By Joel Cone, Special to Auction.com
Today’s higher home prices and tighter housing inventory mean greater competition for consumers and real estate investors. And that competition often results in bidding wars that send the sales price soaring way above the list price.
More sales are being financed, too, increasing the number of potential buyers for any particular home—and, given that fewer homes are on the market, making a bidding war all the more likely. In November 2014, the National Association of Realtors reported that all-cash sales had dropped nationwide to 25% of all existing-home sales for the month, meaning that 75% of the sales were financed.
Bidding Wars Move Into the High End
After the Great Recession, bidding wars became commonplace at the low-priced end of many markets, as cash-flush real estate investors and hedge funds grabbed the best properties.
But as inventories began to dry up at the lower end of the spectrum, bidding wars began to break out at higher price points—even with homes priced in the millions.
Towards the end of 2014, Brandon Carey, a sales associate with Ascent Real Estate in San Diego, Calif., represented clients involved in bidding wars in a much-expanded price range, from $350,000 homes in El Cajon to million-dollar-plus mansions in La Jolla and Del Mar.
“What inventory is out there is limited, and I have people out there trying to buy,” Carey said. “The people looking now are prequalified and seriously motivated buyers. People I’m working with are writing offers. They want to get into a property.”
Expect More Searching, More Persistence
Serious, motivated buyers need to to consider all possible resources when searching for a property in which to invest, whether it means going to war with other buyers for traditional listings on the multiple listing service, or tapping websites such as Auction.com, where they expect to have to compete in an online bidding process.
“Finding properties to buy in a market like this takes a lot more intense searching and a willingness to compete in multiple-offer situations with other buyers who may be just as qualified as you are, but who have an edge because they’re willing to keep submitting offers when other buyers are ready to quit,” said Rick Sharga, executive vice president of Auction.com. “That’s one of the advantages of buying at an auction: it’s transparent, so there’s no hidden multi-offer scenario, and no long delays where you wonder whether or not you’re the winning bidder.”
What’s it going to take for you to come out on top when faced with a multiple-offer situation? The answer: It depends on how badly you want the property.
To Scott Mednick, broker and owner of Marblehead Realty in San Clemente, Calif., that means that buyers need to put on their best face, make their best offer, and “have all their ducks in a row.”
So if you find yourself involved in a bidding war, how do you make your offer look as attractive as possible in the seller’s eyes?
1. Financing.
Buyers who come in with an all-cash offer are still going to have an advantage in bidding war situations. But with more buyers in the market financing their purchases, the smart buyer needs to be pre-qualified for a loan long before the home search begins in earnest. By going to the negotiation table with the pre-qualification letter in hand, you can show the seller that you’re ready, willing and able to deliver on your offer.
2. Submit a strong offer.
The winning buyer in a bidding war will usually be one who comes in with a strong offer—meaning one that reduces the chance of the deal falling out of escrow, thereby relieving the seller of the stress of possibly having to find another buyer down the road.
There are many variables that can make a particular offer stronger than the competition’s.
“As a broker, you get your client to submit close to asking price or at asking price, or offer your highest and best depending on what you can afford,” Mednick said. “It depends on how much you want that house and how much you’re willing to pay.”
3. Make a larger down payment or earnest money deposit.
In addition to meeting or exceeding the asking price, you can also make your offer stronger by offering a larger down payment—maybe 25% to 30% instead of the usual 10% to 20%.
You can also offer a larger earnest money deposit—more cash up front—to the seller.
4. Shorten or eliminate contingencies.
Another way you can try to seal the deal in your favor in a bidding war situation is by shortening or eliminating contingencies. Many real estate deals are made contingent on qualifying for a loan or the appraisal coming in to justify the price, or on a building or termite inspection, or even on the sale of another property.
By eliminating these contingencies altogether or shortening the period of time in which they remain in effect after the seller accepts the offer, you can make a big difference to a seller who wants to get out from under the property with as few hassles as possible.
5. Offer a short or fast escrow period.
Especially if the seller is an investor, he or she may need to sell this property as soon as possible in order to turn around and get started on another property. Time is of the essence in real estate, so sellers may favor buyers who offer an expedited escrow period.
6. Be ready for counteroffers.
At the end of the day, it’s still the seller’s decision to accept an offer from among the many submitted—and it may not be the one offering the highest price. If the seller likes a particular offer for various reasons, but wants to fine-tune it, he or she can still make a counteroffer.
“The seller is looking at the overall net they want,” said Ascent Real Estate’s Carey said. “If the seller counters because he wants a certain price, but you want to stick to your price, you can change the terms of the deal to offer a quicker close or a quicker sale, or by not asking the seller to pay for repairs like termite damage.”
7. Make it personal.
Then there’s the situation where the seller likes more than one of the offers submitted and isn’t sure which one to accept. In those circumstances, and again depending on how much you really want the property, consider preparing a personal letter to the seller.
In that letter, enumerate the reasons why you want to buy the seller’s property, be it for family reasons, proximity to your employment or whatever. Carey suggests including pictures of your family, the kids, the family dog—anything that can make your situation more personal to the seller.
“If the sellers have lived in the property and have emotional ties to it, that letter means more to them because they want the home to go to good family,” Carey said. “The sellers want their home to be enjoyed by another family that will take care of it.”
However, if the seller is a bank or an investor who flips properties for a living, a personal letter is much less important.
“Their goal to make the most money possible” Carey said. “They haven’t lived there.”
In other words, your time might be better spent starting the search for another investment property.
When all’s said and done, it’s up to the seller to select the winning bid in a multiple-offer situation. All you can do to put your best foot forward is offer the highest and best price you can afford, up the stakes with a higher deposit or down payment, minimize the contingencies and submit a personal letter.
While there’s no guarantee that the package you submit buyer will beat out competitors, following these steps will at the very least give you the best chance possible to win the bidding war game.
Joel Cone is a freelance writer based in south Orange County, California. For nearly a quarter century Joel’s career has focused on the residential and commercial real estate industries. After a decade as a staff writer for the Daily Journal Corp. group of newspapers, Joel was a regular contributor to California Real Estate magazine for the California Association of Realtors; was the original Orange County reporter for GlobeSt.com; wrote executive profiles for OC Metro magazine; and has been published in a number of real estate-related publications.
