How to Deal With a Real Estate Bidding War
Bidding wars on houses are happening all around the country.
When real estate markets heavily favor home sellers, bidding wars on homes is not 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 customary to get multiple offers. Sometimes, if the market is hot enough, the offers can get quite competitive, with higher and higher bids.
There are also times when sellers will price their home lower than it is worth to start a bidding war.
Whatever your particular circumstances, if you start getting multiple offers on your home, you will have to choose the one that works best for you – and that does not always mean the bid for the most money.
While buyers are searching for how to win a bidding war, home sellers should understand how to handle one.
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 a bidding war is. Bidding wars are when two or more parties compete to purchase your home.
They do this by making offers on your property. The proposals typically have terms that may be favorable to sellers to win the “bid.”
It is not uncommon 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 seem realistic 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. You will dramatically increase the odds of having a bidding war on your home by delaying showings.
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 looking for your type of property will be lining up at the door come the weekend.
You are also going to put an offer deadline of Monday at noon. You will clarify that you will not be accepting an offer before then. The purpose of doing so is to allow every interested party 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.
The house will not be going under contract until sometime on Monday after you’ve reviewed all the offers with your real estate agent.
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 critical sales tactic.
Understanding all the nuances of handling bidding wars on your home is crucial. Knowing how to handle multiple offers will go a long way to having a successful transaction and maximizing your profit.
Handling Multiple Offers and Bidding Wars on Houses
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 and 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 offers but exclude some on the table. Maybe a few offers are really low or have unacceptable terms.
- Reject all of the offers. None of the proposals 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 sellers’ 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 exhilarating to get an excellent, big, high-priced offer on your home. Most sellers hope 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 an excellent position. When you receive multiple offers, the chances of selling way over your asking price increase exponentially.
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 their “cap price” in the escalation clause.
For example, your home is on the market for $500,000. The buyer could write their offer stating they will pay $515,000 but escalate their offer to $5000 over any offer 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 benefits from 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.
Non-Contingent Offers Are The Best
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 could come in low, causing the lender not to finance what the buyer has requested.
Remember your real estate agent has already done a comparative market analysis (CMA) to establish the value.
Of course, you want to sell your home for what it is worth. The highest offer may be high in relation to the other proposals made, but if it reflects the value of your home better than the lower offers, it really might be the obvious choice.
Cash is King
When there are bidding wars on houses, a significant cash offer can be highly appealing. With bidding wars in real estate, the odds of a home appraising when selling for $50,000-$150,000 over the asking price become slimmer.
A cash offer takes much worry off the table for a home seller. There is no need to worry about a buyer getting a mortgage or the home appraising.
All things being equal, it is usually better for a home seller to accept a lower offer when it is a cash sale. How much lower could depend on other factors.
A cash offer can be appealing because you can skip all the steps required when the buyer is paying with a loan. The sale can close much faster, and you do not need to worry about the home appraiser coming in low.
Some sellers consider a cash offer 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 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.”
An Appraisal Gap Clause is The Next Best Thing
Let’s face it; most buyers can’t pay cash for a home. What’s the next best thing? That would be having an appraisal gap guarantee clause inserted into the real estate contract.
An appraisal gap clause says that the buyer will agree to cover any gap between the agreed-upon sale price and the appraised value.
For example, if the home is selling for $650,000, but the appraisal comes in at $625,000, the buyer would need to put up additional monies to satisfy the lender.
Is The Buyer Waiving The Home Inspection?
When buyers have lost out on bidding wars on other houses, they start to do crazy things. One of them is waiving their right to a property inspection. For some sellers, this is a godsend.
If you have an older home with deferred maintenance issues, an offer without a home inspection contingency should be given a lot of weight.
If your sale has the potential to fall apart after a home inspection, it is not worth gambling for a few thousand dollars with another offer.
What is The Earnest Money Deposit?
One of the more essential things in any real estate transaction is the amount of earnest money the buyer is putting up with their offer. The amount of earnest money is usually anywhere from one percent to five percent of the purchase price.
Having the proper earnest money is vital because it holds the buyer’s feet to the fire. The higher the amount of earnest money, the better.
