How To Win a Bidding War
How To Win a Bidding War.
In real estate, bidding wars are not rare. In a competitive market, buyers looking for their perfect home can drive prices sky-high.
But what is a real estate bidding war? Should you get into one in certain market conditions? And, more importantly, how do you win one?
What is a bidding war?
In real estate, a bidding war is a situation in which two or more people, typically interested parties in the purchase of the same property, make offers to buy the property at the same time. The term can also be used more generally in other types of auctions.
The listing agent may set the price a little lower than the home's market value to entice potential buyers and create a high demand that can send the initial asking price soaring. The role of the selling agent is to be on the side of the home sellers and give them the best price possible for their house, and in a seller's market bidding wars are a great way to make that happen.
The housing market does not have a static purchase price set in stone for each house, it depends on whether there are more buyers than sellers and other factors. One local market can be different from another and so a home that would trigger bidding wars in one location would not do so if it were somewhere else.
As a potential buyer, one thing to keep in mind is that the listing price you see online may be a far cry from what's expected if many competing offers start to roll in.
What is blind bidding?
Blind bidding is a practice where you and the other buyers are not allowed to know what everyone is bidding.
As you can imagine that can drive the selling price through the roof extremely quickly. When a dream home lands on a tight market, it's easy to have people with more money than sense get over-zealous.
The blind bidding process adds a layer of uncertainty where people are basically throwing higher and higher numbers without knowing if what they're offering to pay is reasonable considering the other buyers' offers. In BC, there are talks of making changes to the home buying process in order to remove the possibility of blind bidding to try and tone down the bidding wars.
Open bidding, where other buyers can tell what the other offers are, is more transparent but it is unclear as to whether or not it leads to fairer prices overall. Seller's markets being what they are, it's a good idea to talk things at length with your real estate agent to see what's right for your situation.
When should you get into a bidding war?
Avoid falling into the trap of getting into bidding wars just because you see a home's price climbing.
Hype does not justify higher prices, finding a realtor acting in good faith can save you the extra money you would have spent on a pointless contest.
There are times, however, when multiple buyers will find a house that feels right for them. Maybe the housing market isn't great and that one house is a gem compared to other properties, maybe it's in the perfect spot for your commute and the children's bus route to school.
All real estate agents know that bidding wars happen for all sorts of reasons. The best one is when you find a home fit for you. However, finances are still something to think about. Are you ready to tighten your belt for a few years to deal with the mortgage? Can you keep doing the things you love while living in that home?
It's all worth considering before you make the call.
How do I win a bidding war?
Have all your finances in order.
This means getting things like your mortgage pre-approval documents, pay stubs, and bank statements ready. When it comes to it, most sellers want to know that they are not wasting their time. Showing them that you're prepared and have the means to pay what you're bidding goes a long way.
Set up an escalation clause with your real estate agent.
The bidding process is gruelling. Winning a bidding war can come down to the wire but once you step back you find that you offered to pay more than what you reasonably could.
An escalation clause basically sets up a ceiling for how much you are willing to put down. In a blind bidding war, it helps show the seller how far you're willing to go earlier on. In an open bidding situation, the ceiling of your escalation clause basically gives the other buyers a number they need to beat to take you out.
Use this judiciously when thinking about the bidding process.
Think through waiving conditions.
The highest bid may not be the one that wins in the end. Sending an offer without conditions, like waiving the home inspection contingency, will make your offer very appealing.
It exposes you to the risk of expensive repairs but in multiple offer situations, this can help the seller settle on a buyer far more easily. Most real estate agents would advise against this unless it becomes an absolute necessity to close on the sale.
Be prepared to walk away if the price is too high.
There are times when prices will just go out of control. Homes come and go on the market and a mortgage that would feel like the weight of the world for one house can be much more manageable for a comparable home that comes on the market just days later.
The truth of multiple offers is that they only benefit the seller and the seller's agent. Properties in high demand, properties in a seller's market, sell for a premium - that's how economics work.
It's up to you to do your due diligence to protect your financial health by making sure that the down payment you are putting down is worth the money. Having the upper hand sometimes means knowing when to back out. Confidence goes a long way but, ironically, so do limits.
Should you bid on the property you're eyeing? Think of what life will be like living in that house and what you're willing to sacrifice for that.
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