How to win a bidding war

hand holding a toy house for sale in a bidding war

You may have found the home of your dreams, but be prepared to fight in a bidding war to make it your own.

A shortage of available homes on the market slowed sales, and competition for those homes that are listed remains fierce.

During August, half of the homes that closed around the country were the subject of bidding wars, according to the real-estate broker Redfin, which has agents in 85 of the largest markets.

Much of the competition is driven by the limited supply of houses on the market.

In July, there was just a 4.7-month supply of inventory, according to the National Association of Realtors (NAR) — a six-month supply is considered a healthy market.

Home sales fell 3.2 percent from June to July, according to the National Association of Realtors. “Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month,” NAR’s chief economist Lawrence Yun said in a statement.

The median price for a single-family home was $244,100 in July, up 5.3 percent from the year before. It was the 53rd straight month of price increases.

Homes that hit the market in good condition and at a reasonable price are snatched up fast. In fact, 47% of the homes that sold in July were on the market for less than a month.

NAR's chief economist, Lawrence Yun, said in a release that continued job growth and good mortgage rates were driving home purchases. But he cautioned, "it's unclear if this current sales pace can further accelerate as record-high stock prices, near-record-low mortgage rates and solid job gains face off against a dearth of homes available for sale and lofty home prices that keep advancing."

But don't despair. Here are 9 strategies that can help you win a bidding war:


Tip 1. If you can afford it, pay cash.

"It's cliché, but cash is king," says Trenton Hogg, a Redfin real estate agent in the Denver area. In that region, three-quarters of home sales wind up in bidding wars.

Sellers typically prefer dealing with a buyer who can pay cash, and they don't have to worry about a potential buyer actually receiving the financing he or she needs.

How much house can you afford?

This is the first thing you need to decide before you even begin to hunt for a new place to live. No one wants to be house-poor, saddled with mortgage payments that gobble up too much of their paycheck. Follow these 5 smart moves, and you'll find the price range that fits your budget.


Tip 2. If you need financing, get preapproved.

Pick a lender with competitive rates, and ask to be preapproved for a loan.

You'll need to provide documentation so the bank or mortgage company can verify your income, assets and credit report.

But once that's done, you'll have a letter to show sellers that says exactly how much you're qualified to borrow.

(Of course, lenders won't fully commit to providing the money you need until they see the house you want to buy and are convinced it provides adequate collateral for the loan.)


Tip 3. Understand the market.

Before you hit the street, go online and scour the real estate listings so you know exactly what houses are available and how much sellers are asking.

This isn't the time to dawdle. If you understand the market, you'll be ready to make a move when a home goes up for sale.


Tip 4. Make the first move.

"I always tell my clients to be the first in line" when it comes to making an offer on a home, says Smitha Ramchandani, a Keller Williams real estate agent in Morristown, New Jersey.

If the house is priced properly, she tells her clients to offer full price and be prepared to up their offer if other bids come in.


Tip 5. Make an extra-large deposit.

Sellers often require a refundable deposit when you make an offer — typically 1% of the purchase price. If you want to show the seller how serious you are, consider putting down 10% or 20% instead.

If you get the house, this earnest money will go toward your down payment and closing costs.

Should you pay extra on your mortgage?

Paying off your home loan more quickly can save tens of thousands of dollars in interest charges. But before you start sending your spare cash to your lender, you need to make sure your overall finances are in order. Paying extra on your mortgage isn't always the smartest use of your money.


Tip 6. Don't be nitpicky.

When you make an offer, Hogg recommends removing as many contingencies as possible.

Contingencies essentially give a buyer the right to back out of the contract in certain cases, such as if they have problems obtaining financing, if problems are found during a home inspection or if the house doesn't appraise for the contract amount.

If problems turn up during an inspection, Hogg recommends only focusing on health, safety and sanitation issues.

A survey of Redfin agents found waiving contingencies was the most effective strategy for winning a bidding war.


Tip 7. Make it personal.

Sometimes you can win over sellers by tugging at their emotions. Write them a personal letter about why you want their home, and include a photo of yourself, your family members, even your pets, Ramchandani says.

"Most sellers are very emotional about their homes," she says. "They created memories there."


Tip 8. Include an escalation clause.

Some buyers may be willing to increase their offer but fear overpaying, Ramchandani says. In that case, consider an escalation clause, giving you the opportunity to increase your bid if another potential buyer is offering to pay more.

Just don't get carried away. Set a reasonable cap for yourself. And be sure you can afford your top price and that the house will appraise for that amount.


Tip 9. Be flexible.

Find out what might make the sellers' lives easier. They may want to move out as quickly as possible or may want to stay in the house a little longer, Hogg says.

Maybe they're eager to move across the country for a new job, or they have children in school and want to stay in the house to finish out the school year.

If you can, agree to adjust the closing date to meet their needs. Or consider closing and then renting the house back to them for a set period of time.

"Giving the seller the ability to not have to move twice can get your offer to the top of the pile," Hogg says.