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House Hunting During the Pandemic? 8 Ways to Win a Bidding War
In a COVID real estate market, it can be challenging to make the right offer and even harder to have the buyer accept it. With demand so high, it puts sellers in a unique position to entertain multiple offers and enjoy a bidding war on their property. It’s changing how real estate transactions are made, even affecting mortgage rates, as buyers and their agents nationwide are having to adapt.
“As inventory shrinks and interest rates improve, conditions are becoming more conducive to multiple offer situations,” explains Dylan Lennon, Ph.D., a realtor and consistent multimillion-dollar producer for Keller Williams Professionals in Asheville, North Carolina.
As a full-time residential real estate investor with Blue Ladder Development, Bill Samuel agrees. He advises, “If you really like a property, you must act quickly, or you risk losing it to another offer.”
We take a deeper dive into tricks for today’s COVID real estate market
The COVID-19 real estate market
First, COVID real estate market varies drastically depending on where you live.
TJ Sayers owns Birmingham Homebuyers, LLC, a real estate investment company in Alabama. He says, “My company ‘flips’ 60-70 houses per year, and we continue to be surprised at how the market keeps becoming more competitive even during the pandemic.”
As head of content for residential real estate marketplace Sundae, Joey Campbell has noticed the increase in residential areas. Speaking of coronavirus, Campbell says, “It has exacerbated housing supply constraints and created even more bidding wars in popular residential areas. With super-low interest rates, a lot of new buyers have entered the market, pushing up prices and increasing competition.”
Those aren’t the only reasons, says Todd Huettner, president of Huettner Capital in Colorado. “The real difference with COVID is that it has increased demand,” he says, adding that “the financial impact of Covid has resulted in record low-interest rates spurring buyer demand.”
Strategies for winning a home bidding war
“Although the price is still the first piece sellers will consider, sometimes other aspects of the deal are more important,” explains Lennon. “Depending on the seller’s goals, there are other ways to improve your offer. I’ve had clients shorten or remove the inspection contingency, increase the value of binder deposits, add a binder deposit after inspections, and provide multiple loan approval letters.”
For the average homebuyer, however, that’s easier said than done. It can be hard to determine what is appropriate in a vulnerable market, but the country’s best real estate experts tell us there is no reason to worry.
“Aside from upping your actual offer or opting to put more money for your down payment, there are a few ways to gain an edge when bidding on your dream property,” says Johell Aponte, owner of Houston’s MoveOnHouseBuyers.com. This is how you do it.
1. Waive or adjust some contingencies
“Sellers know 10-15% of buyers change their minds during the inspection period,” says Kevin Bazazzadeh, owner of Brilliant Day Homes, a real estate investment business in Houston. “You can ease their biggest fears by putting ‘more skin in the game.’”
Jonathan Sanchez, real estate investor and co-founder of ParentPortfolio, agrees. “An offer can be made attractive by reducing the number of contingencies,” he says. “This can be accomplished by removing a whole house inspection or agreeing to a sooner close date.”
Waiving inspection is a popular method that Nishank Khanna commonly sees as CFO of Clarify Capital. “Waiving inspection reduces the seller’s risk of losing money down the line should the inspector find any problems with the home,” he explains. “If you’re the only prospective buyer who’s willing to skip an inspection, you’ll have a competitive edge because you’re saving the seller from a hassle and possible expense.”
It’s not without risk, however. “Waiving inspection might make you a more competitive buyer, but when you’re spending at your budget max in a bidding war, you can find yourself in a bind if the house requires any fixing,” says Khanna, who adds that the most common inspection issues are usually the ones you can’t see.
“Prepare to shell out extra cash down the line if you missed anything at first glance,” he warns.
2. Write a letter
Khanna also recommends a personal letter in what he calls a “touch their hearts” tactic, appealing to the buyer’s emotions.
“I’d also recommend a personal letter to the sellers with a photo of you and your family,” says Tyler Forte, the CEO of real estate brokerage based in Nashville, Felix Homes. “These small gestures can go a very long way in the eyes of a seller.”
