Four Strategies For Increasing Your Chances Of Winning A Property Bidding War

Playhouse Real EstateThe San Francisco real estate market is absolutely absurd. I found a new property with panoramic ocean views all the way out in the Central Sunset/Parkside district. It has four bedrooms, four bathrooms, was renovated in 2006, and is roughly 2,200 square feet. The Central Sunset/Parkside district is a middle class neighborhood roughly 25-30 minutes away from downtown San Francisco by car (45 minutes by express bus). It’s often cold and foggy out there, but the views, oh my, the views are amazing if you can find a home on a hill.

I decided to bid 27% above asking all “cash” for the property. My bid would be a record in that area for this size home, which wasn’t something I was feeling too good about. But instead of winning, I got blown out of the water! The winning bidders were a retired couple who offered 50% above asking and a 10 day close. My heart was gutted as this was going to be my “forever home” with ocean views. But at 50% over asking, their price is absolutely ridiculous and I don’t have that kind of money laying around. Note to self: must work harder.

I’m not sure if I should share my four strategies for how to increase your chances of winning a property bidding war since I’m in the middle of my own property hunt. But I’ll tell them to you anyway given I always want to share lessons I’ve learned in difficult situations. I’m sure there are people in Southern California, New York City, Las Vegas, and Miami right now who are frustrated beyond belief with the amount of overbidding going on out there. I feel your pain, and I’m here to help.

FOUR PROPERTY BUYING STRATEGIES FOR THE WIN

1) Don’t use an agent. What do you mean, don’t use an agent? What I mean is don’t use a buying agent given you can drive yourself around town and search for properties on the internet. Let’s say the typical real estate agent selling commission is 5%. The selling agent must give 2.5% to the buying agent for bringing them the buyer. On a $1 million property, that’s $25,000.

Instead of using a real estate agent to buy a property, simply ask the selling agent to represent you the buyer as well as the seller. Of course, having him/her act as a dual agent may create immediate conflicts of interest, but if the agent is a veteran and reputable, I don’t see the harm. As a buyer, you immediately have at least an imbedded 2.5% price advantage over all your competition. Furthermore, the dual agent should do their fiduciary duty and tell you everything that’s going on directly, not from hearsay.

If there is more conflict of interest, it could be at the seller’s expense since a dual agent could “hide” another buyer’s better offer from the seller because he/she might make more commission representing you. Typically in this situation, the dual agent’s manager will preside over the negotiation talks to make sure everything is properly executed. But again, who is really watching the manager?

For first time homebuyers, not using an agent to buy a property seems a little daunting. But like doing your own taxes, or figuring out how to buy your first plane ticket and travel alone across the country, you’ll figure it out if you try. Spend time reading all the disclosure documents. Go on Zillow to figure out the property taxes, the estimated value of the home, and when the property last sold. Get your own inspector to the property to see if there are any problems that need addressing. Review the title report and call the title company to make sure the owners do indeed own the property. At the end of the day, everything is a leap of faith.

Related: My Real Estate Agent Sucks

2) Dangle the carrot. There’s nothing that gets a real estate agent more excited than receiving an exclusive listing, especially in a hot market. Receiving a listing to sell a property not only guarantees them a 2.5% commission, but it also builds their selling resume, which is extremely important in getting more listings.

If you do have another piece of property, then I would highlight the property to the selling agent as something you are thinking of offloading IF there is a successful transaction between you and the property he/she is currently selling. Quid pro quo monsieur. This is clearly unfair to those who are trying to buy, but don’t have a carrot to dangle. But guess what? Life is unfair. There are 23 year old recent college graduates who are moving into million dollar condos because their parents are making the downpayment.

Like any wise business person, a real estate agent should estimate a customer’s lifetime value. The most successful agents buy and sell homes for the same individuals multiple times throughout their lives, and continue to buy and sell homes for their children as well. If you can present to the agent that you could be a fabulous long-term client, then you will have a huge advantage in winning their listing, especially if one of your properties is worth even more.

You should only promise giving them a listing if you really mean it. But there’s no harm in telling them you will strongly consider giving them one of your properties to sell if there’s a successful transaction.

