How To Prepare For Upcoming Bidding Wars When Buying A Home

Anticipating future trends can lead to smart investments. Drawing from my 20 years of real estate investing experience, I expect bidding wars to resurge in the housing market in 2024 and beyond.

The main reasons for the return of bidding wars in the housing market are as follows:

  • Growing pent-up demand since mid-2022, when the Fed began its aggressive 11-rate-hike cycle. Potential homebuyers decided to put their lives on hold and make do with their current living situations. However, eventually, life must go on.
  • Mortgage rates dropped like a rock after Jerome Powell's December 13, 2023 testimony inferring a pivot in 2024. There are now expectations for 3-6 rate cuts in 2024, which could help bring mortgage rates below 6% for the average 30-year fixed.
  • Still lower-than-average supply due to the locked-in effect of locking in the lowest mortgage rates in history from 2020 – 2021.
  • Increased demand for real estate due to the millennial generation well into their home buying and family formation years.

If you believe the real estate market will strengthen, as I do, consider dollar-cost averaging now. Check out Fundrise, which manages over $3.3 billion in equity by investing mostly in residential and industrial properties in the Sunbelt region. The Sunbelt has lower valuations and higher yields.

I Hate Getting Into A Bidding War

I decided to buy a home in 4Q2023 because my stocks had rebounded and a higher-end home I had been eyeing for 16 months came back on the market at a lower price. With high mortgage rates, I was able to buy with little competition.

My kids are 6 and 3, which means I only have 12 and 15 years left at home with them before they go to college. The best time to own the nicest house you can afford is when your kids are at home. You get to amortize the cost across more people while also providing greater comfort and joy to more people. After your kids leave, it is unlikely you will want to buy an even bigger and nicer home.

I was unwilling to wait until the perfect time to buy a new home because I refused to live a suboptimal life with the time I had left. I'm an older parent focused on living life to the maximum now.

Finally, I hate missing out on an ideal property. Getting into a bidding war is suboptimal because emotions can sometimes cause us to act irrationally and pay above market. Once the bidding wars happen, home prices tend to take a step up instead of a gradual increase.

Surprise! If you find a dream property, other people will too. I may have bought too early. However, I'd rather buy a little too early than a little too late.

10-year Treasury bond yield declining, meaning mortgage rates are declining, leading to bidding wars in 2024 and beyond
Mortgage rates decline along with the 10-year bond yield

How To Prepare For Upcoming Home Bidding Wars

I believe with 75% certainty the housing market is going to be strong in 1H 2024. The 25% doubt comes from the economy potentially going into a worse-than-expected recession. The Fed tends to be behind the curve. By the time the Fed cuts rates, the economy could be in trouble.

If you're unwilling to buy a home during the slow winter or during down markets, the best time of the year to get housing deals, here are ways to prepare if you plan to buy a house when bidding wars return.

1) Get pre-approved, not just pre-qualified

Don't delay getting pre-approved. Pre-approved is getting the bank to approve a specific loan amount so you can confidently buy a house. It involves a much deeper process than getting pre-qualified.

To get pre-qualified is much easier. The lender reviews everything and gives an estimate of how much the borrower can expect to receive. Pre-qualification can be done over the phone or online, and there's usually no cost involved. But getting pre-qualified doesn’t mean much to the seller.

To get pre-approved, the borrower must complete an official mortgage application as well as supply the lender with all the necessary documentation to perform an extensive credit and financial background check. The lender will then offer pre-approval up to a specified amount.

Once pre-approved, lenders will provide a conditional commitment in writing for an exact loan amount, allowing borrowers to look for homes at or below that price level. This puts borrowers at an advantage when dealing with a seller because they're one step closer to getting an actual mortgage.

prequalified versus pre-approved

2) Be ready to move fast.

New listings may attract multiple offers quickly. Be vigilant about new listings and be prepared to see homes and make offers promptly. A typical “hot home” stays on the market for two weeks and then goes into contract due to an artificially set deadline.

Prime properties on prime blocks in the best neighborhoods get swallowed up by family estates for generations. We're talking quiet streets, extra large lots, homes with views, and rare architecture. If you miss the window, the home will likely be gone for decades, if not forever.

Some hot homes get into contract even sooner as the seller decides to accept offers as they come. As a result, try to visit the home during the first open house. Even better is trying to see the property before it goes to market if your real estate agent has connections.

3) Line up escalation clauses.

