How Do Bidding Wars Work in Real Estate?

How Do Bidding Wars Work in Real Estate?
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The real estate bidding wars that delight sellers often leave buyers frustrated and disappointed. War can erupt almost as soon as a home hits the market in neighborhoods with strong demand and low supply. What happens next thrusts the seller into the line of fire, as frenzied buyers pull out the stops in an effort to be the last one standing.

Anatomy of a Bidding War

The first rumblings occur when two or more buyers present offers for the same home. The buyers' agents send the offers to the listing agent. The listing agent presents them to the seller. Most state laws require that listing agents present all written offers to their sellers, and present together offers that come in at the same time. This gives each buyer a fair chance, and it makes it easy for sellers to compare the terms of the offers. The full-scale bidding war breaks out when there's no clear winner. In these instances, the sellers ask the buyers to sweeten the deal. Buyers then come back with better offers. Sellers may entertain several rounds of offers before making a decision.

Arm Yourself for Battle

If you're planning to buy a home in an area where there's high demand, preparing early can give you an edge. It's imperative that you get your finances -- and financing -- in order before you start looking at homes. Have your loan preapproval in hand for your first appointment with a real estate agent. Proof of funds can help, too. Proof of funds includes bank and investment statements showing you have access to enough cash to pay the deposit and closing costs.

Preparing an Offer

Know what your bottom line is before you prepare the offer, then prepare your offer accordingly. In an area where competition is especially fierce, you may need to go in with your highest and best offer if you have your heart set on buying the home. Otherwise, give yourself a little wiggle room, but show the seller you're realistic. The seller may reject your offer outright if it's not competitive with the others.

How Offers Are Evaluated

Buyers likely to wind up in a bidding war should structure their offers to make the sale as quick and safe as possible for the seller. Sellers should evaluate multiple offers with an eye on the big picture. Although the purchase price is certainly important, so is the earnest money deposit. The higher the deposit, the less likely the buyer is to walk away from the sale. Money is not the only motivating factor, however. A buyer who has the home inspected before making the offer can offer to buy it as-is, assuming the condition is acceptable to the buyer and the buyer's mortgage lender. Similarly, a pre-offer appraisal may eliminate the need to make the sale contingent on the home appraising for a certain amount. The buyer might also offer a quick closing, if the seller is in a hurry, or allow the seller to remain in the home after closing if she needs more time. Finally, it's not unusual for a seller to be influenced, if not swayed, by a heartfelt letter from a buyer asking for special consideration.