What To Do In A Bidding War
Posted by Niels Madsen on
In a hot real estate market, emotions often run high and tough situations are common. And more often than not, you'll find a bidding war at the heart of those situations. Bidding wars can be high-stress for both the buyers and the seller, and contrary to popular belief, they aren't always the way to get the best price for your home.
With that in mind, there are ways to minimize the stress and increase your chances of getting the home you really want.
What Causes Bidding Wars?
There are two main kinds of bidding war that can occur in real estate: natural and artificial. An artificial bidding war takes place when a seller lists their property at a price below the average local home value to generate interest, then accepts offers over a limited period of time (usually a week). The expectation is that competition between buyers will drive offers up far beyond the home's asking price.
A natural bidding war occurs when there is simply high demand for a property listed at a standard price. These bidding wars are most often seen in a tight market with few homes available. In this case, sellers may or may not accept a limited number of offers to simplify the process.
How To Prepare For A Bidding War
There are a few indicators that can let you know when a home is about to enter a bidding war. Limited house touring times and a quick offer closing date is an obvious sign. Your real estate agent can also help by determining the value of local homes in the neighbourhood and determining whether the house in question is listed at an artificially low price.
When you've established that a home you're interested in is likely to enter a bidding war, the first thing to do is determine the current market value of the home with your real estate agent's help. Then determine the maximum amount of money that you're capable of paying for a home. Compare the estimated market value and your maximum price, and use them to come up with the most you'd be willing to pay for the home if you were to make an offer right now.
If you have trouble coming up with an exact number, ask yourself: what price could you commit to and not feel bad if the property sells over it, because you felt you offered the most you possibly could? Or you can come at it from the other angle: at what point does the price feel like you're paying too much?
Once you have that number, stick to it. Though anxiety might rise as bidding prices go up, remind yourself of the reasons why you chose that number as your maximum price. You don't want to get caught up in the hype and wind up overextending your finances.
Are There Tricks To Winning A Bidding War As A Buyer?
In the recent years of a highly competitive market, buyers have begun to go above and beyond to secure their chances at a sale. Eager home buyers have tried to both befriend and entreat sellers with letters, baked goods, and even YouTube videos.
- The first step to maximizing your chances in a bidding war is to tour the house. This sounds like an obvious step, but you shouldn't underestimate the preference sellers have for buyers that they've met in person. Introduce yourself to the owners, ask them about the home, and chat for a bit. Leave them with a business card so they have your name, profession, and contact information.
- A personal note or letter to the seller is always a good place to start after taking a house tour. Redfin data has shown that in 2015, buyers who wrote a letter to the seller were 14% more likely to have their offer accepted than those who didn't. Letters can be emailed or attached to an offer, and can include touches like a photograph of your family.
- When making your offer, make sure you don't ask for any inclusions that the sellers haven't already indicated that they're willing to honour. If there are belongings or furniture that you feel you must have, ask to buy them after you've bought the house.
- Remember that inclusions aren't the same as contingencies, such as home inspections. While cities with hot real estate markets have seen a marked increase of buyers accepting homes without a self-ordered home inspection, this isn't always a wise decision. Forgoing a home inspection might win you the bidding war, but the issues you could face down the line can be costly: termite infestations, crumbling roofs, broken pipes, eroding foundations, and more.
New homes and condos are less at risk for monumental problems if the home inspection is skipped, but that doesn't mean that there can't still be issues that will hit your wallet after you buy the property. The financial burden of skipping an inspection almost always falls on the buyer. Keep that in mind and make your decision carefully before foregoing any contingencies.
- Accommodate the seller's possession date: Give them the closing date that they want. Your real estate agent can help you determine when this is if the seller isn't up front about it. Many sellers don't know the specific day that they'd like to close on — your offer could capitalize on this by giving the seller room to set an exact closing date within a certain time period, anywhere from two months to two weeks.
- Another big tip is to go to your final dollar figure right away. Take the maximum bid amount you decided back in the preparation stage and make that your offer. If you bid lower at the start with the expectation that you can raise your offer later, you may not get the chance, and could lose your only bid. Go straight to your highest bid trusting in the assessed value of the house.
- Finally, gather the largest deposit payment you can manage. When faced with two almost identical offers, most sellers will choose the one with the larger deposit cheque attached. If you can, have it certified as well. A big certified cheque is proof to the sellers and their listing agent that you're serious about your offer and have the money to back it up.
Should I Avoid Bidding Wars Entirely?
The stress involved in bidding wars is always a consideration to keep in mind, especially if you're just getting into the market for the first time. Unpredictable markets can be hard for even seasoned professionals to judge, and you'll have to weigh the benefits of staying on the sidelines against the risk of being priced out of the rental market.
There are still a couple of reliable red flags that should warn you away from bidding wars. If there's any doubt about the purchase price of a home, a mortgage broker will always do an appraisal. If the appraisal doesn't match the purchase price, financing won't be approved.
Another warning sign is if you want to buy a house in a bidding war just to win the contest. That is absolutely the wrong reason to stay locked in, compared to staying in a bidding war to get a home that you love.
As A Home Seller, Should I Instigate A Bidding War?
Studies have found that despite the competition involved, homes that sell over a more traditional period of time tend to wind up selling for a higher price than homes that go through a bidding war. It's suspected that this is due to more buyers having the chance to tour the home, get their finances in order, and make an offer.
That isn't to say that you'll never get top dollar for your home in a bidding war, but there is no denying that artificially creating one will limit your choices more often than not.
In the end, just like a buyer, the choice of whether to enter a bidding war is ultimately up to you.