How to Start or Win a Bidding War

In the current pandemic real estate market, homes are selling faster than ever and for higher prices than some may have expected. In many areas homes are going into bidding wars before they are sold. Below are tips on bidding wars from experienced real estate professionals.

What is a Bidding War?

A bidding war is what happens when there is more than one interested buyer putting in an offer to purchase a home. These buyers are competing to win the seller’s acceptance of their purchase offer. Each interested buyer tries to make the most attractive offer possible in hopes to “win” the home. In many cases this leads to driving up the purchase price of the home with higher offers.

Bidding wars most often occur in hot sellers’ markets where there are less homes for sale than buyers looking to purchase homes. This gives home sellers a big advantage. In some cases bidding wars can happen in buyers’ markets or neutral markets if the home is in a highly desirable location or has highly desirable features.

How and Why Sellers Start Bidding Wars

In a sellers’ market it is not uncommon for some sellers or their agents to use the strategy of trying to start a bidding war in hopes to get the best offer on a home to make a bigger profit offf of the sale. Whether this is a good strategy is all in the eyes of the beholder.

Some strategies used to encourage multiple buyers to make offers at the same time include getting the house in top desirable condition and then listing it just below the fair market value to draw a crowd. The seller and selling agent may also make the home available to view online, but hold off on taking offers until a certain date. This is a strategy in hopes to get several potential buyers to fall in love with the home and be ready to bring an amazing offer in anticipation of other buyers doing the same thing.

Winning Strategies for Buyers in Bidding Wars

The following strategies are tips that some have found useful in placing the winning bid when it comes to a bidding war. These are not 100% guaranteed steps to winning, but they have proven to help others.

All Cash Offers

"One of the easiest ways to make a home sale go much more smoothly is to purchase the home with cash instead of obtaining a home loan that will need to be finalized and approved by a third party before it is official. An all cash offer allows a faster closing on the sale transaction and the ability to wave contingencies like an appraisal and inspection (not recommended, especially if you are tight on cash after the sale goes through)." Knoxville Realtors Ryan Coleman

Waiving Contingencies

"An offer with little to no requests from the buyer is known as a “clean offer.” The cleaner the offer the more appealing it is to a seller. This means that some buyers will waive all contingencies if possible in hopes of winning the bidding war. The largest and most common contingencies include the appraisal and the home inspection. It is not the wisest strategy to waive all contingencies, especially the inspection, unless you have made plans to set aside extra money to pay for any large safety issues that may be present after purchasing a home with no inspection." Park City Utah Realtors, Alex LaCouture and Katie Noble

It may be a good strategy to pick your battles and not ask the seller to give a credit for updating old windows, or replacing the carpet. These are things that could get an offer passed up for another one.

Putting in a Larger Amount of Earnest Money

"An earnest money deposit is made when you put in a written offer. Earnest money is money that you put in as a “good faith” deposit. It tells the seller you are putting a portion of the purchase price down on the home to show how serious you are in following through with the purchase. Should you walk away from the sale of the home for any reason other than the contracted contingencies made in your offer, the earnest money goes to the seller. If the sale of the home is completed the money goes toward the purchase of the home." - Sara Merhpouyan, Sherman Oaks Realtor

The traditional amount buyers put down in earnest money is about 5% of the purchase offer. To show you are more serious about making good on your offer, a higher amount helps. Some buyers will put down as much as 10% to communicate their seriousness and intent to follow through and buy the home. This is appealing to sellers, especially because they win out with more cash on hand if the buyer backs out.

Include an Escalation Clause

"An escalation clause is an article added to a purchase offer that tells the seller you will increase your offer up to a certain point should there be a bidding war. The clause is worded that the buyer is offering a certain amount, but should they receive a higher offer from another buyer they are willing to increase the offer by a certain amount of money over that competing offer.

For example if you make an offer of $300,000 on a home and another offer comes in for $315,000, and your escalation clause states you will offer $5,000 over other offers, your offer increases to $320,000.

The clause does also state a cap on how much you will offer. So if you stated a cap of up to $375,000 and someone bids $375,500, you lose the bidding war. It is a good way to compete in a bidding war without having to constantly worry about being outbid, but it is not a 100% guarantee you will win. It is still a good strategy worth a try." Luis Pezzini, Luxury Leasing Property Manager

Hire an Expert Agent

"Winning a bidding war is best done with professional bargaining help on your side. Not only will an agent help you to make a strong offer in the first place, they can help you to keep on track with your original financing goals. They can also help you to walk away and help to prevent you from paying too much for a home should the bidding get out of control." Fort Myers Realtor Alex King