How To Win A Real Estate Bidding War In A Sellers Real Estate Market
Attempting to purchase a home over the last year or so has become increasingly difficult. If you look at my FishHawk Real Estate Year-End Review for 2021 – Looking Ahead to 2022 market stats post, you will see that our monthly supply of available homes is sitting around a 1/2 month supply. To put this in perspective, a balanced real estate market is around a 6 month supply of homes for sale. Needless to say, there is a lot of competition for nice, reasonably priced homes that are listed for sale.
So, the question is how do you win a real estate bidding war in a seller’s real estate market? Let’s be honest, there is no way to win every offer. With most homes receiving multiple offers, this is a challenge. I have probably won more than most but I certainly have not won them all! There is no way to ever outbid desperation or a flat-out ridiculous offer.
To land the home of your dreams, let’s talk about the preparation, thought process, and look at some of the components of an offer that we can control to make your offer the best it can be.
- Know and have a local REALTOR® expert that is current with the market value of the homes
- Get a mortgage pre-approval or pre-qualification
- Purchase Price
- Initial Deposit (Called Earnest Money Deposit)
- Additional Deposit
- Closing Date
- Home Warranty
- Property Inspection
- Additional Terms and Contingencies
- Other Possible Items
Know and have a local REALTOR® expert that current with the market value of the homes
Real estate market knowledge is more important than ever in a seller’s market. Some sellers are overpricing their homes on purpose to test the market while other sellers are listing at market value. Knowing the difference is going to impact your offer. A home that is listed over market value will most likely not be getting offers well over the asking price while a home listed at market value will most likely receive multiple offers well above the asking price.
Knowing the current market value of a home, what it is listed at, how much you can afford, and how bad you want the home will bring us to how much we offer on a home. I have some theories on the offer price for a home. Ultimately, you will need to make the offer price decision, but we will discuss it in detail when the time comes.
Get a mortgage pre-approval or pre-qualification
This really should be listed as the first item because it really should be the first thing you do when you start thinking about purchasing a home. Every seller is going to ask for either proof of funds (if it is a cash offer), pre-approval, or pre-qualification letter. A pre-approval letter is stronger than a pre-qualification letter as the mortgage professional will dig further into your credit and ask for proof of income, etc.
The purchase price or offer price is probably the number one thing a seller looks at with an offer. While it is very important, the highest offer dollar-wise does not always win the bid.
For example, we have a home listed for the market value of $500,000. Buyer A puts an offer in for $550,000 using a conventional loan with a 10% downpayment. Buyer B puts an offer in at $540,000 with a conventional loan with a 40% downpayment. Even though the real estate market has been appreciating in value, the seller expects that the appraisal will come in at $500,000. Buyer A is not offering and does not have any additional money to give any appraisal gap guarantee (we’ll talk about this later). Buyer B is offering an appraisal gap guarantee down to the listing price of $500,000.
If the seller accepts the $550,000 offer from Buyer A and the home does appraise at $500,000 the seller will need to either reduce the purchase price to $500,000 or the loan will be denied and the contract will need to be canceled. If the offer from Buyer B was accepted, the buyer would bring an extra $40,000 to the closing table (actual wire it) and be able to close on the property for $540,000. So in this case, the seller accepting the lower offer would be the better decision.
The important takeaway for the purchase price is that is extremely important but other factors do come into play.
Most of the time we refer to the initial deposit as either the earnest money deposit or EMD. The thought process here is the higher the earnest money deposit the stronger your offer is.
In general, we do not see additional deposits in residential real estate that often. We tend to just see the deposits all in the initial deposit. Some buyers will sometimes add more money to a deposit after the inspection period is finished.
This is an important part of an offer. From a seller’s perspective, a buyer that is putting down a 50% deposit on a mortgage is mortgage likely to have the loan close than a buyer putting down 3.5% on a mortgage. Having 50% down will also minimize any possible appraisal issues. In fact, with 50% down, we see the appraisal get waived by the lender in a lot of instances.
The higher your downpayment, the stronger your offer looks to the seller.
One of the overlooked aspects of an offer is the closing date. If you are getting a mortgage usually the quickest we can close would be 3-weeks. Most lenders like 4-weeks. I do like to reach out to the listing agent of any properties I am making an offer on to see if the seller has a preferred day to close. If they do and you can close on that day, it makes your offer stronger.
This is one of the key aspects of the offer. Financing consists of a number of different options.
- Cash: An offer where the buyer is not obtaining financing and is waiving the financing contingency
- Obtaining Financing: An offer where the buyer will be obtaining some sort of financing and the contract is contingent on the buyer obtaining this financing. There are many types of this kind of financing but the main types of loans are Conventional, FHA, and VA. All of these have different minimum deposit amounts for a buyer.
