Preparing for Your First Bidding War

July 12, 2021

You walked in and knew it was “The One”. In your eyes, it was perfect in every way.  This was the house that you wanted to spend the rest of your life with, raising your family, hosting holiday celebrations, and creating warm friendships with the new neighbors you saw walking their dogs along the tree lined streets. The only problem?  A lot of other people were creating their own blissful visions as they walked through the same house, mentally moving in with their families and heirlooms and dogs!

Oh golly!  That spells bidding war!

Over the weekend, I held a house open – a new listing that was pure buyer bait.  And I spent Saturday and Sunday afternoon meeting some wonderful people who loved it.  Offers are due on Tuesday, and it is highly likely that we will have multiple contracts come in.

One young buyer, who came back for a second look, shared that his agent was preparing his offer, his first one ever on a house.  He was adorable, the kid I forgot to have, and I felt compelled to offer some unsolicited advice that I will share:

It’s highly unusual for any buyers to win their very first bidding war. Why? Because they have a hard time believing their agents’ explanation of how really awful it is out there right now. At least some of the other buyers competing against you will have already lost five or more homes, and they are now ready to pull out all the stops. What do these stops look like?

  • They are either foregoing a home inspection altogether or they are paying a home inspector to go over the place before submitting their offer. This investment in their offer removes a risk to the sellers, and can cost around $500 to $700, depending on the size and price of the house and whether it’s a full inspection or what we call a “walk and talk” (which does not include a written report). Going in without an inspection can be a major risk to the buyers, especially with some of the older housing stock in the DC area.
  • They have their financing completely pre-approved and have been through their lender’s underwriting process, with income and assets completely verified and the loan in place, contingent only on finding a house. This makes it possible for them to waive the contingency that allows them out of the deal (with earnest money returned) if their financing fails for any reason.  Again, they are switching one of the risks of buying from the sellers to themselves.
  • It’s customary here to include a financial disclosure form with your offer, and back it up with bank or brokerage statements showing proof that you have funds available for either an all-cash purchase or for a large down payment. Having a strong financial picture will help, and applying the old idea that it’s best not to show all your cards to the sellers is not a great idea in the context of competitive home buying.  You want to look stronger than you have to be in order to reach the settlement table.
  • Our local boiler-plate contracts also have contingencies that allow the buyers to try to renegotiate the price if the house does not appraise, something that is certainly not unheard of when prices are pushed over the prevailing market value in a bidding war. Your competition is probably planning to forego this consumer protection.  If the bank’s appraiser says, “Are you kidding?” and sends the bank a number below the contract price, you will have to increase your down payment by the difference between what you have agreed to pay and the appraised value.
  • You may think that you can negotiate the price down to below asking. Unless the house has been on the market for over a month, smells like cats who smoke cigarettes, and has a lot of obvious deferred maintenance, don’t even think about it.
  • A good buyer broker will make a schmooze call to the listing agent to find out what the sellers need in your offer.  What is their settlement time frame? Do they want to take the dining room chandelier? Will they need to remain in the house for a period of time after settlement?
  • Most offers will include something quite scary called an “escalator clause”.  It tells the sellers that, in the event of multiple offers,  you are willing to increase whatever offer you made to some amount over any higher offer, up to the maximum amount you would be willing to pay.  It is these escalator clauses that create really crazy bidding wars. And they are becoming a necessary evil in the buying process these days.
  • Finally, love letters almost never help. If you have a strong offer, it will trump a weaker one with a “Pick Us” note that is designed to tug at the sellers’ heart strings. Even it the sellers have a heart, it’s likely that the listing agent won’t. Also, many sellers’ agents remove these letters from the offer packets because most buyers include information that, if considered by the sellers, would violate fair housing laws.

Whenever you decide to make an offer on a house, there is no real way of knowing how many (if any) other buyers will show up by the offer deadline. Try to keep your expectations realistic, and don’t fall totally in love with the place until after you hear the sellers chose your offer.

Oh, and believe your agent when she tells you how scary it is out there in the home buying world right now!