Barry Choi
Real estate bidding wars — when more than one prospective buyer is interested in a home for sale — are more common when there’s a low supply of homes for sale and high demand from buyers.
Admittedly, most buyers would prefer not to be involved in a bidding war, but if you’re keen on buying a home, then you’ll need to prepare yourself as best you can.
» MORE: What to look for when buying a house
What is a real estate bidding war?
Many people assume that multiple offers and bidding wars are the same thing, but that’s not necessarily true. In a multiple-offer situation, multiple buyers potential buyers make an offer to the seller of a piece of real estate, often a residential home.
In a bidding war, two or more potential buyers will be engaged in back-and-forth negotiations with the seller, often via their listing agent. These negotiations are often conducted orally with the goal of securing the best final written offer for the seller.
What’s interesting about bidding wars is that there are few real rules in place. The listing agent doesn’t have to let buyers know the current highest bid amount. They only need to disclose the number of competing offers. It’s up to buyers and their real estate agents or realtors to decide if they want to increase their offer or eliminate conditions. The entire bidding-war process could take multiple rounds before things are finalised.
There’s nothing illegal about bidding wars, but many people believe there could be an ethical issue. Since the bid amounts aren’t disclosed, buyers could be enticed to increase their offer significantly when a lower number may have secured the real estate. Likewise, bidding wars could create emotional urgency for buyers, leading them to abandon their budget just to win — a choice they may regret later.
Should you participate in a bidding war?
If you’re looking to buy during a seller’s market, you may not be able to avoid a bidding war. With supply insufficient to meet demand, it’s common for multiple buyers to be interested in the same house — and willing to go above and beyond to get it. A bidding war is beneficial for sellers, who can just let the potential buyers duke it out and wait for the best offer.
Admittedly, entering a bidding war can be emotional and losing can be very frustrating. As a result, house hunters may end up exceeding their budget just because they’re tired of the process.
Before engaging in a bidding war, take some time to reflect on what you can actually afford and what you’re willing to risk in order to win. Even in a hot market, there’s no shame in walking away and waiting for a situation that feels more comfortable. The last thing you want is to spend time regretting home purchase, rather than enjoying it.
» MORE: 7 Mistakes to avoid when buying your first home
Strategies for winning — or avoiding — a bidding war
The best way to win a real estate bidding war is to be prepared in advance. Alternatively, if you are not interested in participating in a bidding war, you need to know your options.
Buy a new build home
Buying a house directly from a builder is one way to avoid a bidding war, since you won’t find yourself in direct competition with other buyers. Instead, you’d come to an agreement with the builder about a unit that’s in progress, or a pre-construction house that will be built to your specifications.
Get more info before making an offer
If you’re concerned about avoiding a bidding war, ask your real estate agent to gather some additional information before making a written offer. Although your agent won’t be able to find out what the bids are, they may be able to confirm how many offers are registered. If there’s already heavy interest and multiple offers, it may not be worth the time to add your bid, especially if the selling price is expected to be higher than your max budget.
» MORE: How much mortgage can you afford?
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Be pre-approved for a mortgage
Mortgage pre-approval helps you to understand exactly how much a lender is willing to let you borrow This can work to your advantage since you’ll be able to focus on houses in your price range and you’ll be able to make an offer without a financing contingency — pre-approval shows that you’re qualified for a mortgage of a certain amount. Sellers rarely entertain offers from buyers who aren’t pre-approved.
Make a noteworthy deposit
A deposit is money the buyer pays upfront, after they make an offer, as a show of good faith that the transaction will close as planned. If your offer is accepted and you fail to close on the property, the deposit is forfeited, and the seller could pursue legal action against you.
There’s no required deposit amount, but making a larger one could help convince the seller that you’re a reliable buyer, and may give you an advantage in a bidding war.
For example, let’s say there are two similar offers, but one has a deposit of 25% vs. one with 5%. The seller may favour the bid with the larger deposit.
Be flexible with your closing date
Some sellers put more weight on the closing date than others. For example, one seller may want to close quickly because they need to relocate for a job, or need the proceeds for a down payment on their next house. Other sellers may prefer a long closing because they don’t want to move before the school year ends or because they’re still searching for their next house. If you can accommodate the seller, they may choose you over someone else.
Consider a bully offer
Instead of waiting for the offer date, you could instruct your realtor to put in a bully offer. That’s where you would submit a bid ahead if the competition. The selling agent is legally required to bully offers to their clients. Of course, for this strategy to work, you’ll likely need to make an offer that’s higher than what’s reasonably expected. It’s essentially a gamble. You might end up paying more than if you had entered into a bidding war, but you may also avoid a longer buying process.
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