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Tough Market for Spring Buyers Means Bidding Wars

By Brian Kline | February 13, 2020

This won’t happen everywhere across the country but many areas are once again facing a serious shortage of inventory as the spring market prepares to get started. High prices, low inventory, and lack of entry-level new construction will all be important factors this spring and into the summer. The demand for homes is still out there in force. In many markets, it has been less expensive to own than to rent for several years. The hurdle to ownership is qualifying for a loan and having the down payment. Entering the spring buying season, undoubtedly many potential buyers are anticipating that their income tax refund will push them across the finish line with the down payment needed to qualify for a mortgage. But for many, it probably still won’t be enough.

What are you going to do as a buyer if a bidding war happens? It’s not all on your shoulders to put your best effort forward. Your agent should have experience and prepare you to come out at the top of the heap. Your agent needs strong relationships with other agents to give you the insider info needed to make the deal.

Bidding War Strategies That Work But Are Almost Impossible to Pull Off

Unfortunately, it’s impossible or highly unlikely for potential buyers to engage the two most likely strategies to win a bidding war. The first is making an all-cash offer. All cash for at least the asking price and maybe slightly more doubles a bidder’s chance of coming out on top. This is according to a Redfin analysis of about 14,000 offers made under similar circumstances.

The second most effective method is not much easier for most potential buyers to overcome. That’s waiving a financing contingency. Essentially, you’re agreeing to forfeit the earnest money deposit if you can’t get a mortgage. Few people are willing to forfeit a significant deposit even if the risk of losing it is very low. However, some people might be willing to risk a smaller deposit. If you do, make sure your agent emphasizes to the listing agent that you are so serious about the offer that you’ve forfeited the financing contingency. This is rare enough that some listing agents might not notice it unless it is pointed out to them.

A Strategy That Can Work for Anyone

If you’ve been looking for a winning strategy for any time at all, you’ve probably heard about the personal letter. This comes in as the third most effective strategy in the Redfin data. What you’re trying to do with a personal letter is standout among nine or more offers that the seller receives almost immediately after the house goes on the market. Some of the offers the seller disregards out of hand. The low-ball offers with a ton of contingencies go in the trash bin. But anything at least meeting the asking price is almost certainly going to be reviewed.

Now the seller is crunching numbers from maybe four different offers. The listing agent is pointing out the strengths and weaknesses of each offer. It’s all a soup of numbers that meet or exceed the seller’s expectations. One offer has a fast closing with all cash but is slightly lower than the other offers. Another is slightly higher but has several contingencies. All of the others are somewhere in between. None is a clear-cut winner.

Except for yours and maybe one other that has taken the time to write a personal letter. The seller welcomes the break from crunching numbers to read your letter. The letter tugs at the emotional part of his/her brain rather than the financial side. Your well-written letter includes flattering the seller’s ego. Assuring him or her that the home will be well cared for. It gives details about why you are a serious buyer. You mention how you’re willing to work through any hurdles that might come up during the sales and closing processes.

One successful letter described how the couple had been searching for a home for more than two years. How they continued saving more towards the down payment as prices continued to climb. How they had several offers turned down without understanding why. You want to convey that you’re a person behind the contract offer. Compliment the seller on the design of the house and the neighborhood. If you can, learn something about the sellers. Maybe they raised children in the house and will be happy learning that’s your goal as well. Also, assure them that you’ll take good care of the home.

Other Bid Winning Tips

Here are some other strategies that you can use solo or in combination.

  • Include a price escalation clause. You need a competitive bid just to get into the running. But it might not be enough. Ask that you be able to counter another offer the seller is favoring. Still, you need to be sure the house will appraise above the mortgage that you are preapproved for. There are a couple of advantages to this strategy. Most importantly, the other offer might tell you what is most important to the seller. Combining this with a personal letter can be a strong combination strategy.
  • Remove as many contingencies as possible. Contingencies favor the buyer, not the seller.
  • Be flexible. Find out what might make the sellers' lives easier. They may want to move out as quickly as possible or may want to stay in the house a little longer. Or maybe they want to close the sale fast and then rent the home back from you for a couple of months until the school year ends or until they report to their new job in another state.

Check out other strategies in the article, How to Improve Your Chances as a Buyer When Multiple Offers Are On The Table.

What’s your take on the coming spring market? Please leave a comment.

Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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