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How to Outsmart Others in a Home Bidding War

Few homes for sale. A surplus of buyers. High interest rates. These are all signs of a seller’s market. They’re also the perfect storm for a bidding war. If you find yourself staring at a potential bidding war to get your dream house, here are some tips to end up on top.

Avoid a Bidding War

It sounds paradoxical, but the best way to win a bidding war is to not have one. Sometimes that’s possible. Other times, a bidding war is inevitable. The point is that there is no reason to escalate prices if you don’t have to.

Recognize a bidding war early and adapt your tactics accordingly. One strategy is to ask the sellers if they have a price they would automatically accept. That way, you cut to the chase and avoid wasting time and money unnecessarily.

Hire an Experienced Agent

“It wasn’t that long ago that coaches were confined to sports. Now, they’re everywhere.” Author Michael Lewis explores the rise of modern coaching in Against the Rules, which extends to real estate. When it comes to winning a bidding war, your real estate agent is the coach that can guide you to victory.

Your agent creates a bidding strategy around your needs and budget. Your agent tells you when to walk away and when to waive your escalation clause. Your agent gives you invaluable insight because they’ve been in your shoes before. Hiring an experienced agent ensures a guiding presence to prevent you from going overboard with bidding and coming away with a favorable price and terms.

Come with Cash

Cash is king, and real estate is no exception. Obviously, paying for a home in cash isn’t possible for everyone. It’s an advantage only a fraction of a fraction of people can afford.

Sellers often prefer buyers with cash because they don’t need financing. This financial security helps streamline the selling process. It eliminates the need for a third party and any conventional speed bumps, such as preapproval and credit checks.

Get Preapproved

A preapproval letter is the easiest way to show sellers you’re a serious buyer. An underwriter reviews your financial information, and a lender prepares a mortgage offer up to a certain amount. The process is a step up from prequalification, which measures your creditworthiness and estimates your mortgage size.

A preapproval letter demonstrates to sellers that you’ve done your homework. The letter states you can borrow the money to buy the specific home in question. If sellers have to choose between two identical offers, a preapproved one is more attractive because it’s a sure thing.

Flex an Escalation Clause

An escalation clause, or escalator, is a part of a real estate contract that says you will outbid other buyers. It means you're willing to bid “A” for the house. If someone comes along and bids higher, you’ll offer “B.”

Escalation clauses let you incrementally raise your offer to a certain limit, which makes waiving your escalator a leap of faith. It reveals to sellers just how much you want a property. It also may be your best option to come out on top of a bidding war.

Some sellers prefer when buyers waive their escalation clause because it drives up house prices. Others prefer buyers to submit exactly how much they’re willing to pay in advance. Work with your realtor to find escalation terms that match your strategy and budget.

Write a Personal Letter

Money speaks to the wallet, but personal letters speak to the heart. While a bidding war can feel like a cold-blooded affair, remember that everyone involved is human. Writing a personal letter to the seller can be the nudge you need to put your bid over the edge.

Use the letter to explain why you feel strongly about the specific property and the neighborhood. Be sincere as you tell the seller why you want to be there for decades to come. It’s okay to get emotional, though that tactic won’t work on everyone, especially not investors.

Don’t Be Picky

A bidding war is not the time to get picky. Sellers, particularly during a seller’s market, have the leverage in a bidding war. They’re less willing to budge on concessions, such as home improvements or paying for the closing costs.

You have contingencies in place, so there is some wiggle room with negotiating. (More on contingencies in a second.) If issues do come up, focus on health, safety, and structural issues, as opposed to cosmetic ones. Quibbling about minor faults is a sure-fire way to end up on the wrong end of a bidding war.

Waive Your Contingencies

Contingencies are specific agreements that a seller must meet to close a home sale. If the seller does not meet the contingencies, the buyer can back out of the agreement. Some examples include:

• Financial contingency – the deal is contingent on the buyer getting a large enough mortgage loan.
• Inspection contingency - the deal is contingent on the home having no deal-breaking flaws.
• Sale of current home –the buyer has to sell their current home to approve the transaction.
• Home appraisal – verifies the home value.
• Clear title – shows who has owned and currently owns a home, as well as liens and disputes.

Waiving contingencies shows sellers you badly want the house. According to Redfin, it boosts your chances of getting a home by 58 percent. The only strategy that worked better was an all-cash offer at 97 percent.

If alarm bells are going off in head saying this seems risky, you’re right. Contingencies are a protection that lets you renegotiate the price and terms, if necessary. Waiving them means you're out of luck if you find water damage or a lien on the title after the sale.

The Bottom Line

There is no magic formula to win a bidding war. The process requires a lot of strategy and a bit of luck. You can improve your chances of winning with preapproval and by writing a personal letter to the seller. In the meantime, your agent can guide your through the process, so you make the right moves at the right time.