How do multiple offers work in real estate? Sometimes when multiple offers are put on the house, it drives up the price of the home – this is called a bidding war. Often bidding wars occur when there aren’t very many homes for sale in a popular location. When you have various buyers who are interested in your property, you shouldn’t just assume that the highest dollar amount is the one you should take. There are other factors to consider, including:
- Financing vs. cash
- Closing costs
- Earnest money
When it comes to how to sell your house, the dream scenario is to get multiple offers on your home—that is, not just one interested buyer but a number of them! Having a bidding war can be fortuitous, but it can also be a little overwhelming. Simply put, it can be challenging to weigh all the different factors of multiple offers and determine which offer is the best.
Of course, you probably know the old real estate proverb: Your first offer is usually your best offer. That doesn’t mean you always have to take the first offer, but you should always strongly consider it. There’s no guarantee that a bidding war will happen that could raise the price of your home. Remember, every day your house remains on the market, it loses a little bit of its luster. As a seller, taking that first offer can be smart even if it’s a little below what you’d hoped for.
Also, note that there is always room for negotiation—even on that first offer! Indeed, buyers typically anticipate a counteroffer, and may, in fact, be lowballing you right out of the gate. You should always attempt to work with the buyer to arrive at a number you both feel good about. You can work with the buyer to get the price you are looking for without a bidding war.
Something else to note: Price isn’t everything. Some buyers may not be pre-approved for a mortgage. Some may be willing to forgo an inspection contingency. Some are prepared to put up a larger sum of earnest money. All of these are factors to bear in mind. As a seller, you get to choose who wins the bidding war, so get as much information as you can to make your decision.
Some bidders include an escalation clause in their offer. It’s an article added to the offer that allows the buyer to increase their bid up to a certain limit in the event of another offer. This article can often start a bidding war as it automatically offers a higher price to the seller. The price on your home can escalate quickly if multiple buyers have escalation clauses in their offer. These clauses are set by the buyers, so when each reaches their limit there could be a clear winner. If you’re in a seller’s market you have the upper hand – a bidding war can cause the price of the home to dramatically increase.
Meanwhile, buyers who make things complicated or have a number of stipulations may not be worth the trouble—even if they do happen to offer the highest dollar amount.
How to win a bidding war: tips for buyers
If you’re a homebuyer in the current housing market, especially if you’re looking at a home in a popular location, chances are there will be multiple offers on the home you would like. In the case of a bidding war don’t give up hope or jump ship, you can do some things to help you win. It’s helpful to read over the sellers tips and apply them – but here’s a few tactics just for buyers.
- Decide what you are willing to pay – Decide how much you have available for a home or how much your loan pre-approval is for and then stick with that! Remember you may like this house but there are usually other sellers and you can look for more options.
- Work with a real estate agent – They are trained for these types of situations and can help you evaluate the bidding war and make smart decisions. Choose a real estate agent that is seasoned and that you trust, buying a house in a bidding war is a complex situation.
- Have your pre-approval ready – You’ll want the financial side as figured out as soon as possible, so you can appeal to the seller. In a bidding war you’ll want every advantage you can get.
- Increase your offer – Consider including an escalation clause in your offer. This will automatically increase your offer if another offer is placed on the house. You get to choose the range of escalation that you would like to occur on your bid in advance so it’s all in your control.
- Simplify your offer – Are you willing to waive some contingencies? Making the buying process smooth can be very appealing to the seller when faced with a bidding war. If you want to wave a contingency then make sure you tell the seller so they can take that into their evaluation of the bids.
How Do Multiple Offers Work in Real Estate?
As we consider how to sell your house when you have multiple offers on the table, and possibly a bidding war, let’s look at some of these issues individually.
Buyers are asked to put forth some “earnest money” to prove that they are serious about buying the house—and while a larger sum won’t change your bottom line, it does show that the buyer is really committed to making the deal work. Earnest money in a bidding war can be an indication to who should win. All else being equal, the buyer who offers more earnest money is usually the one you’ll want to go with.
The Stress of Multiple Offers
Something else to consider is that fielding multiple offers can lead to some complicated and frankly stressful negotiations—not least because there is always the chance that each interested party could walk away! One way you can avoid this scenario is to let all interested buyers know that you have multiple offers on the table and to ask them to put forth their best and final offer. A bidding war is most likely to happen if there aren’t many homes around for sale and it’s a popular area, or you can increase the chances by marketing beforehand so there are many interested buyers at once. If you live in a popular location or are marketing before placing your home on the market, take into account the stress of it all.
Something else you should ask yourself: How does each buyer intend to pay for the home? An all-cash offer is ideal, but such offers are not especially common. If everyone who puts in an offer is also seeking a mortgage, ask them if they are pre-approved. In a bidding war pre-approval can significantly expedite the mortgage underwriting process and minimize the risk of financing hiccups. The pre-approved offer is always going to be preferable to the non-pre-approved. If you have the choice in a bidding war, make sure you ask about their approval status. This will lower your stress as you’ll have more information to make your decision between bids.
You should also take into account contingencies, which are kind of like a “get out of jail free” card for the buyer—a chance for them to change their minds should some unforeseen issue arise. As a seller, you naturally want to see as few of these contingencies as possible; thankfully, most can be avoided.
One contingency is that the buyer says they will purchase your home, but only after they sell theirs. You may want to accept this, especially in a slow market, but always put a timeframe on it—say, 30 days. If you like their bid on your house it could be worth waiting for the buyer’s sale to go through – especially if that means they will be coming back with a cash offer.
There’s also the inspection contingency, which gives the buyer a timeframe to have the house inspected and to back out of the deal if they find anything troubling. This is actually a very normal and prudent request and one you should allow for—most of the time. In a scenario with multiple offers, you may have a buyer who forgoes this contingency, which can save you some time and hassle.
For buyers who are taking out loans, another necessary contingency may be for a financial appraisal—and frankly, there’s not much you can do about this one, as the lender itself typically requires it. They need their loan to purchase the house and want to make sure that everything is on target for their purchase. Generally, homes appraise for right around the sales price, maybe even a little more. If the appraisal comes in low, and you’re in the middle of a bidding war, you have just a few options:
- Come down on the price
- Contest the appraisal, and try to get a second opinion (which may or may not be in your favor)
- Let the deal fall apart
Something else to consider in terms of selling your house: Closing costs. Usually, the seller pays for a lot of the closing costs, including real estate commissions, but buyers may also end up pitching in. In a situation where you have multiple bidders, one buyer may offer to pay more of the closing costs than others—and that’s definitely something to weigh. In a bidding war, the more information you have to evaluate your buyers the better. Ask about what closing costs they are willing to pay before you make your decision. Deciding between different bids can be complex so council with a real estate agent and evaluate all your potential buyers.
How to Sell Your House (and Choose the Right Offer)
Ultimately, you want to make the most informed decision you can, and to pick the offer that’s most valuable. One thing that can help you is getting a report from Sold.com, which can provide you with some real numbers to work with as you size up potential opportunities. The more information you have – especially in a bidding war – the better. Get your free report today when you visit Sold.com!