What are bidding war mistakes to avoid for homebuyers in today’s market?
Bidding every last penny you have
Bidding with many contingencies
Bidding with no contingencies
Assuming you’ll get a second chance
Using the term ‘best and final offer’
Using an escalation clause
Not knowing a home’s true value
The current housing market is hot and is a tough market for buyers. Bidding wars are now the norm on almost every listing. This doesn’t mean that a buyer should just make an offer that would win the bidding war, but in the long run, regret their decisions. For those who are in the process of buying a home, here are 7 bidding war mistakes to avoid.
1. Bidding every last penny you have
In some housing markets around the country homes are going for as much as ten thousand over the asking price! Not only are they going for thousands over the listing price, but the homes also need immediate repairs such as a new roof or new plumbing.
Homebuyers are bidding higher prices to win but then do not have the finances to cover the cost of these must-have repairs. Other situations occur where the appraisal comes in lower than the price agreed upon. The buyer will then have to make up the difference with a higher down payment.
“Unless my clients have families who can give them the extra funds, I advise them to hold back 10% to 40% beyond what they can actually afford,” says Lily Lei, an agent with RSVP Real Estate, Powered by ERA, in Seattle. “If it’s a young couple who are out on their own, for example, and they have no other financial resources, I tell them, ‘Maybe this is just not the house for you. There will be others.’”
2. Bidding with many contingencies
“You should never get involved in a bidding war before your financing is in place and you know exactly where your money is coming from,” says Glenn Raynes, a Las Vegas real estate investor who has been involved in numerous bidding wars and won most of them.
Another big mistake in this seller’s market is trying to add a contingency based on the sale of your current home. Raynes explains that the seller will take an all cash offer over all bids that have contingencies. This means a quick closing with less hassle for the seller.
“It’s seldom all about price,” says Raynes. “Find out what else is important to the seller and try to accommodate that better than anyone else.”
3. Bidding with no contingencies
Releasing all contingencies is not the way to go, especially the inspection contingency. Do not get so excited that on winning the bid that you do not also protect yourself. Agents Jared Blank and Kacey Bingham, managing partners of The Agency in Denver say that if a buyer wants to be competitive in this market, they will need to be able to compromise on a good bit of things, but this does not mean leaving out an inspection. You do not want to win the bidding war on a house that is falling apart. They suggest compromising on things like the length of escrow and down payment.
4. Assuming you’ll get a second chance
This is a sticky one during the current housing market. “Here in the Chicagoland area, bidding wars just won’t quit,” notes Janice Corley, founder and CEO of Re/Max Collection Premier by Janice Corley, a Chicago-based real estate brokerage. “Very often, we see hopeful buyers lose out on their second chance.”
“If you find yourself in a multiple-bid situation, I recommend writing your bid as if you will not have a second chance to negotiate,” Corley advises.
5. Using the term ‘best and final offer’
It’s never over until it’s over. This is the same when it comes to negotiating the purchase of a home.
“Never use the term ‘best and final’ because it usually isn’t the case,” according to Todd Miller at The Agency New Canaan, CT. “Once you use this term, the listing broker will not take you seriously if you actually counteroffer again.”
“There are other important negotiable things that the seller will probably take into consideration,” adds Cliff Smith, also at The Agency in New Canaan. “These include the closing date, a larger down payment, or potentially removing a contingency, etc. If the seller sees the term ‘best and final,’ they may not come back to your bid to see about altering any terms other than price to make the deal work. Instead, they may choose another offer.”
6. Using an escalation clause
An escalation clause in real estate can help you compete in today’s market. This basically is an agreement that you will bid a certain price and if the seller receives a higher offer than the price you bid, you allow your Realtor to increase your offer by an agreed-upon price.
This can backfire according to some agents in the industry. The escalation clause can actually but the bidding afar from you and your agent’s control. It also does not take into consideration any contingencies that are beyond the price that other potential buyers might add.
“Our agents are not big fans of escalation clauses,” says Don Mastroianni of The Agency North Shore Long Island. “We recommend clients give a very strong offer right from the start to be able to stand out from the competition,” says Mastroianni.
7. Not knowing a home’s true value
As a buyer go to the “numbers and proven stats that take into consideration the lack of inventory, market trends, how much the price of properties have increased in certain areas over time,” suggests Meredith Schlosser of Berkshire Hathaway HomeServices, Brentwood, CA. “This will give you a better understanding of what the property is worth.”
You will not win the bidding war if you “won’t step up to their highest price. Instead, they choose to believe the property is worth less.”