Don’t let emotions overrule your budget.
Buying a home is likely the biggest financial investment you’ll ever make, and it can quickly turn into an emotional transaction, especially when you’re up against a number of bidders.
Today’s homebuyers need to be prepared to rationally face this emotionally charged scenario, because bidding wars have made a comeback. According to current data from the National Association of Realtors®, 33 percent of all home sales were at or above the asking price, which is an indication that more than one bidder was involved.
Here are 5 strategies for winning the bidding war without losing your cool (or your shirt):
- Understand the battlefield: The big reason bidding wars are so prevalent, according to Bloomberg, is the lack of housing for sale, which has been held down by tight credit restrictions and homeowners with little equity in their property (and thus little motivation to sell). The January 2015 National Housing Trend Report saw inventories down in 80 percent of the housing markets, with some of the steepest decreases noted in Las Vegas, Key West, Colorado Springs and Columbus. Another major factor is the way many homes (especially in high-demand locations) are now priced: on the lower side. This is a technique meant to attract multiple buyers (including investors) and actually provoke a bidding war, which can send the price soaring, according to auction.com.
- Hire a seasoned warrior: Buying a home in this kind of market takes dogged searching, financing smarts and a competitive skillset. Look for these attributes and experience when interviewing real estate agents. Additionally, ensure your agent is experienced with the neighborhood and type of housing you’re looking for, can move quickly and professionally to formulate strategic offers and counter offers, can keep a cool head during negotiations, and has your best interests at heart (note that “seller’s agents” have a contract to represent the listing’s owners). For additional help with the interview process, check out these 5 tips for selecting a real estate professional.
- Prepare for battle: Before you start negotiating, it’s a good idea to get pre-approved for a loan by your bank or mortgage company. As part of this step, you can work with your bank and your agent to determine the maximum amount you can offer in advance of looking at homes. (Be sure to keep in mind these 8 costs you may not have considered — such as homeowner’s insurance and utility bills — as you create your budget.) You may also be up against all-cash buyers, so CNN Money recommends having your lender pre-underwrite your mortgage, which assures sellers that your financing is solid.
- Fight the good fight: To maximize your competitiveness in the face of a bidding war, you may want to eliminate any contingencies you can comfortably live with. For example, make sure you can handle the payments on two homes before removing the sale of your home as a condition within your offer. Similarly, be forewarned if you decide to make a home inspection informational, as opposed to a contingency, especially if the property is older. Here are other tactics the pros say can sweeten your offer:
- Show flexibility on the settlement date. Tell the sellers you’ll work with their schedule if they want a fast sale, or rent the property back to them after the closing, if they need more time.
- Offer to pay all closing costs. This will help to reduce the sellers’ out-of-pocket expenses; however, be sure to get an estimate of what these would cost first.
- Personalize the transaction. Write a short but heart-felt note on why you want to live in their home. This can be a surprisingly powerful tactic, which the NewYorkPost.com says can make the difference, especially when a seller has identical offers.
- Put in an escalation clause. This will increase your bid by a certain amount above other offers. Make sure the amount won’t go above the market value, as any non-cash offer is subject to a professional appraisal that could jeopardize your mortgage. You also can’t be sure the sellers are telling the truth about having more offers.
- Offer a sizeable amount of earnest money, above your down payment. Realtytimes.com says this will show the strength and sincerity of your offer, as without earnest money you could conceivably make offers on multiple homes.
- Know when to wave the white flag: If you’ve reached the top of your budget range and the bidding is still going higher, there’s no shame in admitting defeat. You’re still a winner, because you didn’t let your emotions get the best of you. Keep on looking and dealing until you find the right home at the right price ― staying within your budget will be worth it in the long run.