Normally, a buyer might make an offer on a home based on his or her perceived value of the property. The seller should then counter the buyer’s initial offer, and in the classic form, a back-and-forth negotiation would occur until a deal is struck at a price to which both parties agree.
But when a great property is priced well, even in a softer market, buyers may find that they are not the only interested party. In this case, a bidding war may ensue.
If a buyer loves the property and wants to beat out the competition, there are certain strategies he or she may employ. Conversely, and perhaps less obvious, the seller and listing agent need to handle the bidding war properly or they run the risk of upsetting all of their suitors and ending up with nothing. A badly managed bidding war can end in disappointment for the seller if the potential buyers feel misled or used — after all, no one wants their offer to be shopped around.
Here are a few best practices for buyers and sellers about how to navigate a bidding war.
How to Navigate a Bidding War as a Buyer
For buyers, a proper offer on a home includes a strategic number, a proposed closing date and financing terms. Arming yourself with current and relevant information will help you approach the process with confidence and efficiency, which can work to your advantage. And when it comes time to make an offer, being flexible and friendly are two of the best ways to ingratiate yourself to the seller.
Get smart. The buyer or the buyer’s agent should schmooze with the listing agent and get some intel. Who are the sellers and what are the factors that will influence their decision? Is the seller an investor looking to cash out? An older couple selling their long-held nest egg? If the seller has flexibility on a closing date versus a need to sell quickly, this timeline may greatly influence how they assess offers. And who are the other buyers? Are the other offers all cash? Are there contingencies you can waive to strengthen your position in comparison with the other bidders? Information gathered about the competition helps a buyer craft a more compelling offer.
Jump in early and come prepared. If you love a property, make an offer. That offer should include not only your bid but also accompanying documentation like a loan preapproval letter or proof of funds. This shows that you’re serious, and should give the sellers confidence that your financing won’t fall through. Start the negotiation quickly, before another shark enters the water. Being first in the pool has its advantages, as many sellers feel a sense of loyalty to the first bidder. Even if someone else comes along, a smart listing agent will circle back to the first buyers who submitted an offer to see if they can improve their bid. If you start a negotiation before another buyer, you won’t (yet) be negotiating against the competition.
Decide beforehand when you’re OK walking away. If you’ve done your homework, then you know the comps and you have a good idea of the subject property’s value. Are the sellers being overly ambitious with their asking price? Or did they price it tightly, so if you bid above the asking price then you’re still in the ballpark of market value? More importantly, how much can you afford? At a certain number, the property won’t be attractive anymore, so identify that number beforehand, and be ready to walk away without regret.
Make it personal. It may sound silly, but a personal letter to the sellers along with your offer can add a human touch and differentiate you from the competition. A warm and fuzzy letter may appeal to the sellers, making them feel good about choosing you over the other bidders. Perhaps you remind them of themselves 20 years ago, passing on a dream home from one family to the next. Flattery can go a long way.
End with an odd number. If your offer is almost identical to another offer, add a few dollars to your offer to tip you over the edge.
[Read: The Guide to Selling Your Home]
How to Navigate a Bidding War as a Seller
For sellers, properly handling this exciting but likely stressful process is paramount and an experienced real estate agent should be able to guide you. Above all, it is important to manage the offers and buyers so nobody feels misled. Sellers and their agents must keep in mind that many buyers who enter a bidding war might have already lost out on another property, so their emotions may be running high. You should be timely in your response to each offer, and also do the following:
Get smart: Who are the prospective purchasers? Sellers and their agents should gather as much information as possible about each buyer. Are they financing or all cash, and if they’re taking out mortgages, have they submitted preapproval letters from reputable financial institutions to accompany their bids? What is the debt-to-income ratio for each party? Are these buyers flexible on the closing date? All of this is relevant in helping to choose not just the right buyer from the pack, but also the best back-up offer just in case the first deal falls through.
Know the best offer might not be the highest. Even if one party is offering you more money than another, it might not be the best offer. Money is money, but a cash offer is generally stronger than an offer that comes with financing. An offer that includes a mortgage will take longer to close than a cash deal, and if the buyers’ financial profile is at all questionable (for example, how is their credit?) there’s a chance they might not secure their financing, especially if they are heavily invested in unstable assets. And do these offers come with contingencies?
If financing is involved, the seller must understand the buyer’s financial profile and his or her likely ability to secure a loan. But if the purchase requires further approval, perhaps from a homeowners association or from a co-op or condo board, then vetting each buyer is even more relevant and imperative. It’s possible that the second-highest bidder might have a more straightforward and simple financial profile, and thus be more of a slam dunk to make it to the closing table. For example, if the highest bidder is taking out a large mortgage and presents a financial profile that includes student debt, outstanding child support payments or a lackluster credit score, it might be wiser to accept a lower bid that might be all cash from a buyer with no debt.
Leave the door open with your backups. In a competitive bidding situation, buyers can become overly enthusiastic, get caught up in the moment and bid above their comfort level or well above their perceived value of the property. There is always a good chance that the winning bidder may walk away due to any number of reasons, including buyer’s remorse or a reassessment of value after a few nights of sleep while the contract is being drawn up. Thus, it is prudent to stay in touch with the backup bids and keep them in play, if possible, to be called upon if needed.
Bidding wars are more common under certain housing market conditions than others, but a great property that is priced well will almost always get the attention it deserves. And for buyers, it’s important to note that just because there isn’t a bidding war and you’re the only interested party, it doesn’t mean it’s not a great home. If it’s meant to be, well, it’s meant to be.
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The Buyer and Seller Guide to a Real Estate Bidding War originally appeared on usnews.com