Consider having your agent include an escalation clause in your offer to automatically bid higher up to a capped amount if other offers come in higher. Be careful with how much you're willing to pay. You don't want to pay so far above market where it will take years to be in the money.

Please stick to my home buying guide so you don't let emotions override your financial senses. Below is a chart that shows the income and net worth necessary to buy a home based on my 30/30/3 and net worth rules.

I would shoot for at least a combination of Reasonable Income + Ideal Net Worth or Ideal Income + Reasonable Net Worth. The best combination is obviously to earn the Ideal Income and have the Ideal Net Worth.

home buying guide by Financial Samurai - income and net worth required to comfortably buy a home, even during bidding wars

4) Highlight your offer strengths through writing.

Write a real estate love letter.

I cannot emphasize enough how powerful making a connection is with a seller by writing a letter. Selling a home can be even more emotional than buying a home, especially if you've owned the home for a long time. The more you can convince the seller to feel good about who they are selling to, the higher your chances.

In the letter, highlight your strong down payment amount, flexible move-in date, not requiring the sale of another home to buy the home, and commitment to closing escrow.

Most importantly, tell the seller your story. Find commonalities between you and the seller that go beyond money. A seller wants to sell to someone they like and trust.

5) Get pre-inspections done or potentially wave inspections.

Inspect the house as completely as possible before making an offer. Let's say the house will be on the market for two weeks with two open houses and two brokerage tours. Go to each one and inspect the house thoroughly on your own and with an experienced real estate professional who knows what to look for. The more hands and eyeballs you have, the better!

Test everything including all the faucets and showers to the washing machine and dryer, and whether or not the windows close properly. Your goal is to try and minimize the number of surprise fixes and costs after closing escrow.

With sufficient pre-inspections completed, you may feel confident enough to make a no-inspection contingency offer together with your no-financing contingency offer. No contingency offers are much more attractive. That said, if you are not an experienced real estate investor who doesn't know what to look for, you should include contingencies in your offer.

Although you will likely lose in a bidding war, it is important to protect yourself from buying a home that may overwhelm your finances.

6) Enhanced down payment and earnest money deposit amount.

Putting down more than 20% can signal you have cash reserves and are serious. The higher your down payment percentage, the more attractive you will look to the buyer. If you can pay all cash, even better.

In addition to making a larger-than-average down payment, consider offering to make a higher earnest money deposit, which currently averages 3%. The earnest money deposit is what the seller gets to collect if a buyer backs out after contingencies are removed.

If you are truly confident you want to buy the house, then putting down either a 3% earnest money deposit or a 10% earnest money deposit shouldn't matter to you. Just be sure you have thoroughly inspected the house multiple times and have your finances right beforehand.

7) Make a preemptive offer

Although a seller may set an offer date, you can always make an attractive preemptive offer based on your budget and favorite home-buying guide. The worst the seller can say is no.

Even if the listing agent says no to preemptive offers, the listing agent has a fiduciary duty to present all offers to their client as they are received. If you are the seller, it is nearly impossible to resist looking at a preemptive offer even if you say you won't accept one.

The preemptive offer is one of the best ways to avoid getting into a bidding war.

how does housing inventory for sale change when mortgage rates change - housing inventory declines when mortgage rates decline
Housing inventory has historically DECLINED when mortgage rates decline (green area)

8) Imagine the inverse of a dead market

It feels uncomfortable to be buying a house in a down market. With little-to-no competition, you feel like you might be walking into a booby trap.

Due to the strangeness of seemingly like the only one house shopping, you may end up not making an offer on any house because you're too scared. Instead, you decide to wait until the all-clear sign because you desire affirmation from other people wanting to buy what you want.

The reality is, often the best time to buy a home is when the majority of buyers are fearful. I experienced this first-hand when I visited open houses between April 15 – May 15, 2020, a month after lockdowns began. I ended up talking for hours over multiple sessions to the listing agent for the home I eventually bought because nobody else wanted to meet. Then the housing market took off in 2H2020.

If you've found your ideal home, it's time to imagine how it would sell during a strong market. How many buyers will come out of the woodwork to bid on your dream home and snatch it away?

I doubt I'd be able to afford my home if it was listed next spring 2024. With the NASDAQ up 43% in 2023, there's no way I could compete against a dual-income couple working at a place like Google with millions in RSUs.

The best way to avoid a bidding war is to not buy a home when everyone else wants to as well.

