“Who wants it more?” – The key to winning a close bidding war for a house

The past couple years have meant lots of aggressive bidding wars for home buyers in Seattle. Bidding wars are nerve-racking, and it is easy to be disappointed or discouraged when you lose, particularly if the final price was the same or very similar to what you were willing to pay.

biddingHaving watched hundreds of bidding wars over the past few years, there are a couple of results that we see all the time. In cases where one bidder goes crazy on the price they are willing to pay, the decision is usually pretty easy. Lots more money wins in most cases.

Having one clear winner on price is surprisingly uncommon though. Out of any batch of offers, there are usually some low bidders, some medium bidders, and at least 2-3 that are more aggressive. The most aggressive offers most frequently land at the same or an extremely similar price. On a $700k house, sellers won’t pick one offer over another based on a $1,000-$2,000 price difference. Most often, they will look to other terms or intangible factors, some of which may surprise buyers.

Let’s walk through a few scenarios. A home seller is listed at $500,000. The seller receives two offers that both go up to $525,000. How will the seller decide?

Down payments matter

Buyer A: Has 20% as a down payment

Buyer B: Has 30% as a down payment

Buyer B wins: Both of these are extremely well qualified buyers. Someone with 20% down is certainly going to have an easy time getting a mortgage. That said, Buyer B almost always wins this scenario, as a seller will believe that the larger down payment equates to lower risk.

Opening bids matter when you use an escalation clause

Buyer A: Offers $510,000 with an escalation clause to $525,000

Buyer B: Offers $495,000 with an escalation clause $525,000

Buyer A wins: These offers are identical on price. Buyer A almost always wins for two reasons. First, the seller sees that Buyer A’s offer starts at $510k, a full $10k over the list price. Buyer B comes in at $5k under list price. The final price is identical, but the seller believes that Buyer A “wants the house more” than Buyer B. If the home just came on the market and there were multiple offers at or above list price, the seller is also confused why Buyer B would start below list price when there is so much interest in the home. Sellers can even be offended by the opening bid when everyone else starts at above their asking price.

Highest and best is better than an escalation clause

Buyer A: Offers $500,000 with an escalation clause to $525,000

Buyer B: Offers $525,000 with no escalation clause

Buyer B wins: Buyers love to use escalation clauses. It allows you to remain very competitive on price, but doesn’t require you to overpay significantly. That said, Buyer B comes in at their “highest and best” offer. The seller believes that Buyer B “wants the house more.” I know this is not necessarily rational, but we have lost in this scenario countless times.

Beating another offer by $1,000 is simply not enough

Buyer A: Offers $500,000 and escalates to $520,000

Buyer B: Offers $500,000 and escalates to $525,000, beating other offer by $1,000

Toss Up: Even though Buyer B’s offer escalates to $525,000, it only goes $1,000 higher than the next highest bid, so Buyer A is $520,000 and Buyer B is $521,000. All bets are off on who will win this one. If Buyer A writes a nice letter or somehow gives the seller more confidence in their bid, they will win, despite the slightly lower price.

If you are going to use an escalator in your offer, you MUST make the amount that you beat the other offer by an amount that changes the seller’s behavior. This obviously varies by price point, but on a $500,000 home a price difference of $1,000-$2,000 is simply not large enough to offset other factors. We’d suggest at least $4,000-$5,000 at this price point to ensure that the seller makes their decision based on price.

A personal letter to seller can sway the decision

Buyer A: Offers $525,000

Buyer B: Offers $523,000, but includes a letter about themselves and why they love the home

Buyer B wins: When a seller has lived in a home for a long time, there can be a strong emotional attachment. This is where they fell in love, raised their kids, etc. The seller’s emotion is taken over in a desire to see the home go to someone that “feels right”. They don’t know anything about Buyer A, and the heartfelt, even corny, introduction from Buyer B carries the day.

Who is most obsessed with the house?

Buyer A: Offers $525,000. Only visits the home once.

Buyer B: Offers $525,000. Visits the home the first day and multiple times after. Their agent is well-organized and in constant contact with the seller’s agent.

Buyer B wins: These offers are identical in every way. However, they see that the buyer has been there multiple times and their is in frequent conversation with the seller’s agent, appearing organized and demonstrating that “their buyer want the house more.” I know this isn’t rational, but that is how the game works.

Pay attention to the irrational

The logical, financially-minded buyer can be extremely frustrated when they lose in a competing bid, particularly when they lose for a non-financial reason. Unlike most financial transaction in your day-to-day life, there is an emotional human(s) on the other side of the deal that might make decisions that seem random or irrational. Strategize with your agent before you place your offer. They’ve been through this situation more than you have and can coach you on how to make all aspects of your offer compelling, even the ones unrelated to price.