It’s something that James McGrath often sees as co-founder of the NYC real estate brokerage, Yoreevo. “While some sellers only care about the price, others are emotionally attached to their homes and want to make sure it will be in good hands,” he explains. However, Khanna warns that this only tends to work “so long as you’re one of the top bidders.”
3. Find out the seller’s needs
“If you’re in a home bidding war, price is not always the most important factor,” says Luke Smith, founder of We Buy Property In Kentucky. “Sometimes, the seller is more interested in terms that are favorable to them. It’s a good strategy to just ask.”
Kendall Bonner, broker and owner of RE/MAX Capital Realty in Lutz, Florida, agrees. “Sometimes the easiest way to get your offer accepted is to meet the needs of the seller,” she says. “Make sure you understand what the seller’s priorities are, such as their preferred timeline for closing. If they are seeking a quicker closing process, they may be willing to compromise on price.”
“When entering a bidding war for a hotly contested home, you should understand the features of an offer that are most important to the seller,” says Forte. In Nashville, he thinks outside of the box with his deals and advises buyers to do the same. “Consider paying for some of the closing costs, such as title insurance, as a way to make your offer look even more appealing.”
4. Present your best offer
There are many other ways to make your offer more appealing. “Some other factors that may be important to them are: closing date, financing terms, contract contingencies,” includes Forte.
Bonner advises buyers to start off strong. “At a time when inventory is low, and there is a lot of competition in the market, now is not the time to try to haggle for the best deal,” she says. “Make a strong offer from the start. Given the current climate, you should be willing to pay a reasonable price for a home in your respective market.”
You should also get a read on the seller, recommends Sayers. “When making your offer on the house, you should try to figure out what kind of seller you are dealing with. Most of the time, fully rehabbed houses that are staged are homes offered by investors/flippers. Homes that are owner-occupied will usually not be investors. This can make a big difference in how to present your offer.”
He continues, “If the seller is an investor who is experienced, you will want to make your best offer initially and do not let the asking price limit you. In competitive markets, houses can sell for way over asking price.”
5. Get preapproved
An important part of the homebuying process is your preapproval, and it’s something our experts stress heavily.
“There is NO chance you will win a bidding war without a preapproval attached to your offer,” Samuels stresses. “I would submit every document your lender of choice asks for to get the preapproval.”
This can work to your benefit, too, says Bonner. “One of the best ways for buyers to stand out in a competitive market is to make sure they are well prepared for the process, including having a strong escrow deposit and preapproval letter. Sellers will have more confidence in buyers who are further along in the financing process with their lenders,” she explains.
A cash purchase can be an enormous advantage, as well. “If you can pay with cash, you give yourself a huge advantage since you can drastically shorten the length of time for the seller,” says Bazazzadeh.
6. Increase your down payment or earnest money deposit
Paying more money upfront can also be a sign of financial reliability and dependability in the homebuying process.
Steve Orlowski, General Manager of Review Home Warranties, recommends a higher deposit to improve your chances. “Find out the deposit amount the seller is requesting, and go far beyond it,” he advises. “Offer a deposit in the double-digit percentage range, like 10% or even 20%.”
7. Pay full amount in-cash
As they say, cash is king, and in COVID real estate, it is no different.
“This year, I’ve visited 12 different properties, made over five offers, and finally got an offer accepted,” says Jonathan Sanchez, real estate investor and co-founder of ParentPortfolio. “Making a cash offer is the most successful path to winning a bidding war because it skips over all the requirements set by the lender.”
“It is important to understand that the strength of financing is a key consideration a seller takes into account when selecting an offer,” says Samuel. “Of course, a cash offer would rate the strongest in this category. Cash is preferred because there is no risk of the buyer not qualifying for a third party approval (the buyer’s lender).”
8. Offer to close quickly
If a seller is particularly sensitive to urgency, your offer to close quickly could be enough to win the home bidding war.
“If the seller or their agent asks for the best and final, we will decrease our time to close (i.e., from 30 days to 20 or 14), and keep the price at our original offer,” shares Smith. “This route allows us to stay within our budget and show that we’re making concessions. Oftentimes, this strategy provides us with favorable results.”
“Another thing you can do is have your home inspector ready to go so you can close a deal quickly,” recommends Aponte. “A day can be the difference in getting or losing your favorite property on the market!”
