With mortgage rates at record-lows and more time being spent at home due to the pandemic, the demand for real estate has gone way up. A property bidding war is now common throughout the country. This article will discuss some strategies on how you can win a property bidding war in a financially prudent way.
Recently, I found a new property with panoramic ocean views all the way out in the Central Sunset/Parkside district of San Francisco. It has four bedrooms, four bathrooms, was recently renovated, 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 sometimes foggy out there, but the views, oh my. The views are amazing if you can find a home on the west side of the hill facing the ocean.
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 in a property bidding war!
The winning bidder was 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 was absolutely ridiculous. I don’t have that kind of money laying around. Note to self: must work harder.
Here are my strategies for winning a property bidding war. You actually don’t want to pay top dollar because that means nobody else was willing to pay your price. Instead, you want to win a property bidding war through relationship-building and other means.
Four Strategies To Win A Property Bidding War
1) Don’t use a realtor / real estate 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 pay 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. However, if the agent is a veteran and reputable plus you have experience, you can save a lot of money.
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?
Do Your Due Diligence
For first-time homebuyers, not using an agent to buy a property is 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 Redfin 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.
If you really want, you can hire a real estate attorney to help you with the transaction. He or she is often helpful in identify red flags and strategies for negotiation. That said, hiring a real estate attorney is not necessary if you are pursing a straightforward transaction.
2) Dangle the carrot for future business.
There’s nothing that gets a real estate agent more excited than receiving an exclusive listing, especially in a strong 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 strategy is 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. They don’t have to follow my 30/30/3 rule for home buying because their parents are hooking them up!
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. They 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.
3) Go with a no financing contingency offer.
A 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.
The fear of a high Days on Market count is one of the reasons why sellers like doing a pocket listing. With a pocket listing, there is no DoM count. Further, sellers can try to sell on the down low and not get embarrassed if they fail to get a great price.
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.
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. They are you perfect target.
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. 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.
An out-of-town or a part-time agent won’t have the massive connections as in-town agents. Therefore, demand may be less for his or her listing. The out-of-town agent also won’t have the pricing confidence. This means you have more room to negotiate.
Always Stay Disciplined When Buying Property
There is one more strategy for helping you win a property bidding war. That strategy is writing a real estate love letter. The goal of the letter is to create a personal connection with the seller. You hope the seller will look upon you favorably versus a buyer who doesn’t bother to make a connection. I’ve had great success with writing beautifully crafted letters in the past to save 2-5% off the sales price.
Property makes people go crazy for some reason. Buying a home can get very emotional, especially for parents or soon-to-be parents. There is this natural nesting desire once you have kids.
I felt a strong desire to provide as nice a home as possible for my son when he was born in 2017. Then when my daughter was born at the end of 2019, I felt the same way about buying an even bigger home.
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.
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