How Do You Win a Bidding War?
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Buying
Potential buyers in most major markets in Canada still face multiple-offer scenarios despite the restrictions imposed by the pandemic. This situation can feel a bit daunting to first-time home buyers, move-on-uppers and real estate investors looking to cash-in on the nation’s competitive housing market. To help, we’ve compiled a list of five strategies to help you win a bidding war in any hot market.
What Is a Bidding War?
A bidding war is a competitive situation where more than one home buyer or real estate investor makes an offer on a home.
Bidding wars happen when there is not enough inventory — homes for sale in that specific real estate market — prompting buyers to compete to win. Typically, bidding wars happen during a seller’s market, but the quality of a property, the desirability of its location, the strength of the school district, proximity to amenities and transit as well as mortgage rates and employment opportunities all influence whether or not a bidding war will take place.
What Is a Seller’s Market, Anyway?
A seller’s market is when there are more potential buyers than homes available for sale. The combination of limited inventory and buyer demand will translate into upward pressure on list prices — resulting in higher sale prices. This type of market gives seller’s the upper hand, which is why it’s known as a seller’s market.
How a Bidding War Works?
Bidding wars aren’t a uniform process — and don’t always happen the same way, even on homes in close proximity. For instance, a real estate agent representing a seller may request that highest and best offers be submitted on a certain date and time. In this type of bidding war, the buyer and their Realtor will have one opportunity to win the seller over with their offer. In these situations, buyers will also resort to emotional strategies, in addition to offer prices over list price. For instance, some buyers will submit a personal letter while others will waive assurances, such as inspection contingencies.
In other circumstances, a seller’s agent may go back to the Realtors representing all the buyers and ask for an increase in their offer. The agent representing the seller cannot disclose the details of the competing offers, but they can suggest what needs to be changed in an offer in order for the buyer’s offer to remain competitive.
In either circumstance, a bidding war can often occur at a rapid pace. This situation leaves buyers in an emotionally vulnerable position — making rash or emotional decisions, when they shouldn’t.
How Do You Win a Bidding War?
Now that you know how prevalent real estate bidding wars are, it’s time to roll up your sleeves and learn how to bid on a house and win a bidding war. You don’t want to find the home of your dreams and have other people take ownership of it, right?
If you find yourself in a bidding war, here are five strategies that can help you come out on top:
1. Make an All-Cash Offer
One of the easiest ways to win a bidding war is to offer all cash to the seller. When making an offer on a house, instead of telling the seller that you’re going to apply for a mortgage let them know that you will waive the financing clause (and ask your agent to tell the seller’s agent that you’re paying in cash). In high-price markets an all-cash offer is attractive because it doesn’t leave room for the sale to fall through should the buyer be unable to secure financing.
2. Waive All Contingencies
Buyers often add contingencies to purchase and sale offers, such as subject to home inspection or upon approved financing, to protect themselves when buying a home; this can pose problems. The fewer terms and contingencies in the contract, the less chance for the deal to fall-through and the more attractive your offer is to a motivated seller.
3. Make a High Earnest Money Deposit
Earnest money is the deposit you provide the seller as a form of ‘assurance’ or ‘guarantee.’ It’s a financial method of showing how serious you are about buying the property — and how easy it is for you to financially afford this purchase. Generally, buyers deposit between 1% to 5% of the home’s purchase price as the earnest money.
If you want to increase your chances of winning real estate bid wars, make a higher earnest money deposit. Instead of paying 5% of the total purchase price as your deposit, pay 8% or even 10%, to show the seller how serious you are as a bidder. Be wary, though, if you do end up winning but walking away, the seller is legally allowed to keep the deposit money.
4. Include an Escalation Clause
In real estate bidding wars, an escalation clause allows you to increase your bid to avoid being outbid by another buyer who is willing to buy the property for a higher amount. When you include an escalation clause on your purchase offer, you can instantly counteract any other bids.
For instance, if you want to buy a home priced at $400,000, you can offer $405,000 and agree to beat any other bids by $5,000 up to a price ceiling of $450,000. It’s up to the seller to accept this clause, but having one will indicate how serious you are in buying the house.
5. Work With a Seasoned Real Estate Agent
There are many strategies to win bidding wars, but following all of these isn’t always enough, especially if you see yourself competing with many bidders who are willing to exhaust their resources to buy the property.
By working with a skilled real estate agent who understands the market, has experience with negotiations, and listens to your needs, your chances of walking away from a bidding war successfully, increase exponentially. Be sure to ask your sales agent whether or not they have in-depth knowledge of the real estate bidding war rules in Canada and information concerning Ontario real estate rules for multiple offers. Agents with plenty of experience are more than happy to provide insight and knowledge into the process of winning a bidding war.
Advice for a First-Time Buyer Entering a Bidding War
If you’re a first-time home buyer it can be difficult to navigate bidding wars. The most important thing is to do your research so you have a clear idea of the process, the market and the home you want to buy.
Once you have these details ironed out, you’ll need to find a real estate agent that will represent your best interests and with experience negotiating in hot property markets. Work with a buyer’s agent who you trust and listen to their advice if you are a first-time buyer.
Your agent won’t just help you negotiate in a fast-paced market, but they’ll help you through the emotional ups and downs of a property purchase and help you not get too emotionally attached during a bidding war. Remember, it may take you a few times before you submit an offer that finally gets accepted, so don’t fret.
Final Thoughts
For these strategies to work you will also need to start your purchasing preparations. Remember, you still need to get pre-approved on your mortgage loan, find a real estate lawyer, and discuss with a real estate agent exactly what you are looking for, along with your budget and timeline. Ticking these tasks off of your list sooner rather than later will allow you to focus on each deal, as it’s presented — and this goes a long way to being prepared to act.
