Housing markets across the country are hot right now, driving up prices and fueling bidding wars.
Everyone wants the most money and the best terms they can get when selling a home. Especially in a hot sellers market, there are times when you may be asked to make your highest and best offer. In these situations it’s imperative that you know how to win a bidding war so that you can ensure you get the home you want.
Unfortunately, we’ve been outbid multiple times by full-cash offers and first-time homebuyers offering $30,000 above the list price. In a seller’s market, the inventory of houses is low, forcing home buyers and investors to get into a bidding war.
One year, we analyzed over 50 properties, visited twelve of them, and made at least five offers. Even in that hot market, we were still able to get our offer accepted!
Whether you’re looking at a condo, townhouse, or single-family home, this article will discuss how to win a bidding war, even in a hot market.
What Does the Highest and Best Offer Mean?
The phrase “highest and best offer” is used by listing agents to inform buyers that there are multiple offers on a property. Listing agents use this as a way to encourage buyers to update their offer and terms to be more attractive to the seller.
It may be tempting to stretch yourself to win a bidding war and get a house you really want, but make sure you take into account also the factors that impact your mortgage payment so you don’t end up house poor.
How Do You Win a Bidding War?
A house that is a good deal will typically receive multiple offers. Sellers wait to accept offers because they want a variety of options to select from.
Don’t be afraid! Sellers don’t always pick the highest offer, but sometimes the best offer!
Luckily, there are ways buyers can have a fighting chance to avoid being outbid on a house. They just need to be creative and make their offer the most attractive. Remember, it isn’t always to highest offer that wins, there are a number of factors that go into a sellers decision when picking an offer.
Here’s how to win a bidding war situation.
Cash is king because it avoids any requirements from a lender.
For example, lenders usually hire a third-party to perform an appraisal valuation of the property. If the appraisal does not meet or exceed the purchase price, the lender could disapprove financing and the buyer will lose the deal.
However, buyers don’t necessarily need to have cash in their bank accounts to make a full-cash offer. Instead, they can leverage the value of their assets (i.e. stocks, property) and create a line of credit (LOC) that is treated as cash. We have a LOC with a bank that we always use to make cash offers, down payments, and pay for rehab expenses.
For example, a buyer Chad has $200,000 worth of stocks and requests a lender to create a LOC against them. The lender then creates a LOC based on 80% of the stock’s value, which creates a balance of $160,000 ($200,000 x 80%). The lender will provide Chad a letter stating proof of funds that can be used to make an offer in cash!
It’s important to note that a LOC is similar to a credit card, which means that the balance needs to be paid back. A solution to this problem is performing a cash-out refinance that creates a term loan that can pay back the LOC.
To learn more about leveraging other people’s money, check out our article: 4 “No Money” Ways to Invest In Real Estate.
Be Prepared To Make a Quick Offer
There are some cases when a seller won’t wait too long to review multiple offers. They might be motivated to sell and just want what they’re asking for.
In a hot market, houses can go under contract after a few hours of being listed! Therefore, it’s imperative to be prepared to make an offer at a moment’s notice.
For example, we’ve been in a situation before where we took our time submitting an offer only to learn later that the seller accepted an offer one hour earlier. However, on a different occasion, we submitted an offer immediately after doing a walk-through. Two hours later our offer got accepted!
Buyers should have the pre-approval letter ready to show proof of funds when submitting an hour. Also, buyers should be aware of how much they are willing to offer on a house before doing a walk-through.
If the property checks all the boxes, they should make an offer as soon as possible.
Negotiations can be reserved for after the offer has been accepted. The goal is to get the property off the market away from other potential buyers.
Add an Escalation Clause
Going back and forth with increasing offer prices in a bidding war can be exhausting. Including an escalation clause in the purchase agreement puts the bidding war on autopilot.
In the event of multiple offers, an escalation clause allows a buyer to automatically counter with an amount above a competing offer by a set increase up to a maximum. It takes out the guessing game of choosing an amount while presenting an offer within a buyer’s comfort level.
For example, Kyle makes an initial offer of $145,000 and has an escalation clause that has an increase of $500 up to $155,000. Another buyer makes an offer of $150,000. The escalation clause would automatically increase Kyle’s offer to $150,500 outbidding the other buyer.
We always include an escalation clause in all our offers and it has brought us much success. In one instance, our offer was accepted $500 above the list price. In another instance, our offer was accepted $5,000 above the list price. All the while, our maximum offer was $10,000 above the list price!
