“Bidding war?” you may say. “No one gets into bidding wars anymore.” Au contraire. If you’re trying to buy in a real estate market where prices have fallen significantly and the market is loaded with foreclosures and a few traditional sales, any well-priced home in good condition will generate multiple offers and potential bidding war. If you’re bidding in a multiple offer situation, here’s how to keep your head.

Make Sure You Really Like the Property
We just went to offer in a multiple offer situation, but we thought carefully about it first. We like the home, but we don’t totally love it. We still love another home that was foreclosed before our offer was accepted, but we can’t wait around for it to come back on the market. The home we just submitted an offer on is a good home we can see ourselves in for a long time. It’s just not our “dream home.” Unless you hit the lottery, your first home rarely is.

Check the Comps
The next step is to carefully review the comps. If you’re buying in a development, comps are easy. See what similar homes closed for in the last three months and use that as your price guide. If you live in an older region like LA where every home is different, then comps are tougher. I generally use an average of the price per square foot for properties with similar square footage, upgrades, bedrooms, and bathrooms within in mile of the house in question.

Determine What It Will Appraise For
This is key. Your agent should be able to offer some guidance here. You could offer 20% over asking if you want to, but it won’t matter if the home doesn’t appraise for that amount. Unlike the bidding wars of the mid-2000s, homes really do need to appraise now, and standards are strict.

Set Your Maximum Price
This is the second key. Once you’ve checked the comps and have some idea of the value, then you can set your maximum price. This is the price you can afford at current interest rates and that you’re comfortable paying for the home. That might be 10% over asking, it might be 5% over asking. It might be asking price. Remember that price. If the bidding goes to multiple rounds, be prepared to drop out if it goes too high. This isn’t a $40 googaw on eBay. You’re spending many thousands of dollars – this is one time you can’t afford to lose your head in a bidding war. There will be other homes.

Choose Your Bidding Strategy
If yours is the first offer and you think the home will go to multiple offers (your agent will have a feel for this), then you can probably start right around asking price. If there are already multiple offers, and some are over asking, you might want to consider making your best offer out of the gate. If the seller comes back to all offers with “submit highest and best,” you don’t have to do more paperwork. Or, if yours is already the highest, they might just accept it.

Don’t Be Talked into Overbidding
With traditional sales, it sometimes happens that the seller will respond to several offers with a minimum price to start the next round of bidding. If that number is above your max, then let it go. Don’t try to sweeten the pot because you’re feeling competitive. Again, there will be other homes. Frankly, I’m relieved we were outbid for the first property we made an offer on. We’ve seen much better homes since then.

If the requested number is below your max, and higher than your initial offer, then you could offer up to your max, or you could choose to walk.

Don’t Assume the Seller Will Renegotiate Later
Some buyers assume that bidding over the market value is okay, because the seller will be forced to come down if the house doesn’t appraise. Maybe, maybe not. Remember, you’re dealing with real people. As a species, people are stupid. We may be smart as individuals, but we often make stupid decisions. The seller could decide to wait and see if it will appraise higher later (it won’t anytime soon, but see my previous sentence.) The seller could ask you to make up the difference in cash (you’re under no obligation to do so if you included an appraisal contingency in your offer.) The upshot is this: the seller might come down, or they might not and everyone’s time has been wasted, along with the $450 you just shelled out for the appraisal.

Buying a home is exciting, and if you fall in love, you might do desperate things to make sure you get it. So, I’ll say one final time: there will be other homes. They will be in your price range. You will have an offer accepted eventually. If you wait long enough, you may even save more money so you can qualify for better terms.

Since we started this process, we visited 30 open houses to determine our needs before we hired our agent. In that time, we saw four that we could imagine ourselves making offers on. Since hiring our agent, we’ve looked at 19 more and made just three offers. Every week there are more homes on the market. So be patient. When it’s the right house, you’ll make the right offer and the home will be yours. You just need to have a little faith.

Comments

2 Responses to “Keep Your Head in a Real Estate Bidding War”

  1. Festival Of Frugality- Honeymoon Destination Edition | Financial Highway on June 23rd, 2009 12:24 am

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