Related: How Much Does It Cost To Buy Your Kid’s Way Into The Best Private Universities?

3) Go with a no financing contingency offer. As I’ve written in a previous post, no-contingency financing is a way to make yourself look as good as an all-cash offer. Your bank has already approved financing for the home when submitting an offer because they know you’re a good customer.

The number one concern a seller and selling agent has is a financing contingency. Having a 14-day financing contingency means that the buyer can walk away with his/her 3% earnest money deposit, and the entire deal for whatever reason they choose. If this happens, the home gets at least a temporary blemish as other buyers wonder why the winning bidder dropped out and also start to question what’s wrong with the property and the pricing.

Only go with no-contingency financing if you are absolutely certain you can afford the property and truly want to buy the property. Otherwise, it’s always good to have an out just in case anything happens e.g. lose your job, get cold feet, medical emergency, etc.

See: The No Financing Contingency All Cash Offer

4) Look for listings by out of town agents. Out of town agents are the odd-balls in the family. They don’t know anybody and everybody looks at them cock-eyed. There’s actually a lot of chitter-chatter that goes on behind the scenes in the real estate world. It’s one big clique. You are either in with the producers, or you’re out. If you are an out of town agent, you are really out and other agents tend to not give you a chance unless you some how have an amazing listing.

As a buyer, you don’t really care about real estate agent politics. What you care about is getting the best deal possible. This is where you dial up your efforts to look at all the online listings, go to all the Sunday and Tuesday open houses, and search specifically for listings with no pictures and firms that aren’t local.

ALWAYS STAY DISCIPLINED

Property makes people go crazy for some reason. Some of these bidding wars are absurd because there is such a huge spread between the winning bid and the second place bid. He or she who cares least, usually wins the most in any negotiation. Know your absolute bottom line number, and don’t cross it. If you end up losing a property in a bidding war, try not to worry too much because there is always something else that comes along.

It can be quite emotional when you are competing against multiple well-qualified buyers. And it can also get frustrating and draining losing out on property after property, especially the ones that meet everything on your wish list. Be careful not to let your emotions cloud your judgement.

Finding a property in a hot market is a numbers game. Get rejected enough, and you’ll eventually find something.

RECOMMENDATION FOR REAL ESTATE INVESTORS

Shop around for a mortgage. LendingTree Mortgage offers some of the lowest refinance and new mortgage rates because they have a huge network of lenders to provide mortgage loans and home equity lines of credit. If you’re looking to buy a new home or refinance an existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

Subscribe To Private Newsletter

Comments

  1. Austin says

    I tried the don’t use an agent idea in the past. A lot of the seller’s agents blew me off because they knew I wouldn’t enter into a term representation agreement.

    Texas’ standard contract has a 10 day option period, after earnest money is paid, in which a buyer can walk for any reason.

  2. krantcents says

    Staying discipline is key in a bidding war! I think finding out what is important to the seller is also important. One of my colleagues is retiring and moving to the Las Vegas area. They sold their home and it was important to them to be able to rent it back for 60 days. The clincher was renting it back for $50 per month.

    • Financial Samurai says

      Good reminder in any negotiation to find out what’s important to the seller beyond money. In my cases, all my sellers wanted was more money. I wrote a personal letter and provided proof of funds.

  3. insourcelife says

    I credit not having an agent with helping me snag a cheap foreclosure when I was one of the 4 bidders a couple of years ago. Went straight to the agent and she was happy to “put a word for me” whatever that means. Saved some money on my current house this way too since I came up with a figure I wanted to pay and then subtracted 3% from that since there is no agent to pay. They took it. Buyer agents just increase the transaction price so I try to avoid them if possible.

  4. Mr. 1500 says

    The wife and I are obsessed with real estate and these suggestions are right on the money. We tried #1 for our last attempted purchase, but were still outbid.

    I’ll throw another one out there too. Get a real estate license. The wife did this in 2 months through an online course. The cost was $700 and there are monthly fees for keeping the license, but we’ll easily make it all back with just 1 transaction. Whether we’re buying or selling, we’ll get about 2.8% of the price back to us. It’s also nice to be able to tour homes easily.

