Bidding on a house

The most nervous part of the house buying process is making an offer or bidding on a property. In an ideal world, you’d be making bids that are within your budget. But that may not end up being the case, especially if you get into a bidding war with other buyers.

A bidding war is common when there is a low supply of property for sale and a high demand from buyers. Most would prefer not to get into a bidding war, but if you are set on buying a house it’s best to be prepared for such a scenario.

It’s worth noting that at this point, an excellent real estate agent will shine. They will do their best to understand the situation and guide you towards what they believe is a winning offer.

Whilst the highest offer will win, there are a few tactics you could discuss with your agent to increase your chances of success:

Commission discount

Your agent agrees to reduce their fee to help you win the property. Note that the seller pays the commission on the sale. So if your agent agrees to take a cut, the seller will pay less. The commission discount may have to be disclosed too. If you come up against an offer that has a commission discount, it’s worth discussing with your agent to reduce their fee. You could also increase your offer to make up the difference too.

Committed deposit

This acts as a security deposit, usually made within 24 hours of an offer being accepted. The bigger the deposit, the more serious the buyer will be taken. Note that this deposit forms part of your down payment when closing conditions are met (or removed).

Escalation clause

When there are multiple bids placed, an escalation clause is a possible tactic. This is when you inform the seller on making your first bid, that you are willing to increase your offer if there is a higher bid than yours. And that you’ll keep increasing your offer up to a best and final offer. This is risky though as you are revealing your ceiling which the seller’s agent could use to bring you up to that final bid. Is it worth doing this then? If you’ve found your dream house, you may wish to include this clause to ensure your best offer is made.

Irrevocable period

This is the amount of time an offer is on the table for. If it isn’t accepted within that period, the offer will expire. The time limit works by taking away from your rival (or you) the opportunity to beat it. If an enticing offer expires in 24 hours, the seller might accept it.

Offer conditions

An offer will come with conditions. Usually a financial one, whereby your offer is subject to obtaining financing and time to get it from a lender. Another is to avoid a home inspection that removes possible costs for a seller. Whilst this condition isn’t advised, a bid without a home inspection is quite likely to beat most. Another condition is time to close or sell your existing property. A bid that can close now rather than in 30 days is far more attractive. You may find that fewer conditions beat price, simply because it provides certainty of a sale.

Time-to-close

This is the time between your offer being accepted and getting the keys to your new home. The seller might want more time to find a new property, or less time as they want a quick sale. Flexibility may work in your favour (if it works for you too).

Bidding wars

In a bidding war, two or more buyers will be in ongoing negotiations with the seller and their agent. This is different to a multiple offer scenario where many buyers make offers and the seller will choose one.

The seller’s agent will inform you how many offers have been submitted. But they do not have to tell you what the highest bid is. You and your agent will need to decide whether to increase an offer or negotiate conditions. The bidding war could be multiple rounds before a bid is accepted.

Whilst bidding wars are not illegal, it does raise issues regarding affordability. As bids aren’t disclosed, a buyer might increase their offer significantly to win. This emotional reaction may lead to committing finances over their budget, especially when a lower bid might have won too.

It’s important to remember that winning is finding a home that is within your budget. Going over your budget is not a “win”. It may be best to walk away and find a new home that works with your finances.

Can you avoid a bidding war?

If you’re trying to avoid a bidding war, your real estate agent can help you. They may be able to confirm if there is major interest in the property and how many offers have been made. But they won’t be able to find out what the bids are. You may wish to save your time and look elsewhere if there are multiple offers.

You may submit what’s called a bully offer. This is submitting a bid before the offer date to get ahead of the competition. Whilst you may avoid a bidding war, your offer will likely need to be high and you may end up paying more than expected.

The alternative is to buy a new home directly from a builder. You’d come to an agreement on a property (either pre-construction or in progress) and avoid competition with other buyers.

Winning a bidding war

The obvious option is offering more money. Your real estate agent should be able to guide you with how best to increase a counter offer. Be mindful of what your budget will allow you in terms of a maximum offer too.

A large deposit may also help in a bidding war. If your deposit is larger than your competitors, the seller may favour your bid. Note that if you fail to close on the property after your offer is accepted, the deposit may be forfeited and the seller could take legal action against you.

A seller may also consider other aspects of an offer when making their decision. This can include flexible closing dates; and waiving of conditions that might allow you to back out of the purchase. Waiving of conditions would decrease the chance of a deal falling through, but may expose you to risks.