing market, when neither side has a significant advantage, an offer to purchase a home typically consists of the following elements:
In a bidding-war environment, things are different.
Mike Opyd, owner of RE/MAX NEXT, a real estate brokerage in Chicago, says that when properties are receiving multiple offers and often selling the same day they hit the market, "we are not typically submitting an initial offer like we would in a similar situation with a slower market."
When submitting an offer on a house when multiple offers are expected, Opyd emphasizes the need for buyers to put everything on the table right away to get it accepted. This often means including an escalation clause to an offer that says the buyer will automatically increase their bid above the highest competing bid by a set amount up to a maximum limit.
In a bidding war, agents say these are some of the key elements where buyers will need to allow for some flexibility:
While an escalation clause can be very helpful, it isn't always wise for a buyer to offer one. Here are some pros and cons real estate professionals see in offering an escalation clause:
In addition to an escalation clause, agents recommend a variety of other tactics that can put you "first in line." These can be as important as the price you pay, depending on the seller and their wants and needs.
In setting a strategy to win a bidding war it's sometimes easy to forget the role of the seller. Remember, the seller decides which offer to accept. Does the seller want a quick closing? Do they want to occupy the home for longer than normal (30 days)? Are they concerned the appraisal won't support the selling price (appraisal gap)? Find out the answers to these questions and plan accordingly.
"House shopping without a preapproval is the quickest way to lose the bidding war," says Richardson. "Preapprovals are a step up from a prequalification and say that the lender has physically verified what was verbally discussed. It shows that you've done the work and are serious about your home purchase."
Arakelian says providing a precommitment rather than a preapproval could give you more of an edge. "Some lenders are underwriting a loan at the time of pre-approval so the buyer is already essentially approved at the time of offer submission (except for an appraisal)," he says. "This gives a buyer a leg up on those with regular preapprovals."
Arakelian also has some advice for buyers when it comes to dates: "Selling a property is much easier than buying in this market, so a buyer with flexible dates and terms will garner considerable favor with a seller who still needs to find a new home."
"If you have to finance, put more money down for the deposit — rather than 10%, put 20% down," says Talia McKinney of the real estate firm SERHANT. "It can show to the seller you are willing to risk more of a deposit should something happen with your financing and shows more confidence in your offer."
Recall that cash offers made up 25% of homes sold in February 2022, according to Realtor.com. Real estate referral company, Homelight, reported 31% cash offers in 2021.
"If you have cash, use it," says McKinney. "There is no risk to the seller in terms of you not moving forward with a cash purchase."
A true cash offer is one in which the buyer does not end up with a mortgage but pays for the home with savings, proceeds from the sale of their existing home, or a gift.
Richardson lists several concessions that, in addition to an exclusion clause, are popular with sellers:
"Offer to pay a portion of the seller's closing costs. Let the seller choose the settlement attorney and/or make a joint decision on inspectors or contractors performing the repairs. Accept the home `as-is' and waive the right to ask for repairs. Allow the seller to remain in the home after closing for a set period of time rent-free."
With an appraisal gap guarantee, if the negotiated price exceeds the home's appraised value, you have to make up the difference.
"Sellers want to know that if they sell to you that you'll actually get the home," says Ken Pozek, chief executive officer of the Pozek Group.
Some would-be buyers write a personal note to the seller, making their case for why their offer should be accepted.
Polly Watts, Vice President at Sundae recalls one such note: "A buyer wrote a note explaining that they had a few children in the household with special needs, and the letter detailed how that house met all their specific needs. It helped to get additional eyes on their offer and they were able to secure the home."
Wagner says that when all is said and done, sellers want a "no-hassle" transaction. "Cash is king," he reminds, primarily because it is relatively hassle-free. He and others point to one Achilles heel with escalation clauses, their complexity. That's why, he says, a lower cash offer with no escalation clause might beat out an escalation-clause offer.
Bidding wars are a fact of life in a seller's market, and each has only one winner. So what do you do if you lose?
Richardson suggests a backup offer. "If anything falls through with the first buyer, the second buyer — the backup buyer — is now next up to purchase the home. Buyers should consider backup offers because if the property comes back on the market, another bidding war could ensue, a backup offer avoids that because the backup offer immediately becomes the primary offer."
Avenue 8's Grossman believes the best way to win a bidding war is to avoid it in the first place.
"We worked with a buyer who fell in love with a home in the East Village except the seller wasn't going to respond to bids until after the first open house had taken place," Grossman says. "In this instance, we asked the seller's broker to 'reprice' the apartment that they would honor even if subsequent offers came in higher. They came back at a number 10% above asking, our buyer agreed to it, we went to contract quickly, and other buyers were left wondering why they didn't even get a chance to bid."