    The bad part is you have to work under a broker for 2 years who will take some of your profits. However, all of that is negotiable and she found a low fee one.

    PS: We’ll be in San Francisco/Yosemite next weekend! I love your corner of the world.

    • Financial Samurai says

      I’ve thought about the real estate license thing as well. But gosh darn it, that takes effort :) And then there’s the fact that the real estate industry here is so clicky.

      Hit me up when you’re in SF!

  5. Mr. Frugalwoods says

    San Francisco has to be the craziest US market at this point.

    Have you tried paying a bird dogger for your own leads? I know a few couples who are doing this now. Basically you pay someone who finds you people who are pre-market with their listing. You swoop in and buy for cash before competing.

    Are you in SF for work, or because it’s where you want to live the rest of your life? Seems like you could have a much higher standard of living in another big city like Chicago or Boston. Then again, SF is amazing. If not for the cost of living it’s where I would be.

    • Financial Samurai says

      Cool term I have never heard of before, so thanks for that.

      I feel a little miffed buying more property, and more property now that the market is hot. But, I didn’t have the liquidity to buy what I wanted two years ago, and my mantra is to buy when you can afford it (http://www.financialsamurai.com/the-best-time-to-buy-property-is-when-you-can-afford-it/)

      I LOVE, LOVE San Francisco. I’ve lived everywhere and have visited everywhere, and I truly don’t think there’s any place better in terms of lifestyle, weather, and job opportunities. I also love Hawaii, but Hawaii ocean view homes are equally expensive, but there are no six figure job opportunities there. So in a way, buying in SF is actually much more conservative than buying in Hawaii.

      To afford a $1 million mortgage at today’s rates, $150,000 suffices. Can’t make that in Hawaii easily, whereas there are plenty of $150K-$200K jobs in SF if you have over 10 years of experience.

      • JW says

        Sam,

        A million dollar mortgage on a $150,000 salary, are you serious? In SF?!

        A million dollar mortgage means you’re taking on a million dollar note and you think $150,000 annual income will “suffice”?

        It’ll certainly pay the mortgage but doesn’t leave much left over (what $3,000 a month) for all over living expenses?

        Gutsiest move I ever saw…

  6. Alex says

    I can verify the tip about using the selling agent as your own. Once I did that and the agent told me if I can hurry up with my offer, he would quickly show it to the sellers before another offer was expected to come in. He also told me how much “he thought” the offer should be for to win the property. In the end I lost it to a lower cash offer (verifying that tip too).

    It seems like SF is in a ridiculous RE bubble. You could sell your SF properties for big profit and live at Tahoe until it settles down.

    • Financial Samurai says

      “He thought” is definitely “he knows.”

      The SF property market is in a bubble. The question is, how much larger will the bubble get given we are still cheaper than other international cities BY FAR, and our tech/internet industry is booming so far.

      Maybe we’re in the 7th inning of a 10 inning game… and then a 10% correction.

      But when Manhattan common property trades at $1,500/sqft and SF common property trades at $800/sqft, while China’s capital account is opening up….. I don’t know if the bubble really bursts.

  7. whoanelly says

    Point #1 is interesting. Dual agent arrangements always made me leary. A long time ago I thought I lost a bid due to this. Coincidentally the other party was offering all cash and bid 1% higher than me (agent knew they had the ability to do so and I could not). So your argument works if you have alot of bargaining power (i.e. cash). The only downside I could see is that the seller could decide to reject a dual agent agreement since they risk losing out on a higher selling price. If the market is hot enough, they could decide to drop their agent and go with another. Which is why if you choose to have a selling agent represent you, you should only sign a very short term contract!

  8. Money Beagle says

    Yes, I would think that keeping emotion at bay has to be at the top of the list. If you see absurd offers, you need to be able to walk away and not get caught up in the heat of the moment, otherwise you could end up paying a lot more than you had originally planned and take yourself right out of ‘value’ into ‘loss’ territory in terms of your equity position in the home.

