How to Deal With a Real Estate Bidding War
When real estate markets heavily favor home sellers bidding wars are not that uncommon. In fact, not having a bidding war can be unusual in some circumstances.
Wanting to know how to deal with a bidding war on a house is far more likely today than it used to be.
When selling a home in a hot market, it is normal to get multiple offers. Sometimes, if the market is hot enough, the offers can start getting quite competitive, with bids going higher and higher.
There are also times when sellers will price their home lower than it is worth just to start a bidding war.
Whatever your particular circumstances, if you start getting multiple offers on your home, you are going to have to choose the one that works best for you – and that does not always mean the offer for the most money.
Two of the questions real estate agents are often asked are “How do I handle multiple offers on my home?” or How do I deal with a bidding war on my house?”
What is a Bidding War?
Before we talk about how to have a bidding war on your house, you may be wondering what is a bidding war. Bidding wars are when two or more parties compete for the purchase of your home.
They do this by making offers on your property. The offers typically have terms that may be favorable to sellers in order to win the “bid”.
It is not uncommon at all for bidding wars to have numerous parties making offers on a home. Bidding wars on houses sometimes take on an auction-like feel whereby buyers make offers that don’t even seem realistic in order to land the home.
Bidding wars on houses tend to occur when there is limited inventory at a particular price point.
How to Have a Bidding War on Your House
Before we get into how to handle multiple offers, let’s first discuss how you can increase the odds of actually getting a bidding war going in real estate.
One of the best ways of getting multiple offers in a strong seller’s market is to defer your showings for a short period. By delaying showings, you will dramatically increase the odds of having a bidding war on your home.
Deferring showings works like this – you list your home on a Monday or a Tuesday into the multiple listing service, but you don’t let anyone into your home until Friday. Buyers will have five full days of seeing your home listed in the MLS but will not be able to schedule a showing before Friday.
What you are doing is creating demand for your home. You are getting the word out your home is for sale and putting people on notice. Buyers who are looking for your type of property will be lining up at the door come the weekend.
What you are also going to do is put an offer deadline of Monday at noon. You will make it clear that you will not be accepting an offer before then. The purpose of doing so is to give every interested party the opportunity to make an offer.
So if the first person through the door on Friday makes an offer, you will not be addressing it. Instead, you will be collecting multiple offers through a full-fledged bidding war.
Not Deferring Showings Drops Your Chances of Bidding Wars
When inventory is extremely low and there are more buyers than sellers, real estate agents are doing a disservice to their clients by starting to show properties immediately. You might think getting an offer on the first day your home is for sale is great but what you’re missing out on is more offers!
Instead of taking an offer from the first person that sees the house, with deferred showings, you’re dramatically increasing the odds there will be multiple offers and bidding wars. Make sure you follow the reference on deferred showings to read about this important sales tactic.
Keep reading to see the best ways to deal with multiple offers and bidding wars on your home. Knowing how to handle multiple offers will not only go a long way to having a successful transaction but maximize your profit.
Handling Multiple Offers and Bidding Wars
Keep in mind there are four scenarios when dealing with bidding as follows:
- Go back to all offers with a “best and final”. You will be asking each party to come back with their highest bid along with their best terms.
- Accept one of the offers on the table. Maybe one offer is just head and shoulders better than the rest.
- Negotiate with one or more of the offers but exclude some on the table. Maybe a few offers are really low or have terms that are acceptable.
- Reject all of the offers. None of the offers happens to be acceptable.
One additional nugget to be aware of – according to articles 1-15 of the Realtor Code of Ethics multiple offers DO NOT have to be disclosed, although I am not sure why you wouldn’t.
With authorization from the seller, an agent can also reveal, when asked, if an offer is from the listing agent, another agent in the same firm, or a co-broke.
As a seller, you have your own priorities that may not be the same as other seller’s priorities. Here are some tips to help you ensure that your decision matches your goals, and not someone else’s.
Use the tips below for handling multiple offers.
The Highest Offers is Not Necessarily the Best Offer
It can be incredibly exciting to get a nice, big, high-priced offer on your home. Most sellers are hoping to make as much money as possible off of their sale, so getting excited about a high price makes sense.
Being involved with a bidding war on your home is a nice position to be in. When you receive multiple offers the chances of selling way over your asking price, increase exponentially.
In fact, it is becoming quite common in strong seller’s markets for buyers to write an escalation clause into their offer.
An escalation clause is a legal term that allows the buyer to increase their offer amount over and above the highest bidder. The buyer sets what is called their “cap price” in the escalation clause.