For a seller, if they have two offers and everything else in the offer is created equal with one offer being a cash offer and the other offer being an offer with a financing contingency, it would be rare for the financed offer to win the offer.
In some markets, buyers are able to get the sellers to purchase a home warranty for the buyers. In this market, I recommend not asking for one. Asking for the seller to purchase one for you will weaken your offer.
98% of the time I like to use the Florida “AS IS” Residential Contract For Sale And Purchase when making an offer. This contract includes a clause that says the following:
If Buyer determines, in Buyer’s sole discretion, that the Property is not acceptable to Buyer, Buyer may terminate this Contract by delivering written notice of such election to Seller prior to expiration of Inspection Period. If Buyer timely terminates this Contract, the Deposit paid shall be returned to Buyer, thereupon, Buyer and Seller shall be released of all further obligations under this Contract.
Because of the clause, the shorter the inspection period, the stronger your offer is. The contract defaults to 15-days for the inspection period but for most offers, I recommend between 7 to 10 days in this market. The one thing I DO NOT recommend is fully waiving the right to inspect the property. I strongly feel that every home should have a full home inspection.
Additional Terms and Contingencies
In the current strong seller’s market, I recommend not adding any additional terms or contingencies unless 100% necessary. Items like having the seller cover some of the buyer’s closing costs or having a contingency that the buyer’s current home must sell in order to close will generally not get accepted. We want to keep the offers as simple as possible.
Other Possible Items
- Escalation Clauses: If multiple offers are received on a home, bidding is not usually a back-and-forth process. Instead, the seller’s sometimes ask buyers to submit their “highest and best” offer for the home. Since potential buyers have no idea what the other offers might be for, buyers can add an escalation clause to their offer. The escalation clause indicates that the buyer is willing to offer higher up to a specified dollar amount if other offers that can be proven up to other specified dollars have been received. I know that was clear, right? Let me break it down, for instance, a buyer may bid $600,000 and include an escalation clause saying they are willing to pay $2000 more than the next highest bidder up to $650,000. If the clause was accepted, the seller would need to provide copies of the competing offer. I have two issues with the escalation clause. First, it is sometimes confusing to the seller and or the listing agent. Second, and this is more important, it is like playing poker with your cards up. If the seller knows that you are willing to go to $650,000 why not just counter you back at $650,000? For the most part, I am not a fan of the escalation clause but there are instances where using it might be helpful.
- Include an Appraisal Gap Guarantee: Including an appraisal gap guarantee, also known as an appraisal variance, is another way to win an offer on a house. With homes in the FishHawk and Tampa areas selling above the asking price, there is a risk that a property may not appraise at the offer amount. Since lenders typically won’t issue a mortgage for more than the appraised value, that means a seller either won’t get the full bid price or the sale will fall through. However, an appraisal gap guarantee promises that a buyer will pay cash, up to a certain amount, to cover the gap between the appraised value and the bid amount. This is very helpful especially if a property is bid well over the asking price.
- Personalize Your Bid (Love Letters): I DO NOT recommend these. In 2020, NAR cautioned REALTORS® and buyers about using these letters since they could open the door to a violation of the Fair Housing Act. Since letters and photos can reveal a buyer’s family status, race, or even religion, using them to make housing decisions could be deemed discriminatory. Here is the link to NAR’s Love Letters or Liability Letters article.
- Offer to Pay Seller Costs: This is an interesting concept but probably confusing to the seller as the actual dollar amount of the closing costs will not be known at the time of the offer. I think it is better to offer more and use the appraisal gap guarantee to cover the difference.
My Final Thoughts
There is no question that this is a tough market for buyers. Be prepared, find a REALTOR® that understands what it takes to win offers in this market. Be prepared to come in with an offer over the asking price for a home. With pure supply and demand, I think that this year will be another year of large property appreciation. What might be overpaying by a little now will most likely look like a bargain in a year from now. In this market, finding a home that checks off “most boxes” is probably something you will need to accept. It will be hard to find the perfect home. There is a good chance that you will get frustrated. I can admit that I do sometimes as well. If you find me as your REALTOR®, I promise that I will do the best I can for you to get you into your dream home!
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About The Author
The above real estate article How To Win A Real Estate Bidding War In A Sellers Real Estate Market was written and posted by Jeffrey Gould.
Jeff is a top-selling, nationally recognized REALTOR®, real estate Broker, and your local FishHawk Ranch real estate expert. You will find him selling homes in Tampa Bay, Florida, and surrounding areas. Some of those areas include FishHawk, Lithia, Riverview, Valrico, Apollo Beach, Brandon, and Tampa.
If you are looking to sell or buy a home anywhere in the Tampa Bay area, Jeff is your local and trusted professional.
Jeff can also be reached via text or phone at (813) 421-3007.
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