    • Financial Samurai says

      I’m glad the winning bidder was 17% higher than mine. It was easier to just forget about it as a result. If the winning bidder was 1-5% higher than my offer, I would be distraught………….. the spread was $275,000. That is absurd.

  9. J says

    Sam- sorry you lost your house. I hope another one comes along soon.
    Do you think the market will settle down? I live in LA and my area of the valley is pretty hot right now. Nothing like SF tho. We want to move to SB and the prices seem to be going up much faster there- more in line with SF I think.
    A financial planner once told me that a drop in the stock market usually goes hand in hand with a drop in real estate. I know you don’t have a crystal ball but what do you think is happening?

    • Financial Samurai says

      Thanks.

      I think the tech correction this year should cool down the housing market somewhat. Check out Twitter’s share price collapse for example.

      Or maybe the correction serves to make people want to buy property EVEN MORE because they want to be more diversified.

  10. Dan @ The Mad Real World says

    Wow those overbids are huge! Awesome article, thanks for sharing. I don’t know what I would do in that situation. In my area I stay away on a property with lots of buyer activity to avoid the bidding but it sounds like that may not be an option in your area if you want to get more property.

    I don’t believe you are saving the seller 2.5% by not using a seller’s agent. The listing agent would get that 2.5% along w their listing commission. I used to deal with listing agent directly in the hopes that they would steer the seller towards my offer because more commission. Unethical but there are many unethical realtors. It didn’t seem to help much and I met an agent I liked so I just use him now so he can at least get half the commission.

    When prices are high and I don’t see any deals I start sending out letters to homeowners, advertising, etc.

      • Dan @ The Mad Real World says

        Somewhat. I sent out around 300 letters and got calls from 15-20 people maybe. I keep a list of contact info for the owners of the buildings that I am interested in. Have not purchased any but there is one I may in the future.

        I enjoyed doing it and was a great feeling when I got my first response to the letters. I would definitely recommend giving it a try. You could check if your city keeps a spreadsheet of all homes. Mine did and they told me where to download it. I used it for my mailings.

        I was mailing out for 5-8 unit buildings.

        You can email me if you want.

  11. The First Million is the Hardest says

    There are only a few select areas where you’ll see bidding wars around here, but I think those are good tips. Especially 1 & 2. I don’t know if there’s anything that will get an agent on your side faster than the promise of more commission.

  12. Derek@LifeAndMyFinances says

    I typically like to use a buyers agent because they can sniff out home sales before they even hit the market. My sister just put an offer in on a house and there has never even been a for sale sign in the front yard. If you go without a buyers agent, you might be missing out on deals and never know.

    • Financial Samurai says

      That’s true. Going with a top producer can be a very good idea who is well connected.

      For me, I’m a pretty aggressive hunter via the internet and in person b/c I have lots more time on my hands. I hustle to no end until I find something, and then I work my negotiations.

  13. Mrs. 1500 says

    In Colorado, there is no such thing as dual agency. The only way to represent both sides in a transaction is to be a Transaction Broker. There is no fiduciary duty with transaction brokerage, and the TB must disclose everything they know to both sides. They cannot advise price or terms, and there is no loyalty to either side.

    Any agent is required by law to present all offers, even if the offers are received after the property is under contract. Of course there are unscrupulous people in any field, but this is something that you can be disciplined for, if it is ever found out that you “hid” offers.

    Our city is in a huge boom, probably not like SF, though. Almost nothing sits on the market for any length of time. Even the duds go quickly. Entry level homes (less than $250,000) are snapped up within a day, no matter what the condition. The only properties that are sitting around are the above $600,000 houses. We have a 13-month inventory and very low demand.

    I think one of the best ways to find a house in a hot market is to drive around the areas you want to live in. Take a letter with you, stating that you are looking for a house, and if that person is thinking of selling, they should call you before they call a real estate agent. Play up the fees they can save if they sell without an agent, and emphasize that you aren’t looking to lowball them on their house. You wish to pay a fair price, and they can save tens of thousands of dollars in real estate fees if they sell directly to you. Most people will not call, but you are only looking for one house…

    Good luck!

