After months of searching, you’ve finally found your dream home. You’re financially secure and ready to take the next step in buying a house. But if you’re searching for a home in a seller’s market, there’s one thing standing between you and the home of your dreams: other buyers.
Bidding wars are the hallmark of a seller’s market. You may find that your perfect home is perfect for several others. We’ll look at a few strategies you can use in a bidding war to avoid heartbreak and ensure victory.
Offer a Cash Deal
“Cash is King” is a common real estate expression and for good reason. If you don’t need to apply for a mortgage, your offer will usually jump to the top of the pile. The seller doesn’t need to worry about you running into problems with financing. But don’t worry. You may be able to use delayed financing after you close on the sale to help you regain access to the cash you have in the home.
A cash sale saves time for everyone and can close much sooner because there’s no underwriting process to wait on. If the seller wants to sell their home as soon as possible, a cash offer is very powerful.
Make The Highest Offer
Traditionally, the best way to win a bidding war is to offer the most money. Although the highest offer isn’t always the one that the seller chooses, money does talk.
Under no circumstances should you throw caution to the wind and ignore your budget. Bidding wars can get emotional, but you must be able to walk away, secure in the knowledge that a home that fits your budget awaits.
How can you tell how much competition you have on a home? Ask your real estate agent to get in contact with the seller’s listing agent, who should have some key insights. Your real estate agent can also use local market data to help you strike the perfect balance between saving money and securing your home.
Have Your Preapproval Letter In Hand
Get preapproved for a mortgage before you start shopping for a home. If you’ve heard about the prequalification process, note that the prequalification is an estimate of the loan amount based on verbal confirmation of your income and other details.
A preapproval letter, on the other hand, offers a precise mortgage amount based on your W-2s, bank statements, credit score and more official documentation.
A preapproval letter tells the seller that you’re serious about buying their home. It also tells the seller that you won’t run into trouble getting a mortgage to buy the property. It’s always possible that if you don’t have preapproval, a seller could skip over your offer entirely.
Waive the Inspection Contingencies
Most offer letters include a contingency that says you can cancel the sale if a home inspection reveals major problems with the property. Although you can make your offer stronger by agreeing to skip the inspection contingency, you’ll be taking an enormous risk.
Unless you know for a fact that the property has been properly maintained – which might be the case if you’re buying from a family member or close friend – you might be purchasing a house whose great looks hide some urgent and expensive repairs.
But if you feel able to shoulder the potential risk and want to make as clean of an offer as possible, do a thorough walkthrough of the home. Here are some things to mark off your walkthrough checklist before submitting your offer:
- All lights and outlets in each room work
- Toilets, showers and faucets aren’t leaking or emitting foul odors
- All home appliances are functioning as they should
- Gutters are clean, secure and directing water away from the home
- Garage door closes and opens correctly
- Home security system arms and disarms as it should
- No cracks or other issues with the foundation
You can also ask the homeowner for repair and home improvement records, as well as any warranties for work completed. These documents will give you a closer look at the condition of the home and how well the owners have been taking care of it.
Drop Other Contingencies
Sellers don’t want their homes to sit on the market forever. They also don’t want to have to relist their home because a contingency resulted in the sale falling through. You can make your offer stronger by dropping your contingencies. Contingencies are specific conditions that must be met before the sale can be completed.
For example, you might have a contingency in your offer letter that says the home must meet or exceed your offered price during the appraisal. This is because mortgage companies won’t lend out more money than the home is worth. You’ll still need the appraisal, because your lender requires it.
By dropping the contingency, you’re telling the seller that you’re willing and able to pay an additional amount in cash at closing if the home appraises for less than the agreed-upon purchase price.
For example, you may be willing to pay up to $5,000 extra at closing to make up for the low appraisal. This allows you to fill the gap between the appraised value and the purchase price.
But be careful. You still need to have enough cash to cover your down payment and closing costs. With an appraisal shortfall, you’ll need to come up with that money.
Otherwise, you’ll end up either having to walk away without your earnest money, or putting less down on the house, which might force you into buying private mortgage insurance (PMI).
Be Available
The final key to remaining competitive on a home sale is to keep yourself available. Leave your information with the seller and invite them to contact you or your agent with any questions about your offer.
Respond to any inquiries quickly and have your real estate agent regularly check in with the listing agent to monitor the seller’s progress. Be as flexible as possible and stay on the seller’s radar. When they decide, you’ll want to be the first to know.
How To Beat A Contingent Offer
What if your dream home’s seller accepts a contingent offer from another buyer? Likely, it means it’s time to move on, but if your heart is set on a property, there are some things you can try. Who knows? You may get lucky.
Find Out if The Sellers Are Accepting Backup Offers
First, have your real estate agent find out if the seller is still accepting offers while the sale is pending, and if they included a kick-out clause in the sales contract. A kick-out clause allows a seller to continue accepting offers while the potential buyer awaits the home inspection, appraisal or financing needed to close.
If the seller gets a better offer, and depending on how it’s structured, the kick-out clause allows them to notify the first potential buyer and encourage them to do one of the following:
- Match the competing offer or exceed it (the escalation clause)
- Agree to waive all contingencies in the contract
- Agree to waive some contingencies
If there is no kick-out clause, all you can do is have your real estate agent keep an eye on the pending sales process. It’s possible that buyers will back out after reading the home inspection report or they won’t be able to get the financing they need.
If your need for a new home isn’t urgent, and you love that house, you could wait it out. Just know that most sales contracts successfully close.
Should the sale fall through, be ready to act and make an offer that matches or exceeds the last offer. Otherwise, the sellers may decide to simply put the home back on the market.
What To Include in Your Backup Offer
If you are serious about making a backup offer, make it worth the sellers’ time and effort to invoke the kick-out clause. Make the offer price tantalizing, the earnest check large and the contract as contingent free as possible.
Keep in mind that while you are awaiting a resolution between the sellers and the first potential buyers, you will not be able to make an offer on another home. If you are in the middle of house hunting in a competitive market, this may cause you to miss another great opportunity.