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Low unemployment, low interest rates, and rising home values are all typically good things, but they can make buying a home challenging. When everyone is trying to buy, you may end up with competition for your dream home that could turn into a bidding war. Thankfully, there are multiple ways that you can beat the competition to close on the house that you want.
In hot housing markets, there are more buyers than there are available homes. When multiple people all want the same home, a bidding war can result. Typically managed by the seller’s real estate agent, bidding wars occur when several buyers repeatedly improve their offers until one of them “wins.” The bids typically involve an increase in the offer price, but can also include some non-financial strategies.
If you have been advised by your real estate agent that the market you are shopping in is very competitive, take the time to read up on strategies that may be helpful. We put together a list of tips to guide you to a bidding war victory.
1) Research the Local Market
Before you submit your first offer, make sure that you do your research. As a homebuyer, it’s important to understand the specific market you are looking to buy in. Examining factors like initial asking prices, how long homes stay on the market, and the final sale prices will give you an idea of how competitive the home buying market is.
Home prices are driven by buyer demand, the features of the individual home, and the market itself. As we mentioned before, lenders will only make loans for the amount that homes will appraise for, and home appraisal values are greatly influenced by comparable home sale prices. In this way, one factor (market sale prices) influences the other (appraisal values), and vice versa. Of course, in extremely competitive markets where many buyers are paying cash (and therefore don’t need to worry about lenders), these rules may not apply.
Still confused about where to start your research? One of the most important tools used by appraisers and real estate agents is looking at comparable sales, or “comps.” To figure out the value of the house you want to buy, you need to find homes that are similar in size, condition, and location that have recently sold. It’s possible to do this yourself by searching online real estate listing websites, or you can ask your real estate agent for a list of comps.
2) Write a Letter to the Seller
When sellers have multiple offers presented to them, how can you make your offer stand out? Writing a letter to the sellers of the home you want is one way that you may be able to win a bidding war without investing anything other than time. Don’t underestimate the power of a sincere, heartfelt letter explaining why you want the house, and perhaps your future plans for the home.
Selling a home can be a difficult process for many, and making an emotional connection with a potential buyer can sometimes be a powerful motivator. In addition, keep in mind that the home seller is also going through a big move and life change — if you can partner with them on issues like closing date flexibility, you may be able to beat out less accommodating buyers.
Ready to take the first step? Check out our guide to the financial documentation and other paperwork you’ll need to begin the home loan process.
3) Make a Cash Offer
If you have enough saved to make an all-cash offer on the home you want, this can be a strong advantage. Without having to go through the inspection and appraisal processes required for a mortgage, there are fewer chances for the deal to fall apart, or to get mired in long and costly required repairs. In addition, cash transactions can typically close much quicker. Statistically, a cash offer will greatly improve your chances of winning, and some sellers will even give a significant price discount to cash buyers.
4) Waive Financing Contingency
Many of the strategies used to win a bidding war are designed with the intended goal of enabling the transaction to successfully close as quickly as possible. Waiving your financing contingency is another strategy along these lines. A financing contingency is a stipulation in your offer that you will only purchase the home if your loan is approved and funded.
With this contingency in place, you would walk away from the transaction if the lender denied your loan. The home seller typically must agree with this, but as we discussed previously, loans aren’t always approved. This contingency does protect you as a buyer, but incomplete sales can be a high source of frustration (and wasted time) for home sellers.
Waiving this contingency shows home sellers that you have complete confidence in your loan funding, and, if your loan is denied, you will give the seller your earnest money deposit (usually five percent of the purchase price). This may sound a little risky, but if you have done the work needed to obtain a fully underwritten loan pre-approval, you can be confident that your loan will be funded and the contingency won’t be necessary.
Wondering if you need a pre-approval? We’ve got you covered with the answers to your pre-approval questions!
5) Use an Escalation Clause
An escalation clause is a way to increase your offer automatically if there are other bids on the home you want. For example, if you are making an offer of $300,000 on a home in a competitive market where you expect it to close closer to $350,000, you can include an escalation clause saying that you are willing to pay up to $360,000 — or whatever your maximum bid would be. If you do use an escalation clause, be sure that you also state that the seller can only take your winning bid to an amount above the other bidders. For example, if the competing bid was $325,000, you should pay only $325,001, not your maximum of $360,000.
6) Complete a Pre-Inspection
Previously, we discussed many ways to remove roadblocks in the homebuying process. One such “roadblock” that you should never completely eliminate is the home inspection. Having a thorough home inspection is extremely important because it can protect you from buying a house in need of many unexpected and expensive repairs. However, inspections can often uncover issues that will stall or even stop the home buying process: costly repairs, code violations, and even issues that can impact your financing or future insurance. Because of these potential issues, one very aggressive home buying strategy is waiving your inspection contingency.
For all but the most seasoned (and wealthy) investors, waiving your inspection contingency can be a costly mistake. One of the only ways for most homebuyers to safely waive this contingency is by completing a pre-inspection. By paying for a pre-inspection before you make an offer, you will then have the information you need in order to decide whether you want to buy the home in question or not. This strategy allows you to waive the inspection contingency while still protecting your potential investment.
7) Place the Highest Bid
Finally, one of the best ways to win a bidding war is also the most simple: place the highest bid on the home you want to buy. Nearly all sellers want the best price they can possibly get for their home, and coming in high (but within your budget) can get you the kind of attention you want, and save everyone a lot of time.
Just make sure you don’t bid more than you can afford. Of course, you want to close on a new home, but don’t get too fixated on a single property. Not only will you regret it later, but you may run into issues with your financing. Your lender will only give you a loan for the amount that the house will appraise for. If your offer is higher than the appraisal value, you may need to pay the difference out of pocket, also known as bringing “cash to closing.” This amount will be in addition to your down payment and other loan costs.
Looking to buy in a hot market? Check out these five strategies that can help you succeed in highly competitive real estate markets.
Make Your Dream Home Come True
It’s easy to confidently make the best offer possible when you have a fully underwritten pre-approved loan from your lender ready to go. If you are ready to succeed in today’s competitive home buying market, take the first step: get pre-approved online or contact a Pennymac Loan Officer today.
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