Winning a bidding war for your new house

Some buyers may assume that bidding wars for houses are a thing of the past, relegated to the annals of the real estate bubble. If our recent experience is any indicator, competitive bidding is still alive and well. In fact, even in the depths of the real estate downturn, competitive bids never actually went away. They simply became less frequent. I took a look at all of the offers that findwell submitted and received in the Seattle area during 2009, and we experienced competition on ~15% of those offers during 2009. The real estate market is slowly on the mend, and we fully anticipate that there will be more competition for homes in 2010 than we saw last year. While it won’t near the frenzy that we saw during the housing boom anytime soon, the good houses will get snapped up in bidding wars. Here are some strategies for winning a home in a competitive bid situation.

Which homes will bring out competing bids?

Buyers who are new to this market will often assume that it is still a buyer’s market and they may leisurely browse and bid on listings since they “are not going anywhere.” Supply and demand is highly-localized. Some Seattle metro areas remain a buyers market, but as you move closer in to major employment areas, many neighborhoods are experiencing very balanced markets at the moment. There are also quite a few neighborhoods that actually demonstrate a seller’s market, with less than 6 months of active inventory at any given time. The market seems split in two at the moment, with a smaller percentage of homes selling very quickly, and other homes lingering on the market for months at a time. Buyers are being picky, and the homes that linger either suffer from a less-than-desirable location, awkward floor plan or poor design. Often they are also over-priced. But there is a category of homes that are in good locations, in good condition and are attractively priced. Those homes may sell within days, and you need to be on your toes. If you have been surfing listings online and find a home that jumps out at you because of its attractive price, location and quality, then that home just jumped out at 50 other folks who are going to try and see it and perhaps bid on it.

Here is a statistic to remember. So far in 2010, 39% of homes in Seattle, Bellevue, Redmond and Kirkland have sold in 0-30 days. 25% of homes sell in 14 days or less. Not all of those will have competition, but the shorter a home is on the market, the more likely it is that they received multiple bids.

How to win a competitive bid

Winning a competitive bid is not always an easy task, and may not be for the faint of heart. Here are some ideas to help you craft strong, winning offers when you face competition from other home buyers.

  1. Time is of the essence – Successful bids will often happen at lighting speed. Call you agent for a showing immediately when you see the home hit the market. Sometimes you need to place your bid the day it comes on to be successful. Some sellers will feel loyalty to the earliest bid, if all other terms are equal.
  2. Money talks – All things considered, the highest offer price will almost always win. Your attractive down payment and large earnest money deposit won’t mean a lot to the seller if they can pocket an additional $10,000 from another buyer. All cash offers can win at times, but only if a quick closing is critical to the seller. A higher offer with a mortgage will still beat a lower offer that is all cash in many instances.
  3. Confident you will close – In today’s tight lending environment, sellers want confidence that you are the buyer who is most likely to close their loan. Nothing is as disappointing as having a transaction fail because the lender couldn’t get the loan done. Larger down payments, strong employment, loan pre-approval and significant earnest money are all signals that you are a strong buyer.
  4. Minimal/shorter contingencies – An offer that is not contingent on the results of your inspection or your financing can be very compelling for a seller. In this market, many competitive situations still allow for financing and inspection contingencies, but you should include only what is necessary and make sure that your contingency timelines are very short. Getting your inspection completed quickly or allowing a short timeframe to get your financing in order can help you to win against other offers.
  5. Escalation versus “highest and best offer”  – There are two methods to increase your bid to beat others. One involves an escalation clause, where you make a lower bid that “escalates” to a higher number, beating competing bids by some amount up to that limit. Alternatively you can just pick the highest bid you are comfortable with and take your chances. There are compelling reasons to try an escalation clause, as it can help you avoid paying significantly more than a competing bid. However, in the eyes of a seller, a straightforward offer appears stronger. Let’s say the house is listed for $450,000, and there are multiple competing offers. You could offer $460,000 and see what happens. Or you could offer $450,000 with an escalation to $460,000, beating a competing offer by $1,000 up to that limit. Those offers are essentially the same if people are bidding up to $460,000. However, sellers will see the straightforward offer of $460,000 to be stronger than the escalation, since you didn’t start your offer at a low amount.
  6. Easy to Work With – You don’t write this into the offer, rather it is the story that your agent tells during the offer process. Sellers (and their agents) want to work with buyers who will be easy to work with. You want the seller to know that you will be fair, reasonable and reliable throughout the closing process. This can be equally important for your choice of agent. Other agents want their sellers to work with agents who are clear communicators, polite and professional. You agents should provide a neatly written offer, be very clear about your offer terms, and instantly reachable to help answer questions. Agents who are pushy, rude or ultra-aggressive when trying to get them to accept your offer will not be the ones that are chosen. I have seen this first-hand twice in the past month, where I won offers for my clients because I was perceived as the more professional and polite agent. (The offer terms were nearly identical in both cases.)
  7. Intangibles – If all of the above are identical in competing offers, they are going to pick one from a variety of intangible factors. Sellers are often highly emotional about their home, particularly if they have lived there for many years and raised their family there. They want their home to go to someone who will enjoy the home like they did or will care for the home in the same way. Sometimes it pays to “personalize” the negotiation by writing a letter. Tell them why you love the home, a little about yourselves, and how much you appreciate the way they cared for the home. Include a family picture. Yes, this approach can be cheesy, but it can definitely help to put a personal face on the buyers to make the seller feel more comfortable with their choice.

Bidding on a home in competitive situations is unnerving and stressful. It pays to have a strong agent at your side who has coached many buyers through the same process. They can help you to write a “clean” offer, with the best possible terms, and can make sure that your offer is communicated effectively to the listing agent and seller. They can also help guide you on price, telling you how high the bidding may go, but also limiting your bid so that you are not overpaying.

The single most important advice I can offer in a competitive bid situation is to not bid more than you are comfortable with. Set your upper limit and stick to it. Getting wrapped up in the competition may leave you feeling that you overpaid or may have you regretting that you went way over your budget. Losing a competitive bid for a home is always disappointing, but there are always other houses out there.