How to Win a Bidding War

Being a buyer in a hot housing market can be frustrating. No sooner do you find the home of your dreams that you discover someone — or several someones — has already made an offer. Pretty soon, you’re in a bidding war, trying to prove why you are the most worthy buyer for that home.

The whole process can be complicated and drawn out. But if you are determined to be the last buyer standing, here’s a look at six ways to make your offer stand out so you can win a bidding war.

Get pre-approved

One of the best ways to strengthen your odds of winning a bidding war is to get pre-approved for a mortgage. When you become pre-approved for a mortgage, a lender takes a full look at your finances and determines how much of a mortgage they are willing to give.

This is different from pre-qualification, so make sure you go through the full process of pre-approval.

Buying a home is one of the biggest investments you can make, but that’s only true if you are able to make your mortgage payments and settle other bills at the same time. Pre-approval will help you understand how much you can afford to spend on a house.

By having a mortgage pre-approval letter, you are assuring the buyer that you can buy their home. It gives them peace of mind knowing they don’t have to worry about the deal falling through if you are unable to secure the full amount for a mortgage after making the offer.

Put more cash down

In addition to being pre-approved for a mortgage, another way to strengthen your offer in a bidding war is to put down more cash. Depending on the terms of your loan agreement, a typical buyer will make a cash payment of 3% to 6%. However, by increasing how much cash you will put down, you will look even more appealing to a seller.

You can strengthen your chances even more by making a full cash offer. Cash offers typically close faster, which appeals to many buyers. If you’re purchasing a home as an investment, and you have earnings from a previous investment property, a 1031 exchange could help you secure the deal. Consult with a 1031 specialist to find out if this is the best option for you.

If you aren’t able to make a cash offer, you can also increase the earnest money. Typically, earnest money deposits range between 1% and 3%, and it lets the owner know you’re serious about the offer. If you increase the amount of your earnest money offer by even 2%, it lets them know you mean business.

Putting down more cash with your offer comes with its challenges. You don’t want to completely deplete your savings while fulfilling your homeowner dreams. You might consider taking on a side hustle to build up your cash reserve and make your offer even stronger.

Include an escalation clause

Another way to strengthen your bid is to include an escalation clause. An escalation clause is an addendum to your offer contract that says you are willing to increase your offer incrementally by a certain amount to counter other bids.

For example, if you make a $250,000 offer on a home, but you are willing to spend up to $300,000, you could add a line that says something like, “My initial offer is $250,000 with an escalation of $5,000 over competing offers up to $300,000.” It’s kind of like adding auto-bids to an auction.

As with putting more cash down on your offer, it’s important to know your full spending potential before adding an escalation clause. If you’re getting out-bid well beyond your means, it’s time to walk away.

It’s important to note that not all homeowners or selling agents will accept escalation causes. It pays to work with a buying agent who can help you decide if this is the right course for you. Find the best local buying agents to help you secure the best deal.

Be flexible

In buying and selling real estate, speed can play a big factor. A lot of sellers want to close quickly so they can afford paying multiple mortgages. Others want more time to clear out their home so might want a long contract.

If you’re able to be flexible with your contract and move-in date, note that in your offer. Even if you can’t afford to increase the amount of your offer, a seller might choose you if you can offer this kind of flexibility.

Limit contingencies

When making a purchase offer, most buyers include contingencies with their contract. Contingencies will allow you to walk away from the offer, with your earnest deposit, if issues come up. These contingencies include home inspections, coverage in case you can’t sell another property, and so on.

By removing some — or all — contingencies in an offer, you can stand out to a seller in a bidding war. Before you decide to forfeit your earnest money, however, it’s important to know what you can risk.

If you like putting a mark on a home and don’t mind putting in elbow grease, buying a fixer-upper might appeal to you. If you have any reservations, it’s important to know the issues that might come up when buying a home as is. If a home needs more TLC than you can give, it’s best to move on.

Write a personal note

Beyond the cash and incentives you state in an offer, some realtors also encourage buyers to include a personal note to the seller. In the letter, you can tell the seller about yourself and why their home is the one for you.

While home ownership is a significant financial investment, for some it is also deeply personal. Someone selling their long-time family home, a historical treasure, or a space they spent time and effort customizing may be looking to pass it along to a buyer who will cherish it as much as they do.

This extra personal step could be just what it takes to make your offer stand apart from the rest in a bidding war.