Homebuyers

Bidding Wars: How Homebuyers Can Triumph in the Housing Market—And Know When to Walk Away

Bidding wars may be making a comeback.

With mortgage rates hitting their lowest level in over a year, more buyers are expected to come off the sidelines and start attending open houses again. The additional competition for a limited number of homes for sale could lead to one of homebuyers' fears: a resurgence in bidding wars.

When a bidding war erupts, many buyers panic. They may be so afraid of losing the home that they end up offering a purchase price they regret in the long run.

However, there are things buyers can consider before they blow through their budgets. These tried-and-true tips may help buyers win a bidding war—and know when to consider walking away.

How much should homebuyers offer in a bidding war?

It's always good for buyers to look at the comps, a.k.a. how much similar homes in the same area recently sold for, before making an offer. Then they can submit an offer they feel good about.

When homebuyers find a home they could see themselves living in—and realize that about a dozen other buyers have just done the same thing—they should take a moment before offering more than they can comfortably afford.

They should ask themselves "On a scale of 1-10, how much do they love the home?" said San Antonio, Texas-based real estate agent Tanya Lechner of LPT Realty. "That will determine how important it is to win the bidding war."

Then they can work with their real estate agent to figure out how much they should offer for the home.

Homebuyers can also compete on terms

Bidding wars aren't just won by those who submit the highest offer.

Lechner typically tells her clients to "win on the terms" of their offers. For instance, they may be able to help the seller cover their costs.

"They can pay for the title policy and the closing costs and sometimes that will beat other buyers alone," she said. "They can also shorten the inspection period to look more appealing to sellers."

Should homebuyers waive contingencies?

Some buyers may also decide to waive the home inspection contingency to sweeten their offer.

However, they should still plan on having an inspection to ensure there aren't any potentially costly problems with the home.

"Many purchasers arrange home inspections (at their own cost and for their own information) before submitting an offer so they can waive any home inspection contingency," said real estate agent Andrea Saturno-Sanjana with Coldwell Banker Warburg in New York.

Buyers may also consider waiving the appraisal contingency—but do so at their own risk.

If the home doesn't appraise for the amount they have offered for it, they may have to pay the difference out of pocket.

Understand what the seller needs

Understanding the sellers' needs can also give buyers an advantage. That's where working with a real estate agent can help.

"Sometimes, it's not just about how much money you can offer," said Austin Glanzer, owner of 717 Home Buyers in Lancaster, Penn. "Often, sellers value convenience, assistance, or unique terms over a higher price."

As an example, he pointed to a buyer who offered a 30-day rent-back option to a seller. This gave the seller additional time to find their next home.

"Such creative solutions can make your offer stand out," said Glanzer.

The flip side of that is to offer a quick closing by finding a lender that can offer this perk or by buying the home in cash.

Consider using an escalation clause in your offer

Buyers may also want to consider using an escalation clause in their offers.

This is when a buyer agrees to increase their offer if the seller gets a higher offer. It generally says that the buyer will pay a certain amount over the largest bid up to a certain amount.

When to walk away from a bidding war

Part of your strategy for a bidding war should be knowing when to walk away.

"Use the common advice for auctions, 'Before bidding begins, set your limit and do not go over it,'" said Danny Johnson, a San Antonio, Texas-based real estate investor. "The key there is to set the max price you are willing to pay before countering."

While it may be hard to walk away from a home you're emotionally attached to, "it helps to think that an even better house is meant for you," he said.

One of the best things a buyer can do is communicate their non-negotiables with their real estate agent, said Saturno-Sanjana.

These should include things like maximum sale price, maximum down payment, and the earliest (and latest) time for closing, she said.

It's generally good to avoid blowing through your budget and winding up house poor. You want to make sure you have enough left over every month after paying your mortgage to cover maintenance and repairs, and any unexpected expenses, and still be able to enjoy yourself.

"Avoid stretching your finances to make an offer that could jeopardize your financial stability," said Glanzer. "Knowing when to walk away from a deal that exceeds your budget protects you from potential pitfalls."