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If you're shopping for a home when the supply of houses is low and demand is high, you may find yourself in a bidding war, with multiple offers pushing prices ever higher.
Add prospective homebuyers excited by low mortgage rates into the mix and you might be edged out several times when trying to buy a home.
No single strategy can guarantee that you win a bidding war on a house, but there are several steps you can take to put you in the best position to compete.
» MORE: How to make an offer on a house
Get a mortgage preapproval letter
Buyers need to show they can get financing to purchase a home. This is why a mortgage preapproval is essential, especially in a bidding war.
With a mortgage preapproval, a lender evaluates every detail of your finances, including your credit score and report, and decides if it will loan you money to buy a house. Preapproval is based on documentation like W-2 tax forms and bank statements.
“When evaluating multiple offers, if they don’t have a preapproval letter, it doesn’t even go in the pile where we are going to look at the offer,” says Sissy Lappin, a real estate broker at Lappin Properties in Houston. “It goes in the ‘B’ pile instead of the ‘A’ pile.”
Don’t confuse a mortgage preapproval with a pre-qualification. A pre-qualification merely estimates how much a bank might be willing to lend someone with your income and credit profile. It’s based on general details you provide to the lender.
Pay in cash or put more money down
While the highest offer isn’t always the best one, money talks when bidding on a house.
Buying a house with cash is more attractive to sellers because it eliminates the chance of financing falling through before closing. Cash deals also typically close sooner.
“The bigger down payment and cash offer go to the front of the cafeteria line,” says Lappin.
Can’t pay cash? Your earnest money deposit also shows buyers you are serious about buying the house. A typical earnest money deposit is 1% to 2% of the home’s purchase price, but the amount varies by location. A higher earnest money deposit may catch a seller’s attention in a hot housing market.
Don’t get so wrapped up in winning the bidding war that you disregard your budget and end up house poor. The process can get contentious, and Lappin says you don’t want to end up having buyer’s remorse.
» MORE: How to navigate a hot real estate market
Use an escalation clause
If you’re in a bidding war, you can strengthen your offer by using what’s called an escalation clause. It’s essentially a contract addendum that states you’re willing to increase your offer incrementally up to a certain limit if other offers come in that match or top your initial bid.
For example, say the seller's asking price is $200,000. Your real estate agent would write your offer to state: “My initial bid is $200,000 with an escalation of $2,000 over competing offers up to $210,000,” or something to that effect. If another bidder offered more than $210,000, however, you’d be out of the running.
Limit the contingencies
Contingencies in home purchase contracts allow buyers to walk away from the deal — without losing their earnest money — if certain conditions aren’t met. But in a bidding war situation, you'll want to use them carefully.
Submit a clean offer and avoid too many contingencies or demands, says Bruce Ailion, a Realtor and attorney at Re/Max Town & Country in the Atlanta area.
“To be competitive, you need to do your homework in advance,” he says. “Know you can get financing so you do not have to be contingent on credit review. Know home conditions, do a quick inspection before submitting an offer. Agree to pay a certain amount above list and know you can afford that over appraised value amount.”
Be flexible on the closing date
Let’s say someone outbids you by a few thousand dollars, but you’re willing to give the seller more time to move out. That flexibility can make you the front-runner in a bidding war.
Extra time to close may be attractive to a seller who might otherwise have to spend more on moving expenses or be crunched for time to find another home, especially in a tight market.
On the other hand, if a home is already vacant, sometimes you can win the seller over by offering to close in a shorter time.
Don’t count yourself out after losing a bidding war
In a competitive housing market, there’s a chance you may lose out on more than one bidding war. While that’s disappointing, it doesn't mean you should give up.
Ailion advises buyers to stay in touch with their agent and allow their offer to be a backup in case the deal falls through.
“I would advise them to watch the back on the market listings,” he says. “There is far less competition when a property comes back on the market versus going on for the first time on the market.”