With housing inventory relatively low and demand from buyers high, today’s real estate market requires buyers to be extra strategic when entering the market. Spring of 2021 showed over 70% of home listings resulting in a bidding war —which can certainly be stressful and frustrating to buyers, to say the least.
Below are ways to prepare to put yourself ahead in a real estate bidding war.
Be Prepared Ahead of Time
Keep Your Emotions in Check
Buying a home can be exciting, but often equally overwhelming. Looking for a home in a highly competitive market where bidding wars are the norm means emotions are sometimes running high. If you’ve ever been in a bidding war—or your offers have been rejected time and time again—you know the frustration, overwhelm, and even desperation that can arise from the inability to get you dream home.
Getting into the right mindset can help you minimize stress and frustration. In a hot market, buyers should prepare themselves for the reality that they will likely have to outbid other buyers. It’s also possible that you will be outbid a few times before making the winning offer on a home purchase. Set realistic expectations from the beginning and keep in mind that the homebuying process shouldn’t be taken personally.
Hire a Good Real Estate Agent
Hire an experienced real estate professional you can trust to improve your chances of winning a bidding war (should you find yourself in one). An agent who knows the market will help you strategize and advise you throughout the process. They will provide valuable insight when considering options such as submitting a higher bid, making reasonable concessions, or walking away from a deal altogether.
Working with a real estate agent helps anchor you to your goals and can make them easier to achieve. A true professional will help you determine what kind of home you’re looking for and what your non-negotiables are. When the time comes to negotiate, you will want an experienced agent to do the heavy lifting on your behalf.
Present a Preapproval Letter with Your Offer
Oftentimes, sellers are looking for the best offer with the least likelihood of falling through before closing. In this type of market, they are at an advantage to do just that. Cash offers can be appealing because they eliminate the possibility of a buyer not qualifying for financing.
If you can’t afford to make an all-cash offer on a home, don’t worry—many consumers cannot afford to do so. In 2021, 78% of homebuyers financed their purchase. So although you may hear stories about cash buyers winning any available real estate with all-cash offers, the statistics show you’re more likely to bid against other buyers with financing.
The most important thing you can do before you start making offers on homes is to secure a pre-approval letter to submit with your offer. This tells the seller that you’re a serious buyer and financing is guaranteed. Many sellers who receive multiple offers will eliminate those that don’t have pre-approval letters right away.
You can start the mortgage pre-approval process with Lafayette Federal today to make sure you’re starting the homebuying process on the right foot.
Add an Escalation Clause
In a market where you’re likely to have a competing offer with other potential buyers, you can improve your chances of winning a bidding war by adding an escalation clause to your offer. An escalation clause is an addendum to a real estate contract that automatically escalates your offer if another offer is higher than yours.
For instance, let’s say you find your dream home and it’s listed at $495,000. You submit an offer of $515,000, which is slightly above the asking price, with the hope that will give you the competitive edge—only to find out that another family beat your offer by an additional $5,000. Without an escalation clause, you may have lost the property to the higher bidder.
Including an escalation clause, however, could keep you in the running. In this case, maybe you’re willing to go up to $525,000 to buy the home. Your escalation clause might state that if an offer higher than yours is submitted, you will beat their offer by $10,000, up to your limit of $525,000. If there are no higher offers, you just won the bidding war.
Consider Waiving Contingencies
Contingencies are specific conditions in a real estate contract that must be met for the sale of the property to close. There are standard contingencies that many contracts include which allow you as a buyer to terminate the real estate contract without penalty. Here are some of the most common contingencies:
- Home inspection contingency: You can back out of the deal if significant maintenance or structural issue is uncovered during the inspection.
- Appraisal contingency: You can terminate the contract if the home doesn’t appraise at or above the asking price.
- Financing contingency: If you can’t secure financing, the contract can be terminated.
- Home sale contingency: Your offer is contingent upon the sale of your own home (within a specified amount of time) and the contract can be terminated if your home doesn’t sell.
