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When you find the ideal home to buy in a hot seller's market, chances are you’re not alone.
You may soon find yourself in a bidding war, which is when multiple buyers compete for the same property. Consequently, these situations drive home prices higher, and they’re more common in sellers markets.
You may not be able to avoid bidding wars when home shopping and you shouldn't let the competition scare you off. But you will need to get ready. If you're concerned about finances, understand that a good strategy involves more than just throwing around extra money (although that often helps). Here's how to prepare for battle and eventually come out on top.
Get preapproved for a mortgage
Unless you plan to buy a house with cash, get preapproved for a mortgage from at least one lender before home shopping. A mortgage preapproval informs sellers and real estate agents how much a lender might let you borrow. It’s based on a credit check and review of your finances, but pending full underwriting.
Without a mortgage preapproval in a competitive market, your offer will go to the reject pile.
Treasury Bills or HYSA: Which grows your down payment faster?
Be prepared to offer above the asking price
Homes are more likely to sell above the asking price in a seller's market, so it's a good idea to shop for properties well under your spending limit. But how high should you go? There's no formula for figuring how much to offer on a house, but there are a few guidelines:
- Look at the comps. Consider prices of comparable homes that were recently sold or are pending sale.
- Lean on your real estate agent. A good buyer's agent has deep experience in the market and will recommend a price point.
- Avoid overspending. The victory of winning the battle won't be worth the financial stress of owning a home you can't afford.
» MORE: How much house can I afford?
Maximize your down payment
Putting more money down will lower your monthly mortgage payment because you'll pay more upfront. It will also reassure sellers that you have some financial cushion.
For example, if there's a gap between the home appraisal and the sale price, you will either need to make up the difference, renegotiate the price with the seller or walk away from the deal. It's easier to close the gap if you have more money set aside than you need. You could put some of that money toward filling the gap and still have enough to meet a lender's down payment requirement.
However, don't put down more than you can handle. Keep some money in savings for emergencies and homeownership expenses.
Offer more earnest money
Earnest money is a good-faith deposit a buyer makes when a seller accepts an offer. A typical amount is 1% to 3% of the home price, but buyers often put down more in hot markets. That shows sellers you're committed to buying the property.
Earnest money is usually kept in an escrow account and disbursed at closing. Then, buyers can apply it toward closing costs or the down payment, or pocket the cash. The seller can keep the earnest money if the buyer walks away from the deal for a reason that's not spelled out in the purchase agreement.
🤓 Nerdy Tip
Ask your real estate agent how much earnest money to offer. Sellers' expectations will vary by area. » MORE: Buying a house this year
Treasury Bills or HYSA: Which grows your down payment faster?
Limit contingencies
Contingencies are clauses in the purchase contract that outline the conditions under which you could back out of the deal without forfeiting your earnest money. They protect your interests as a buyer, but too many stipulations will hurt your chances of getting an offer accepted.
The key is reassuring the seller without taking too much risk. A real estate agent’s advice is critical because the decisions are more nuanced than either-or propositions.
For example, a home inspection contingency lets the buyer negotiate repairs, adjust the price or walk away based on the inspection. Rather than waiving the home inspection contingency, a risky move some buyers have taken, consider agreeing to request repairs only for significant issues above a certain dollar amount.
Be flexible about closing and move-in dates
Flexibility around the closing and move-in dates can win over a seller, even when you're competing against higher-priced offers. Find out what the seller wants, and do whatever you can to accommodate their timeline.
Offer to pay your own agent
Traditionally, the seller would pay 5%-6% of the home’s sale price in commission, which would be split between their agent and yours. Now, there is more room for negotiation, which gives both you and the seller power over how the agents are paid.
By offering to cover your agent’s fee yourself, you may gain an advantage over other bidders who expect the seller to cover their agent’s commission.
Accept a loss and move on
A bidding war is a misnomer. It's not really a war; it's just one battle. In a sizzling market, you may end up losing on a number of houses before finally getting an offer accepted. Shake off the loss, take a break if you need it and work with your agent to stay on top of new listings. You never know, the right house could come on the market tomorrow.
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