Real Estate Bidding Wars: Win or Walk?

September 30, 2018

In an ideal world, your buyer is the only bidder on their dream home. However, unless all the planets are impeccably aligned and you’re in the midst of a balanced or buyers’ market, you and your buyer may find yourselves in the unenviable position of having to compete with another anxious buyer (or several) who shares your client’s ideal of what constitutes a dream home. When should you encourage your buyer to walk away from a war? Does the procedure involve a logical strategy for buyer or seller, or does it all boil down to gut feeling? How can a seller maximize the benefit of a multiple bid?

When accepting a listing, experienced agents are aware that there are two basic options. The traditional conservative approach involves establishing a reasonable asking price marginally higher than perceived fair market value. Individual offers ensue and are presented on a first-come, first-served basis. The other more aggressive approach normally requires not only a market wherein buyer demand excessively exceeds supply, but also the trifecta of a suitable property, a mutually trusting agent/seller relationship and nerves of steel.

To incite a competition and hopefully generate great terms for your seller, list at or below fair market value. The remarks section of the MLS system listing should include a specific date and time, usually a few days after the listing is uploaded, when all offers will be presented to the seller during the same assembly. This hard-hitting option permits all interested buyers and their agents with the chance to be notified of and, like a furniture auction preview, leisurely view the listing prior to presentation day. It also affords the interested parties the time to improve the attractiveness of their upcoming offers by fulfilling any conditions in advance.

Offers can then be submitted without the typical frenetic feeding flurry on the day the listing appears. It can be a more civil procedure for obvious reasons, and certainly great for a homeowner, but the competition is often a nightmare for anxious buyers and their agents. Be careful with this marketing method, though, because it can backfire. If you don’t have an appropriate property during the right market conditions, the result can be a sale price below market value – and an unhappy seller.

Before your buyer even begins to view property in a competition-prone market, they should confirm – in writing – their ability to finance a purchase by seeking an unconditional pre-approved mortgage. A good practice anytime, but it’s particularly so when competing. Insist on an approval letter that doesn’t just state they’re approved subject to confirmation of employment, down payment and credit report. If you can assure the seller and their agent that the financing condition is a mere formality and that your client has been unconditionally pre-approved – and you can prove it – you may be in a stronger bargaining position.

Depending on circumstances, to enhance the attractiveness of your client’s offer even further, you might exclude the financing condition. However, if your buyer elects to include it, during the negotiation, clarify to the seller that only their property must be approved by the lender by way of a realistic appraisal. If the lender thinks the buyer was overly generous and they have a minimum down payment, the buyer had better have more cash in the piggy bank. The loan may be approved, but at a lower principle amount because the purchase price excessively exceeded the lender’s appraised value. Arguably, though, the best reason to seek a pre-approval before entering a bidding war is to confirm your buyer’s absolute maximum affordable price. Then, they can’t go nuts in the heat of the moment. Reasonable heads may then prevail.

To avoid further conditions, your buyer could arrange for technical inspections to be performed prior to the offer presentation date. It means upfront fees for a potentially losing bid, but as they say, better safe than sorry. Unless your buyer’s offered price is exceptionally higher than a competitor’s, or all competing bids include the same condition and the seller is confident that their home will easily pass an inspector’s scrutiny, the seller is unlikely to even consider accepting such a condition.

It’s really easy for a group of competing buyers sitting on the edge of their seats to agree to pay an unreasonably high price which, under calmer circumstances, would be considered ridiculous. Winning the bid may be emotionally satisfying, but from a money perspective, it’s crazy. Leave impulse shopping for the grocery store check-out. If their emotions get the better of them, they may ultimately buy a lovely home, but at an exorbitant price.

To get the best possible deal, they must steer clear of emotionally attaching to a particular outcome – or property. It can certainly be exciting at the time, but also painful if they lose a bid – or later when they realize they grossly over-paid. Tell them to be cool. If they’re successful, that’s great; celebrate. If not, then at least they tried. Move on. There’s always another house. It’s just sticks and bricks.

This article was written by By Ross Wilson and originally appeared in Real Estate Magazine Online Edition on September 27, 2018
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