If you’ve been bidding on a house lately in Seattle (and many other cities), buyer competition is alive and well. Inventory of homes for sale is at lows we haven’t seen in over a decade, so the few homes on the market may be subject to fierce competition by buyers.
Getting in a bidding war for a house is unnerving, and one should never bid beyond their comfort range for a particular house. The old adage that “there will always be another house” is still true. That said, there are many basic mistakes that we see buyers make when placing bids in these competitive situations that can be avoided.
- Escalation clauses that aren’t compelling – Using an escalation clause is a favorite tactic to raise your bid based on the competition without overpaying. The buyer specifies a starting price, an amount they will beat another offer by and a cap on the highest that the buyer is willing to pay. For example, the starting offer is $500,000 and will beat any other offer by $1,000 up to a limit of $525,000. Escalation clauses can be an effective bidding tool to win against competing offers, but only if you beat your competitor by a meaningful amount. If you only beat your competition by $1,000, then the final offer price from you is $511,000 and your competitor is $510,000. A $1k price difference is not significant on a $500k sale, and the seller is going to evaluate other factors like financing/down payment/etc. You need to beat other offers by a “decision-making” amount. If the seller can get $5000 more from you, they will take notice. If the seller only gets $500 or $1000 more from you, they may chose your competitor with better overall terms.
- Asking for seller-paid closing costs – The real estate market bust from past years trained buyers to aggressively ask for seller-paid closing costs, often 1%-3% of the sale price. While there are still instances where asking for seller-paid closing costs makes sense, competing against 10 other bidders isn’t one of them. If there are 10 offers on a home, and one of them asks for the seller to pay 3% closing costs, I can guarantee that the seller is going to ask “Why in the world do they want me to pay their closing costs with this much competition?” Even if your net offer price is high after the seller pays closing costs, the perception your offer leaves is going to make your offer lose.
- Not giving the seller what they want – Listen to what the seller wants, and put aside your own preferences. If the seller wants a 45-day closing because of their moving schedule, then by all means give it to them. If the seller wants to keep the washer/dryer, then let them have it. Maybe you have to extend your own lease or purchase a couple of appliances, but in the grand scheme of a home purchase, those are small inconveniences to secure the house that you want.
- Cash offer does not mean big discount – Many cash buyers assume that because their offer is all cash and can close quickly, they are going to get a huge discount compared to buyers who need a mortgage. That is simply not true in most cases. We were recently involved with a home that had 9 bids, 8 of which needed a mortgage. The home was listed for $470k and the winning bidder got the home for $511k. The one cash bidder was the lowest offer at $470k, and was the first offer discarded. Would you wait 30 days for a well-qualified mortgage buyer to get an additional $41k? Of course you would. Only sellers who are desperate for a quick sale or have a house in very poor condition are going to go for such a discount on a cash offer. Cash offers are compelling and often win, but only when the offer price is reasonable compared to the competition.
- Needless contingencies – Normal real estate contracts are often filled with contingencies to let a buyer back out for various reasons. If you have the time and ability to waive those contingencies prior to the offer, then do so. If they title report is available, review it prior to your offer and waive the title contingency if you are satisfied with the report. Get a copy of the seller disclosure prior to your offer and waive that contingency as well. It may even make sense to hire an inspector to pre-inspect the home so that you can make your offer without an inspection contingency.
Winning a hotly contested bid for a home is tough. The odds are stacked against you if there are 10 offers, since there will only be one winner. A higher price can easily sway the bid your way, but often bids may be similar and the seller makes decisions on other factors. Spend the time with your agent ahead of time to prep a compelling offer that is easy for the seller to accept, and you will maximize your chances of a successful bid.