    • Financial Samurai says

      I do like the letter approach. Seems like a numbers game that could work.

      Interesting in CO the agent has to show an offer even after you’ve gotten in contract. But, once you’re in contract with escrow, I would think it’s hard for either side to break it off without a penalty.

      I think the SF home inventory is at under 3 months in comparison to your 13 months btw. It is nuts (http://www.paragon-re.com/Market_overview/)

  14. Josh says

    Good advices in the post. With that said, I still sort of get a bit of a humble brag vibe here. The figures you list are not all that high for SF or NYC, but is at nosebleed levels for most of the country and probably for lot of your readers. Just curious is there a level at which you would you stop investing in residential real estate and just have a primary residence and maybe a vacation house and use your money for other things? Maybe at $20mil or $50mil?

    • Financial Samurai says

      $1.5 million is nothing close to $20-$50 million. Not sure how you make the leap. Not sure how losing out on a property is a humble brag either. If I won the property, maybe. But you’re visiting my house now, so it’s up to you to accept my perspective.

      That said, I changed the figures to percentages in the post. Does that work better for you?

      • Josh says

        You’re free to write your content as you see best and deem most helpful to your readers. I forget how I found your site, but find your materials are very informative and helpful in my view. I commented earlier because you mentioned previously about advocating stealth wealth, but yet listed the dollar amounts of your own ability to having the financial wherewithal to spend relative high figure for a residential investment.

        As for the $20 to $50 mil amounts, these were net worth references. I was just curious in your opinion, at what net worth amount, if ever at all, does one stop looking at residential real estate as investments and start looking at other opportunities.

        • Financial Samurai says

          It really is a balance I struggle with regarding writing with authenticity and real examples and writing more amorphously.

          In SF, median home prices are at $1 million and they aren’t that great. If I were to write about buying a $2 million dollar+ place I would probably be more vague.

          Can you share with me your emotions when you initially read my example and disappointment in loss? I want to better understand why my disappointment and loss was used by you to say that I’m bragging as that is something I wouldn’t do. I would feel empathetic instead.

          Tell me your property situation, age, income and location so I can better understand where you are coming from.

          • Josh says

            It was just a quick, innocuous observation, that’s all. From reading your post, I didn’t infer you were that disappointed from losing the bid. I don’t have any reason to doubt you if you said you were upset over losing the bid, but it didn’t come across that way to me from your writing at least. The figures you list, although are typical for SF real estate, is still very high compared to majority of the country. My comment was in no way gloating over a well off guy’s loss at all, but rather my initial first impression of your post, with the dollar figures mentioned it felt to me as perhaps akin to if one of the execs at twitter mentions “oh well, may have to downsize from 8 mil to 5 mil house after 30% stock drop in the recent week”.

            Emotionally, I didn’t feel anything particularly truthfully since I don’t know you personally, but more importantly since I didn’t think you were that interested in winning this bid. I just thought you were looking for an investment property and if this one didn’t work out, you’ll just find another one.

            I think it’s great you’ve done well for yourself. From your reading your blog, I particularly admire your courage to walk away from such a high compensated position in your 30s to pursue something you enjoy doing more. I know I’d be too frightened to do that at multi six figure income levels unless I absolutely hated my job with a passion.

            As for me, I’m in my late 30s, in high tech, homeowner in San Jose since 2009, about 20% north of your average net worth chart. Good luck with your search. I enjoy reading your posts.

            • Financial Samurai says

              Maybe it’s because I’m always positive and trying to find the silver lining in everything, like using this loss to write a helpful post for example. I did use the words “felt gutted” and “forever home” in my intro though.

              It is also good feedback that even though you are north of my NW charts, and live in San Jose where you are familiar with what’s going on in the area though that you still responded with a different perception.

              This is good feedback as I look to make my posts more generic, and less personal for business reasons.

  15. Scott @ Youthful Investor says

    With that amount of money trading hands (excess of $1 million) I would think patience might be the most important strategy here. Yes, you might want to win a bidding war but, at the expense of overpaying or worse? Attachment to a property could lead to emotional bidding. Of course if it’s the dream home one might want it regardless but, is it worth the cost? How many other homes are out there that would suffice or better? There’s a lot of selection.