If the buyer violates the contract terms, they stand to lose this money. It is their “skin in the game.” Accepting a lower amount of escrow funds is not smart. Speak to your real estate agent about what is customary for your area.Having the proper amount of earnest money is the glue in a real estate transaction.Click To Tweet
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, they 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 slightly, but bidding wars create an extreme environment where being rational often goes out the window.
The buyer may have been approved for a smaller loan than their offer, hoping that the difference can be made up somehow. 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, you might be better off taking a different offer from someone you know can pay.
Always Get a Pre-Approval Letter
This is where it becomes highly imperative to know the difference between being pre-approved and pre-qualified for a mortgage. Many real estate agents 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. It would be best if you insisted on a mortgage pre-approval.
A while back, there were multiple offers on a home I was marketing in Holliston, Massachusetts. The agent presented a proposal 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.
Continue to Think About The Home Appraisal
When a buyer makes a high offer, it is essential to compare the price to what your home is worth. The higher you go over the house’s actual value, 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 house’s market value before funding the loan.
Lenders do this to protect themselves and ensure they make sound business decisions.
It can be pretty 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 fantastic, 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 go 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 if an appraisal comes in low or has additional funds to make up the difference between the appraisal and sale price.
I ask the buyer to state in their offer they will cover the difference between the two – remember the appraisal gap mentioned above!
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.
You may discover you get a lot less than you expected and have to jump through many hoops to get there.
When I sell any property significantly over asking, I’m constantly counseling the owner that there is an increased potential for the home not appraising.
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, to make their offer more appealing to a seller, a buyer may waive some of these things.
The fewer contingencies in a real estate contract, the better. If you can find a great offer without them, all things being equal, you should be golden. Buyers may want to include several 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 buy your home. These contingencies can lead to trouble, particularly where the buyer’s existing home has to sell before buying yours. It is almost a complete waste of time to consider a home sale contingency.
Make Sure The Buyer Doesn’t Have A House They Need to Sell!
Your real estate agent should always do their due diligence and determine 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 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. As previously mentioned, if a buyer agrees to waive a home inspection, they must REALLY want your house!
How Long to Close?
What is your preferred closing date? The agreed-upon closing date is usually one of the more essential terms in a bidding war.
Some sellers prefer an extended closing date, while others want to close quickly.
How important the time to close is can vary from seller to seller. If you have already bought another home, you may want to close quickly.
On the other hand, an extended closing date may be desirable if you have not located a home to purchase.
The average time to close from start to finish is 45-60 days. Keep this in mind before the offers start to come rolling in.
It would help to let your real estate agent know your preferred closing date upfront. It will not be unusual for the buyer’s agent to ask the listing agent what is the seller’s desired closing date.
They do this to craft the buyer’s offer as strong as possible.
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.
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 on homes 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.” This is how I would recommend to my clients they handle a multiple offer situation in most circumstances.
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 has other terms far more appealing, like cash, sometimes it’s better not to gamble. Remember that being in a bidding war can be stressful for a buyer. The last thing you want to find out is that the buyer is backing out due to remorse.
What NOT to Do With Multiple Offers and Bidding Wars on Houses
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 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 Bidding Wars on Houses
Unfortunately, a large percentage of real estate agents have no idea what they are doing when it comes to bidding wars on houses. 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!
With permission from the seller, a real estate agent 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 their 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 allows you 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.
Hopefully, you have enjoyed the guide on how to handle bidding wars on your house.
Additional Helpful Home Selling Resources
- Does going to the listing agent really save you money – some buyers make the mistake of going directly to the listing agent, thinking this makes sense. Often there can be dire consequences for putting yourself in this position. Learn more from the excellent article by Kevin Vitali.
- How to sell a home from a long-distance – Without a doubt, selling a house when you are out of state can be more challenging. See some helpful tips from Kyle Hiscock on making this situation go more smoothly.
Use these additional resources to make intelligent decisions when buying or selling a home.
About the author: The above Real Estate information on how to deal with multiple offers and bidding wars on your home was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at email@example.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for 35+ Years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.