Whether you’re picking up a new addition to your rental property portfolio or are shopping for a house where you can raise your family, buying a property can be an exciting opportunity. But in today’s tough, competitive market, a simple, straightforward offer may not be enough to secure your acquisition of the property. If your bid is contested, you may enter a bidding war – and you’ll be forced to escalate your offer if you want to win out.
But how exactly do bidding wars start? And how can you come out on top of one?
How Do Bidding Wars Start?
Bidding wars start when two or more prospective property buyers submit a purchase offer for the property. Upon review, the seller may notify each buyer that the bids are close to each other and give them a chance to outdo each other. Depending on the situation, this could evolve into a series of mutual escalations until one bidder drops out.
The Importance of Consulting With Experts
When you’re wary of entering or participating in a bidding war, it’s vital to consult with experts before making any significant moves. A real estate agent, or an advisor with your property management company, can help you understand the market, analyze your financial position, and even make recommendations for what you should do next. In the next section, we’ll be making some general recommendations for how to engage in a bidding war, but since every situation is unique, it pays to have personalized consulting on the matter.
Tips for Winning a Bidding War
How can you win a bidding war once one begins?
- Know your limits. Before you begin formulating your bidding strategy, put some limits in place for yourself. It’s easy to get caught up in the competitive nature of bid escalation, but you don’t want to make an offer outside of your budget. Set a ceiling for the highest price you’re willing to offer and don’t move past it.
- Secure your preapproval letter. Hopefully, you’ve done this already, but if you haven’t, now is a perfect time to get a preapproval letter from your lender (assuming you’re going to finance this purchase). A formal letter of preapproval shows the seller that you’re serious about the purchase and you have the credit score and financial history to back the bid. If your competitor doesn’t have one, this will give you the edge instantly.
- Up the price. This tactic should be obvious, but it’s worth mentioning: consider upping the price. There are many ways to strategically position your bid, but at the end of the day, most sellers are primarily interested in getting the highest possible price for their property. If you up your bid to a price higher than all other competing bids, the seller will be all but forced to accept your bid.
- Waive certain contingencies. Waiving contingencies is a risky business, but it could help your bid stand out in a pile of competitive offers. Ordinarily, buyers are protected by contingencies that protect them from certain problematic events, allowing them to back out of the deal even after the bid is accepted. For example, you could waive the financing contingency that protects you if your loan falls through, or the inspection contingency if you’re confident in the condition of the property. Any contingency waiving is going to increase the risk of the purchase, so exercise this tactic with caution.
- Consider making an all-cash offer. If you can manage it, consider making an all-cash offer. All-cash offers are much more attractive to sellers than loan-dependent offers since there’s less of a possibility for the deal to collapse and they get paid faster. Cashing in a retirement fund or selling your assets may not be the best financial decision, but it could help you win this bid.
- Add an escalation clause. Escalation clauses allow you to up your bid if your competitors make an offer higher than yours. It’s an added layer of protection that can help you outbid your peers.
- Write a personal letter. If the bids are close, a personal letter to the seller could sway them to choose your offer over the others.
- Be ready to take action. Often, you’ll have to act fast if you want to win a bidding war; be ready to take action when you receive a new message from your agent.
To amateur buyers and inexperienced real estate agents, bidding wars are an intimidating headache. And certainly, they can be stressful – and they can be heartbreaking if you end up losing. But as you become more familiar with the real estate world, bidding war mechanics are going to become more comfortable to you, and you’ll have a great chance of winning any bidding war you enter.