For example, let’s say your home is on the market for $500,000. The buyer could write their offer stating they will pay $515,000 but will escalate their offer to $5000 over any offer that comes in above $515,000.
The buyer also inserts the cap price – in this example, the buyer could cap their top offer at $530,000.
An escalation clause works for both buyers and sellers. The buyer gets the benefit of landing the home, and the seller wins with a great offer.
But offers are made up of more elements than just the money being offered.
The buyer has to be able to get funding for the offer they make. The buyer may include contingencies in the offer that you are not eager to agree to.
Your home may not even be worth the money being offered – which means the appraisal will probably come in low, causing the lender to give less than the buyer offered.
Of course, you want to sell your home for what it is worth. The highest offer may be high in relation to the other offers made, but if it reflects the value of your home better than the lower offers, it really might be the obvious choice.
Can the Buyer Afford the Offer?
Buyers can offer any number they want to offer – most won’t be so reckless, but it can happen. When multiple offers are coming in, and the buyer really wants the home, he or she may make an offer that will be a struggle to honor.
People can become irrational when they get competitive, especially in a bidding war over their “dream home”. It sometimes can be like a free for all where you see people putting up their bidding card, and the auctioneer is talking so fast you can barely understand them.
I’m exaggerating a little bit but bidding wars do create a frenzied environment where being rational often goes out the window.
The buyer may have been approved for a smaller loan than the offer he or she makes, hoping that somehow the difference can be made up. But what if it can’t? Hopefully, the buyer has been pre-approved for a loan big enough to cover the cost of the offer made, but if the buyer hasn’t, then you might be better off taking a different offer from someone you know can pay.
This is where it becomes extremely imperative to know the difference between being pre-approved and pre-qualified for a mortgage. There are a significant amount of real estate agents who will take their buyer’s letter and be too lazy to look it over.
I can’t tell you the number of times I get a pre-qualification letter from a buyer’s broker. This type of mortgage letter isn’t worth the paper it’s written on. You need to insist on a mortgage pre-approval.
A while back there were multiple offers on a home I was marketing in Holliston Massachusetts. The agent presented an offer with a pre-qualification letter.
The buyer’s credit score, income, and employment were not even checked. This is what’s called WORTHLESS. The agent cost the client dearly, as the seller didn’t want to wait a day with other offers on the table.
Is Your Home Worth That Much?
When a buyer makes a high offer; it is important to compare the price to what your home is worth. The higher you go over the actual value of the home, the more likely you are to run into problems with buyer funding from the lender.
Anytime a buyer purchases a home with a loan, the lender requires an appraisal to verify the market value of the home before funding the loan.
Lenders do this to protect themselves and ensure they make good business decisions.
It can be quite upsetting for both the buyer and the seller to get a low appraisal and discover that the loan will not be for the amount the buyer offered.
In Bidding Wars The Buyer’s Down Payment Matters
When bidding wars happen the likelihood of a home not appraising for the agreed-upon sales price rises dramatically. Imagine listing your house based on comparable sales at $500,000 only to get an offer you accept for $550,000.
On the surface this seems awesome but what if the buyer is only has a 5 percent downpayment and doesn’t have additional down payment funds?
If the appraisal comes in low the buyer will not have the funds to make up the difference between the appraised value and the sale price.
When I am going over multiple offers with a seller this point becomes really important.
You want to choose a buyer who has either enough money down to satisfy a lender in the event an appraisal comes in low or has additional funds to make up the difference between the appraisal and sale price. In fact, sometimes I have asked the buyer to state in their offer they will cover the difference between the two.
When a seller picks on an offer with a lower down payment they will either be forced to try to fight the low appraisal, which isn’t easy, or as a last resort just lower the price.
At that point, you may discover you get a lot less than you were expected, and have to jump through a lot of hoops to get there.
When I sell any property significantly over asking, I’m always counseling the owner that there is an increased potential for the home not appraising.
Is the Buyer Paying In Cash?
A cash offer can be appealing because you get to skip all the steps required when the buyer is paying with a loan. The sale can close much faster, you do not need to worry about the home appraiser coming in low, and you do not have to stress about whether a lender will ultimately fund the buyer to make a purchase.
Some sellers consider a cash offer to be ideal because of its convenience and are willing to take a lower cash offer over a higher offer where the buyer will be getting a loan.
If you’ve benefited from getting multiple offers in a bidding war and have a cash offer a little less than a financed bid, it makes sense to choose cash. There is a reason why they say “cash is king.”
Look Closely at Contingencies in a Bidding War
Some of the most common contingencies in real estate contracts are as follows.
- Home Inspections
- Financing contingency
- Home sale contingency
In bidding wars in order to make their offer more appealing to a seller, a buyer may waive some of all of these things.
