Pros and cons of trying to win a bidding war

 In recent months, there have been a lot of articles written about how to win a bidding war, but few articles that looked at the pros and cons of these methods. All the articles have great tips for winning at any cost, but are there any downsides to some of these strategies?

After months of searching it looks like you have found your forever home!  You know what you want to offer and you’re ready to go.  You make your offer.  But, all of a sudden, you find yourself in a bidding war.  What can you do to snag that home before someone else does?

It is a seller’s market; inventory is tight, home prices are continuing to increase and interest rates could go up at any time.

If you are convinced that now is the time for you to make your move first, try not to panic.  Next, look over the strategies below and plan accordingly:

1.  Work with a real estate professional who has a solid track record and strong relationships with other agents to get inside information to make the deal.

Pros:  The right broker who is invested in the community in which the property is located might know more about the seller. The seller could have hot buttons to which only a locally connected agent could gain access. The right agent might know the circumstances around why the property is hitting the market. Maybe it’s a job transfer and there is a specific date that the sellers need to be gone. You could tailor your offer to that time frame if you are able. The more information you have, the better equipped you are for battle. Also, a great broker is a good negotiator no matter what inside information they have on the property.

Cons:  The only downside to working with a broker is that they have to be compensated for their work.  Whether they do a fabulous job for you or the bare minimum, you still have to pay the commission. Or do you? Most often the commission paid to your buyer agent is paid by the seller. The seller agrees to sell his house and pay a commission. That is customarily split between the buyer and seller agent.  The only time you would have to pay for you buyer agent is if there is no selling agent; most often found in For Sale by Owner properties.

2.  Get prequalified or preapproved.  Just make sure you get with a lender! There is a lot of misunderstanding about what these letters mean based on what they are called. A prequalification is an estimate of how much money you can get from a lender based on a conversation you had AND an examination of income, credit and employment documentation. Usually your lender will utilize an automated underwriting system as well, which is a computer telling you everything looks good and meets the criteria for the loan program you are applying for.  Now a preapproval is an amount for which you have tentatively been approved based on everything you need for the Prequalification, but an actual underwriter has reviewed your loan application and documentation.  A pre-approval is a stronger document and will give the seller more confidence in your ability to get financed.

Pros:  Having a true preapproval will show that you are serious.  Based on the information you provided to your lender, you are credit worthy and your bid should be strongly considered. 

Cons:  If you are preapproved for an amount that is lower than what the competitors bid you may need a new preapproval.  Keep your lender on call.  You really have to know who you are going to use for your loan before you begin the bidding process because in this market you need to know for sure that barring unforeseen circumstances you can get the funding to purchase the home. 

3.  Submit your bid with an offer to beat the highest bidder! In many cases, some offers now include an additional promise called an escalation clause to beat the highest bidder by a certain dollar amount. A seller in Laconia recently received an offer saying the buyers will beat the highest offer by $5,000. If your seller is strictly money oriented this might be the way to go! Many agents are not comfortable with escalation clauses, but the practice is certainly worth discussing with your agent.

Pros:  If you submit your offer with an escalation clause, you should be the highest bidder. 

Cons:  If you submit your offer with an escalation clause and you already were the highest bidder, you might just outbid yourself!  Also consider that if the property is under the value of your offer, your lender will lend on the value or purchase price, whichever is lower!  You will be on the hook for anything above the value out of your pocket. 

4.  Waive the home inspection (or offer to have a pre-home inspection) A home inspection is an important part of the home buying process, designed to help buyers learn up front any problems that require work or if there are necessary repairs that need to be made to the property.  If you have done your research on the property and feel confident that you can handle any major repairs that need to be done, then waiving the inspection could push your offer to the top of the pile. 

Pros: The main advantage to taking this path is that you shorten the sales time and most sellers will love this.  There will be no waiting to schedule a home inspection and no haggling on the sales prices to try to get the homeowners to make repairs.  If you are dealing with a newer property the likelihood of problems is minimal.  Older homes have more “hidden” issues and should have a home inspection.

Cons:  Just remember that if you agree to do it, there is no turning back! You have given your chance of halting the sale due to a serious structural issue or termite infestation away upon making this agreement.  As long as you are in a position to deal with major repairs should they arise, this could be an option for you.

From a lending standpoint, water tests on wells and appraisal-of-value inspections usually cannot be waived. We are seeing some approvals now that are waiving the appraisals with strong borrowers and good real estate areas.

If you are too nervous to go completely without an inspection, you might be able to set up a preinspection before you make the offer, but if there are 10 other offers with waived inspections this approach is not likely to work.

5.  Write a letter to the homeowners — In a hot area, you can set yourself apart from other buyers if your offer comes with a letter about why you are the best buyers for this home.  If you go this route, rely on your agent to guide you in structuring the letter. 

Pros:  Often people have an emotional attachment to their homes and they might enjoy getting to know a little about the next inhabitants. Sellers might appreciate knowing that you will love and cherish their home in the same way they did. Talk about yourself and your family, why you love the house, provide some compliments to the seller in the process.

Cons:  This is a great idea if your lifestyle is in complete harmony with that of the sellers.  What if your idea of what you want to do with the home horrifies them?  It could go the other way. If you take this route, keep it simple and assure them their beloved home will be well maintained and cherished.

Of course, none of these tactics is 100 percent guaranteed to make you the winner in a bidding war.  The biggest tip we have? Know when to walk away. After all, no house is completely perfect, and if you don't make this one yours, there's sure to be another that catches your eye ... maybe just around the corner. 

Keith Murray is a Senior Loan Officer with Mortgage Equity Partners. Contact him to discuss your real estate finance needs at 603-321-5764,  kmurray@meploans.com, or KeithMurayLoans.com