Bidding War Basics

There is a misconception that the highest offer wins the bidding war and that is not always the case, we are finding more and more that terms are what make the difference!

While I am not going to give away all my secrets, in this post I am going to discuss the seller’s mindset and cover bidding war basics.  This is the MINIMUM that you should be doing to win a bidding war, of course for my clients, I always do a little extra. In this strong seller’s market we are seeing time and again how much terms matter. Terms are non-monetary benefits you as a buyer can give the seller to make your offer stand out.  Typically they are in the form of flexibility and offer security.

Homeowners want their houses to sell for the most amount of money, in the shortest period of time, with the least amount of stress.

Let’s break that down into actionable items.

Bidding Wars: Money

You need to be competitive.  It doesn’t matter how amazing your terms are if your offer is insultingly low. There is no defined price, I would never suggest using a blank “x%” above asking rule when making offers. I typically show my clients a quick CMA (the same comps I would use for sellers) based on SOLD homes in the area.  That will tell us what the home should appraise for.  In a seller’s market offers should be at or slightly above appraisal regardless of the asking price.

When Money Matters

• New Construction and Flips

• REOs/ Bank Owned Properties

• Sellers who lost their job, lost a family member & their income, are selling strictly for the money

Cash offers are a perfect example of money not being the sole factor when it comes to bidding wars. When presented with multiple offers of similar value, lower cash deals are often selected over slightly higher offers using a loan.  The seller gets the full amount at closing, so why are cash deals so valued?  Because they close quickly (don’t have to wait for the mortgage commitment) and they don’t need to appraise.

Bidding Wars: Time

Time is a commodity.  I speak with my clients on how we can use time as an advantage to make our offers with a loan as close to a cash deal as possible. This is extremely useful when making offers on vacant homes or when working with sellers who need the money quickly. 

Not all sellers want to close as quickly as possible and flexibility is also power. If the sale is contingent  on the seller finding a new home, providing the option of a later closing date or allowing for a Use and Occupancy for a specified time makes your offer more enticing.

Bidding Wars: Least Amount of Stress/ Offer Security

Selling a home, especially one that is being lived in is stressful. As a buyer you want to make the process as easy as possible for the seller.  You also want them to feel secure about your offer.  These are a few basic ways we can do that.

Give FHA & VA Loans A Fighting Chance.

FHA and VA loans are unfairly looked down on.  To put yourself on par with others you can offer to pay for repairs that would be needed to obtain your loan that wouldn’t be required if you had a conventional loan.  We have our lawyer cap this amount in Attorney Review.

Make Your Offer As-Is Pending Environmental and Structural. 

Even if an offer is made to purchase a home as-is you always have the right to conduct an inspection and cancel the deal if you find major issues with the home.  Some buyers will make offers higher than they can really afford and then use the inspection to try and reduce the sale price. By coming in AS-IS Pending Environmental and Structural, you are essentially saying that you expect the seller to fix major issues (issues with the roof, foundation, mold, asbestos, termites, or oil tanks) but you will not ask for minor repairs.  If your inspector finds a costly issue that is not structural or environmental you can always cancel the deal.

Waive Appraisal/ Partial Appraisal

You have to have some money set aside and trust your agent for this one. I will run a CMA for my clients to get the home’s market value A.K.A. it’s expected appraisal value.  In a seller’s market listing agents will intentionally price a home low to create a bidding war (and in some cases for the bragging rights since they know it will sell greatly above asking).  If you are making an offer at or slightly above market value, you can waive the appraisal all together or you can waive part of it.

Waiving partial appraisal.  Let’s say asking is $800k and you know market value is $850k.  You can waive $50k in appraisal.  That means in the worst case scenario if it appraises at $800k you would have to make up the $50k that the bank won’t give you a loan for.  If it appraises for $825k, you would only have to make up $25k.  If it appraised for $750k, the max you would be expected to pay would be $800k. If you fully waive appraisal then you would need to make up the entire difference regardless of what it was.

I have never had a client waive partial appraisal and have to pay the difference.  Typically getting the house to appraise is the listing agent’s job.  When we waive it, I show up to the appraisal with comps to assist in showing the home’s value. However you NEED to have the difference you waived set aside if the appraisal does not come out in your favor.  

For example if you were going to put down 20% on an $850k home, that is a $175k down payment.  If you waive appraisal up to $50k, I would write the offer with a 14% down payment which is $119k.  We would set that $56k aside to make up the difference if we needed to.  If it appraised at $850k we would just change out down payment to 20%.  Nobody ever gets upset that you are putting more down.

Write A Buyer’s Letter.

I’m not going to lie, I was a skeptic, and didn’t believe this made a difference. However I will never forget winning my first bidding war.  There were 14 offers, all above asking, at least one was cash, and we were NOT highest or best.  Our offer was competitive, but it was our letter that got us the house. The seller read my client’s letter and new they would cherish the home he raised his family in as much as he did.

I view a buyer’s letter as a cover letter for your offer.  I have a format I share with my clients and I work with them to make sure the letter hits some key points.  Essentially we introduce and humanize ourselves while sharing what we loved about the house.  We are using the letter to build trust and make the seller feel secure about us as buyers. We also include a photo so there are faces with our names.

Buyer’s letters work best when family homes with sentimental attachment are being sold. They aren’t effective on new construction, flips, or bank owned properties.