The fewer contingencies in a real estate contract, the better. All things being equal if you can find a great offer without them you should be golden. Buyers may want to include a number of stipulations in their offer that can make the deal harder to complete. They may require that your house appraises for a certain amount, or that they must get approved for a loan, or that the home has to pass a home inspection.
Buyers will sometimes try to add a contingency that their current home must sell first before they will buy your home. All of these contingencies can lead to trouble, particularly the one where the buyer’s current home has to sell prior to buying yours. In fact, it is almost a complete waste of time to consider a home sale contingency.
Your real estate agent should always do their due diligence and find out if the buyer needs to sell an existing home before buying yours. It is highly advisable to insist this language is in the buyer’s pre-approval letter. The language should read something like this: “Buyer getting their mortgage is not subject to the sale of any real estate.”
A home inspection is actually one of the biggest stumbling blocks to getting to the closing. Unless your home is in mint condition, a buyer removing their home inspection should be weighed heavily. Buyers rarely do this and for a good reason. If a buyer agrees to waive a home inspection, they must REALLY want your house!
How Long to Close?
You want to get the sale done as quickly as possible, naturally. But you might be surprised to find that the buyer making the best offer wants months to close the deal. Months? Yes, months. If you have the time on your hands and are not in a hurry, it may be worth it to get the higher offer.
But for most sellers a quick closing is ideal. You can get your money, move into your new house and get on with your life.
With multiple offers on a home, the time to close is usually a significant consideration for both the buyer and seller.
You may have to weigh what is most important to you if one buyer doesn’t blow you away with the exact terms you would like.
Clarify What You Want, and Base Your Decision on Your Goals
If you want the most money possible and you think your home is worth the price, take the highest offer if it makes sense to you. But know that it is OK to take a lower offer if it gives you what you want – no contingencies, quick closing, cash, or whatever else suits your goals.
Remember sometimes the sure thing is better than gambling for a few more dollars in your pocket.
The Logistics of Dealing With Multiple Offers
Now that we have discussed what to think about when getting multiple offers, you need to know how to deal with them.
Usually, the best way to deal with multiple bids of your home is to go through each one by one. Your real estate agent should be helping you with this exercise. Pointing out critical terms in each offer will be paramount. Remember you are laymen. A real estate agent should be seeing offers all the time. Hopefully, bidding wars are not foreign to your real estate agent.
Most of the time the best course of action is to go back to each party that made an offer and ask them for their “best and final offer.” In most circumstances, this is how I would recommend to my clients they handle a multiple offer situation.
If however, there was an offer that just blew you away, it might be more prudent to just go with that party.
If one offer is significantly higher than the other offers or had other terms far more appealing, like cash, sometimes it’s better not to gamble. Keep in mind that being in a bidding war can be stressful for a buyer. The last thing you want to find out is the buyer is backing out due to remorse.
What NOT to Do With Multiple Offers in a Bidding War
Knowing how to handle multiple offers in a bidding war as a seller is vital. There are certainly some things you don’t want to do when you have multiple offers. Below are things you should not do when a bidding war ensues:
- Drag out responding in an attempt to get even more offers. The odds of anything good coming out of intentionally dragging your feet is slim. Don’t piss off the buyers you already have!
- Don’t get greedy which is really the symptom of dragging your feet. Treat all buyers with honesty and respect.
- Do not use a BAD offer to try to get more from a good offer. I can’t tell you how many times sellers have gone to the well too many times in an attempt to get more from a great buyer. Doing so can backfire on you, and you’ll be left with nothing. Don’t do it!
The Biggest Myth With Multiple Offers
Unfortunately, there is a large percentage of real estate agents who have no idea what they are doing when it comes to multiple offers. Incompetence can cost a seller dearly when it comes to knowing how to handle multiple offers.
One of the biggest myths is that a real estate agent cannot reveal information about offers on the table. WRONG – this is so far from the truth, and it’s what costs sellers from getting the maximum amount of money for their home all the time!
A real estate agent, with permission from the seller, can reveal the bid amount of other offers along with any other term. The key phrase here is with the seller’s permission. A real estate agent cannot arbitrarily make this decision on its own.
Revealing the highest offer on the table is often the best way of getting more from buyers just under the highest bidder. Never discount this tactic when in a bidding war.
Final Thoughts on Bidding Wars
Having a bidding war of your house really gives you the opportunity to get the terms and conditions out of the sale you want. With bidding wars, you are in the driver’s seat dictating the outcome as you would like to see it unfold.
Source: maxrealestateexposure.com ~ By