Here is a sample of the language I use in all my offers: “Buyer will match competing offer and increase this net offer to the seller by __________ up to a maximum purchase price __________.”
Waive the Whole House Inspection
Waiving a whole house inspection makes an offer more attractive. It removes the buyer’s ability to negotiate if there is an issue with the house. The buyer will be purchasing the house “As-Is” with no repairs required from the seller.
However, it does sound risky not having an inspection on a house especially if there are truly issues with the property. Replacing a leaking roof or a non-working furnace can cost thousands of dollars and doesn’t necessarily mean it’ll increase the after-repair value (ARV).
Therefore, we do “information-only” house inspections. This gives the benefit of identifying major issues with a house but avoids disclosing any results to the seller or the listing agent. Buyers will not be able to use the information for negotiating, but it will provide confidence when acquiring the house.
Some sellers are particular about who they sell their house to and who they are financing with. It may sound odd, but we’ve seen buyers denied because they were not financing with a local bank.
We also have friends who are also investors that got denied because they used their LLC name on the purchase agreement. The sellers did not like the idea of selling to investors. So, they got denied.
For that reason, when we purchase investment properties I use our name. Just before we have to sign documents to close on the property, we submit an addendum to put our LLC on the deed.
Writing a personal letter along with a purchase offer can sway the sellers to choose that buyer above the others. On one occasion, we met the owners of a property just before we were going to do a walk-through. We had a sincere conversation with them and had our offer accepted by them.
How Much Should You Offer?
The amount a buyer can offer on a house is first limited to an amount pre-approved from a lender. Thus, buyers should be mindful of which houses they look at and make sure it fits within their budget.
In a buyer’s market, buyers can refer to the recently sold, comparable properties (i.e. comps) to see at what price the houses had sold for. This should give a buyer an idea of the current market value of the house and what to offer even though it may be below the list price.
In a seller’s market, the seller can drive up the price. Therefore, trying to submit a lowball offer will easily get denied.
We once made an offer on a house not accepting it was a seller’s market. Based on the comps, we made an offer of $15,000 below the list price. The seller did not accept our offer but accepted another buyer’s offer that was $10,000 above the list price.
However, regardless of the market, an offer that will be financed will be limited by the appraisal process. Lenders will not approve financing a property if it does not meet or exceed the appraisal valuation.
We made a full-price offer on a property before, but the appraisal valuation came in $16,000 below the purchase agreement. Either we had to come up with the difference, walk away from the deal, or the sellers had to reduce their price. We ended up acquiring the property $16,000 below my initial offer!
A buyer considering paying the difference should take into account the impact it will have on their finances. The buyer should not chase a house assuming it’s an investment. Instead, they should be reminded that it’s only a form of shelter and that there will always be another house.
Can a Listing Agent Tell You About Other Offers?
Listing agents can share details of other offers to buyers. However, that doesn’t necessarily work in the favor of the listing agent. Thus, they just inform buyers to give their highest and best offer.
We’ve had an instance where a listing agent did disclose to us an offer made by another buyer. They liked the dollar amount offered by the other buyer but preferred our terms.
The listing agent sent us a copy of the other purchase offer in hopes that we would raise our offer. We stood firm on our offer price and still got the house $10,000 below the list price.
Bidding wars are not fun and can be exhausting. There have been multiple times when we just wanted to take a break from real estate.
Thus, buyers shouldn’t settle on a house just for the sake of getting an offer accepted. Instead, buyers should be patient and make their first offer their best offer. Whether it’s your first home purchase, your forever home, or you’re a real-estate investor, you’ll need to be prepared for the prospect of a bidding war and all that entails. You should also be prepared to walk away from a house if the bidding war drives it beyond what you can comfortably afford.
Now that you know how to win a bidding war, get out there and start your house search!
Tawnya is an elementary special education teacher by day and co-blogger at Money Saved is Money Earned by night.
She holds an Honors BS in Psychology from Oregon State University and an MS in Special Education from Portland State University. She has had a pretty successful writing career, first as a writing tutor at the Oregon State University Writing Center, and in recent years, as a freelance writer.
Tawnya and co-blogger Sebastian have a wealth of knowledge and information about personal finance, retirement, student loans, credit cards, and many other financial topics. They teach people how to save money, make money, and understand money.