Also in agreement is Michael Shapot, Licensed Associate Real Estate Broker of New York City’s The Shapot Team. “Offer flexibility in the closing date. With so many moving parts, including the possibility of further lockdowns, a buyer who can be flexible is at an advantage.”
Things to caution for when bidding
Be careful when overbidding
“With demand so high during the pandemic, we’re seeing buyers offering significantly above home value to beat out the competition and win their dream home,” says Khanna. “They’re met with frustration when their lender is unable to provide a loan for more than the appraisal value.”
It can end in disaster, he warns. “These same people end up having to walk away from the sale because, without a loan for the full amount, the house is out of budget and unaffordable.”
Adam Mitchell, Owner of We Buy Houses Fast in Dallas, advises buyers to take the emotion out of the process. “Know your MOA (max offer amount), and stick to it. This will help people make rational decisions when in a bidding war,” he explains. “If the bidding gets crazy, there is probably someone paying with cash, and if so, the sky’s the limit on what the cash bidder can offer. If you suspect this and you are using a mortgage, walk away and find another house.”
“Without consideration of the true value of a home, overbidding doesn’t make sense,” says Khanna, approaching the issue with an analytical sense. “If you end up bidding above the home appraisal, you’ll have to cover the cost above your mortgage loan out of pocket, or hope the seller is willing to negotiate down. For many buyers, it simply isn’t worth it.
Bidding against yourself
It sounds silly, but it happens often. It is important when buying a home that you do not make offers without a counteroffer. Otherwise, you can end up bidding against yourself.
It is not enough for someone to just say there’s interest in the home. Only raise your offer after someone has actually increased theirs, or you will end up just bidding against yourself.
Weigh the pros and cons of escalation clauses
“You can put in an escalation clause, which adds as an auto bid of x amount every time someone matches your offer,” describes Aponte. “This can be risky, but it is a way to not lose your potential dream home.”
“An escalation clause can be beneficial, but keep in mind that when you make an offer with such a clause, you are essentially showing your cards to the buyer,” warns Forte. “If you plan to finance the home with a mortgage, I recommend asking your lender to personally call the listing agent to vouch for you.”
“Ultimately, sellers are free to accept the offer that works best for them,” says Lennon. “Sometimes this means rejecting offers with escalation clauses because they seem complicated. In some cases, my sellers have seen lower offers with no escalation clauses as better than a higher offer with escalation. In many cases, the simpler offer wins.”
If you decide to take this route, he recommends obtaining the right professional who can help. “Escalation clauses are technical and require an experienced agent to handle the procedural aspects,” he explains. “Make sure you’re working with a knowledgeable agent. Otherwise, things may backfire.”
Be cautious of sellers using manipulative tactics
Not everyone you will encounter on your homebuying journey will be as honest as you may like, so it’s important to proceed with caution and watch out for sellers peddling tricky manipulation schemes.
“If you use an escalation clause, use caution,” says Bazazzadeh. “Your agent must require proof from the listing agent of the other offer triggering the escalation. There are cases of dishonest agents who either lie about other offers or have had someone put in a phony offer just to get the max price from the buyer.”
In a competitive real estate market, there often isn’t time to waste. The best way to avoid a bidding war is to make your first offer your best one. There are several ways to do that.
- Submit proof of funds – Everyone likes a cash buyer. With cash, there’s no fear of loss of financing or any appraisers or insurers to please. If you are using a mortgage, prepare your documents for review, including a preapproval, so buyers know you’re serious.
- Avoid contingencies in advance- “Don’t be greedy,” says Bonner. She explains, “Don’t ask for more than you need from the seller, in terms of closing costs and other contingencies, such as repairs. Focus on what repairs are most necessary—those that could prevent you from securing financing.”
- Flexible closing date- “The bottom line is that the best offer is not solely about the purchase price,” says Forte. “Find out what factors are important to the seller, and appeal to them.” A flexible closing date could very well do the trick.
- Write a letter- McGrath encourages you to turn to paper and pen. “By including a letter that tells the seller a little bit about yourself, why you love the house and why you want to make it your home, you can make the difference in close bidding situations.”