    • Financial Samurai says

      Everything is relative. $1-$1.5 million sadly can’t buy you a great deal here in SF. In Manhattan, I don’t think anything less than $5 million can buy one a town home.

      But yes, patience is key!

  16. John C @ Action Economics says

    Excellent Advice. I used a dual agent when we purchased both our houses and it worked out well. I’m glad I haven’t had to deal with a bidding war like that, I can see how it can get out of hand, luckily my market is no where near as hot as where you are at. I have a friend who is looking to buy a house in a similar market where he keeps ending up in bidding wars (and losing). I will be forwarding this article onto him.

  17. rob says

    Interesting ideas but where I live Germany it’s exactly the opposite, Real Estate has mostly flat lined for the last 10 -15 years, but if you’re investing for yield than this is the place, we just in the process of buying two more properties in Frankfurt, they caught my eye because they are listed directly no agent (here the buyer pays the 6%) so a savings right there secondly the yields are 5.6 and 5.5 percent. I just got a mortgage quote 2.75% plus 1.35% principal (mortgages are quite different here). So my plan is to make the mortgage payments from our regular pay and invest the rental income, while I won’t be able to invest 100% of the income (carrying 3 mortgages and still paying rent is a bit of a stretch) I can make a good portion.

    I ran the numbers and we’re much further ahead than if we simply paid off the mortgage as fast as possible, being a high tax country means we want to avoid too much income, at least until my Wife retires in 12 years.

    oh yeah one of the really odd things about German Real Estate is that while Germany is tenants pay the bulk of the running costs!

  18. Jef Miles says

    Hey Sam,

    Looks like the US market is really heating up again, or is this San Fran only?
    Here down under (in Australia) the prices are getting crazy too with a median house price of ~650k here is Sydney

  19. Jack says

    Interesting tips, especially the one about out of town agents.

    Personally, I got my place at a reasonable price making an as-is offer. It limits your negotiating room, but I’d seen their inspection report and the place was remodeled so likely didn’t need much work. My inspection did find one thing we ended up negotiating about but otherwise was smooth sailing.

    When it comes time to sell, if someone makes me an as-is offer, I’m certainly going to give them more attention since it indicates desire and wanting to get the deal done without extra hassle.

  20. Jacob says

    Dallas / Fort Worth area is pretty hot right now and almost no inventory on the market. We just bought a house, and our original offer was the 2nd offer (2nd day on the market) and was around 3% over asking. But, wow, 50% over list price seems crazy!

    The other issue lately all around dfw seems to be the appraisals. Obviously if you’re paying cash, it doesn’t matter, but I’ve read that it seems like appraisals aren’t keeping up with the sticker shock over the last year of competitive bidding on homes in the area.

  21. SNengr says

    Wow… you must really like SF. We bought a 10 year old house in the suburbs of Kansas City at the height of the bubble for $100/sqft. New construction high end housing runs about $150/sqft.
    My wife and I are both engineers and make a combined income of about $250k, which doesn’t seem like much, but our yearly expenses run $75k. I don’t feel our life style is overly frugal. We have a $1000/month food budget. We go on 3 vacations a year, 2 skiing in Colorado, and one warm weather destination (this year was Puerto Rico). We own our house and pay cash for new cars (and drive them for 10 years). The cost of living is so much lower in the Midwest than on the coasts.
    I am sure most east and west coast people would never consider living in the Midwest. In the end, we all have the same restaurants, same sports, same theaters, same malls, so on and so on…. It’s true, we can’t snorkel in our back yard, but there is a 99.9% probability you can’t either. Maybe we will consider moving to an ocean front property when we retire and get old, around 40.

    • Financial Samurai says

      Yes, I definitely love SF for the weather, culture, food, nature, job market, and entrepreneurial spirit!

      I think it’s great everybody has their own preferences. Otherwise, places would be even more expensive!

Leave a Reply

Your email address will not be published. Required fields are marked *