In a hot market where bidding wars abound, waiving as many contingencies as possible can make your offer more desirable to the seller because it leaves less chance that the deal will fall through.
In this market, motivated cash buyers can (and often do) waive all contingencies. Individuals who finance their purchase won’t be able to waive all contingencies, as the lender will only loan the appraised value, but they may be able to waive some.
Waiving any or all of the other contingencies could be beneficial, but should also be thoroughly considered and discussed with your real estate agent. It’s not always advisable to waive the inspection contingency, but it is an option you can consider.
Oftentimes, the seller is also a buyer and is trying to conduct both transactions at the same time. If your circumstances allow, you can offer to be flexible with the seller on closing or move-in dates.
For example, the seller may prefer a fast closing so they can secure financing for their new home, but wish to stay in the home for a period of time after closing. If the new home they’re purchasing won’t be ready for them right away, they may hope to rent the house you’re buying from them for some time after closing.
Depending on your financing and current living situation, being able to accommodate the seller’s preference could help move your offer to the top of the list. The more flexible you can be to work with the needs of the seller, the more desirable your offer may become.
Buying a House Over Appraised Value
Once your offer is accepted, an inspection will take place (unless you waived your right to the inspection) and the home will need to be appraised. All lenders require appraisals to make sure that the value of the home is worth of at least equal value to the mortgage loan you’re borrowing.
Under normal market conditions, it’s relatively rare for appraisals to come in below the contract price. In 2021 however, 19% of appraisals came in low—more than double that of the year before. The higher frequency of lower-than-offer appraisals is attributed to prices rising month over month and homes often going into contract well over the sales price.
When the appraisal comes in lower than your offer during buyers’ markets—where inventory is high and competition is low—there may be an opportunity to negotiate a better price. But that’s not often the case in a highly competitive market. There are a few key things to know about buying a house above appraised value.
The Buyer Pays the Difference if the Offer is Above Appraised Value
With over half of homes selling above their listing price in 2021, buyers entering the market should adjust their budget accordingly. Experts suggest buyers prepare to offer 1-3% above the list price, but some real estate agents say 5% is an even better buffer to add to your budget.
If you make an offer above the amount you were approved for by your lender and the appraisal doesn’t support it, you’re on the hook for the difference. For some buyers, that’s not a problem, but others may find themselves in a bind and have to back out of the contract.
Offering 5% above an appraised value of $500,000 adds $25,000. Can you afford to pay those extra funds out of pocket? If not, then adjust your maximum budget before looking at properties.
When It Might Make Sense to Pay Over Appraised Value
In a competitive market, it can be easy to get swept up in a bidding war, especially if you love the house you’re bidding on. And while you should always aim to keep your emotions in check, there are circumstances when it might make sense to pay over appraised value on a home.
The important things to remember when considering buying a property over its appraised value are affordability and timeline of ownership.
If the property in question is one that you see as a dream home for you and your family, your sense of urgency may increase. But even the most perfect property isn’t worth overextending yourself. Going into the process with firm limits as to what you can and cannot afford will prevent you from paying too much for a house that leaves you with buyer’s remorse in the end.
Affordability should remain your guiding light in the homebuying process. That dream home could end up feeling more like a nightmare if you find yourself struggling to pay the mortgage and other homeowner expenses after all is said and done.
If affordability isn’t an issue, then you should next determine how long you plan to own the home. Is this a long-term hold or is there a chance you may need to sell in less than five years? Buying a house above appraised value is less risky if you own the property for long enough to build sufficient equity to make up for overpaying on the purchase.
Lafayette Federal Is Your Trusted Homebuying Partner
Simplify your journey by partnering with Lafayette Federal for your mortgage lending needs.
At Lafayette Federal Credit Union, we offer competitive benefits, including a 30-day close guarantee. If closing takes longer than 30 days, we offer a $250 closing cost credit (up to $2,000) for each day beyond 30 days. Additionally, Lafayette Federal offers nationwide financing, competitive rates, up to 100% financing options, loans up to $3,000,000, and money-saving rate discounts.