In California, bidding wars are the norm when it comes to purchasing a home. Sellers appreciate the ease of selling and the array of options to choose from. But for buyers, bidding wars are frustrating and anxiety-producing.
According to an analysis of offers written by Redfin agents in 2016 and 2017, the bidding war strategies most likely to lead to the seller accepting their client’s offer over another are a(n):
- all-cash offer, which improves the offer’s chances by 97%;
- waived financing contingency, which improves the offer’s chances by 58%; and
- personal letter to the seller, which improves the offer’s chances by 52%.
On the other hand, the inclusion of a pre-inspection and/or a waived inspection contingency (a bad idea anyway) had no significant impact on the offer’s chance of being accepted. Further, in some competitive markets it has become commonplace for the seller to order a pre-inspection and share it with all interested buyers so everyone is on the same page when bidding.
What this ranking tells us is that buyers reliant on financing are put at a serious disadvantage when competing with cash-heavy buyers or investors. One way buyers who need financing can improve their chances is to waive the financing contingency — but how does that work?
Some lenders offer an advance guarantee of financing by going through a more rigorous pre-approval process before the escrow process begins. This fully-underwritten pre-approval letter will allow your buyer to waive the financing contingency and improve their standing among other buyers. It’s a good idea to have your buyer look into this option if they’re buying in a competitive market.
Another strategy not mentioned here is including an escalation clause, which lists the buyer’s offer with the caveat that the buyer will beat any higher offer up to a certain number. These have significant drawbacks.
An escalation clause should only be used in dire circumstances — when the buyer is very serious about buying the home and the buyer’s agent is certain there will be other competitive offers. The reason being, an escalation clause puts the buyer in a vulnerable position, since the seller now knows how high they are willing to go to secure the home. Thus, the seller may counter at a higher price, expecting the buyer to meet their highest price point laid out in the escalation clause.
If the buyer wants the home badly enough to accept the likelihood of paying this top price, then an escalation clause just may be worth it to improve their chances.
A better way to enact this same strategy is to have a conversation with your buyer, find out their top price, and be a living, breathing escalation clause for your client in conversation with the seller’s agent. This way, the seller doesn’t have the buyer’s top dollar figure in writing, but the buyer can still improve their chances by not losing out to a slightly higher offer when they were willing and able to beat it.
Finally, when a buyer loses out despite their best efforts, see if the seller is willing to accept their offer as a backup offer. In case the first accepted offer falls through, the backup buyer will be ready to step in. This is beneficial for the buyer and seller alike, since the backup buyer won’t have to compete with other buyers if the home comes back on the market — and the seller doesn’t have to face the potential monetary loss due to the stigma of a home returned the market.
Agents and brokers — what are your tried and true strategies for winning a bidding war? Share your experience in the comments below!