Don't Let Your Emotions Get The Best Of You When Submitting A Bid

The risk of paying far above the current market price during a bidding war is real. Essentially, your winning bid resets the market higher, which might be OK if the market keeps going up. Or it could be risky and leave you stuck.

If you win a bidding war, then you must deal with the “winner's curse,” which means nobody else was willing to pay what you paid. Hence, you need to hope the overall market continues to go up after you win.

The good news is that the chances of the housing market crashing right after you buy are low. However, if you buy in a down market, the market will unlikely turn higher right after closing either. Thankfully, over the long term, the housing market tends to go up.

If you lose a bidding war, stew with your disappointment for a while and then move on. There will always be another dream house waiting for you. When that time comes, hopefully, your finances will be in even better shape.

Reader Questions And Suggestions

Do you think bidding wars are coming back as the Fed cuts rates? Or do you think the housing market will stay lukewarm for a while longer? If you are expecting bidding wars to return, how are you preparing if you are a homebuyer or current owner? Why do buyers wait until everybody wants to buy a home until they buy?

If you believe the real estate market will strengthen, as I do, consider dollar-cost averaging now. Check out Fundrise, which manages over $3.3 billion in equity by investing mostly in residential and industrial properties in the Sunbelt region. The Sunbelt has lower valuations and higher yields. Financial Samurai is an investor.

Fundrise

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6 thoughts on “How To Prepare For Upcoming Bidding Wars When Buying A Home”

  1. Funny you bring this up, I just had this conversation with my wife.

    We have 4 rentals in Heartland America + our primary in So Cal. I just told my wife we are going to redo our HELOC and she looked at me and said, “really, again?” Our goal is to buy a vacation home that we can short term rent out as well, and eventually use as a retirement house in 30 years to spend summers in the mountains, (hopefully 10 years if our FIRE plans go better than expected).

    Why redo our heloc? We currently have a 200k HELOC through First Republic, now Chase. Our first is at a 37% LTV at 2.8%. We have a ton of untapped equity we cannot get to. My thought is go for the biggest HELOC we can, (should be able to get 500-600k, up to a 65% total LTV) so we can go into our next investment as a “cash” buyer. Between our actual cash, plus heloc, this will give us the ability to place aggressive offers, close quickly, and try to get a “deal”. Once closed I’ll cash out refi it to terms we like, and pay back the HELOC.

    Other reasons I love HELOCS- investment opportunity comes and stocks are down, and you need a quick 50-100k. (I’ve had to do this before). Does paying the high rate hurt? More so mentally than financially- but if it’s for a 30-60 day period while you are waiting for treasuries to payout or stocks to rebound, it really doesn’t cost you that much, and your opportunity cost is much more. Years ago it allowed us to buy our house we are in now as a non contingent buyer, without selling our other house first, which is the only reason we beat out the other 10+ offers, they were all contingent (our offer was not the highest just the best terms).

    I’m a huge HELOC fan- for good times and bad. The best part- they are free to get! No appraisal fees, no closing costs, etc.

  2. I’m curious to your thoughts on your first suggestion point – Getting Pre-Approved. If I want to be prepared and ready for the right property to be available, should I keep renewing a Pre-Approval continually? I assume most Pre-Approval Letters only are good for 90 days until they expire. Does it make sense to continue to provide updated documentation and undergo your credit being pulled every three months just to keep an approval letter always active? I’m wondering how others have viewed this when not needing to move in a specific timeline, but want to be ready if something of interest comes along – could be 3 months, could be 2 years.

    1. Yes; you have to constantly update your documents once the time has expired. The second and third time around won’t be as painful given you know the loan officer and filled out the basics.

  3. Hopefully the RE market will pick up in 2024! I have a property that I want to sell and have been prepping it for sale. Will wait on the sidelines till then!

  4. Tony Clifton

    This post makes perfect sense and is also what I am hearing from friends in Real Estate. I don’t have 20 years experience in Real Estate, I don’t work in Real Estate, but I have spent decades studying markets and market structures.

    Why did houses prices gap up 2020 – 2022 (25-40%) —-> Same reason Crypto, Growth Stocks, Animated GIFs, Collectables, any risk assets did. Zero Interest Rates, QE (MBS buying by US Govt), PPE loans, suspension of mortgage and student loans. All risk assets repriced higher because of these inputs, money had to go somewhere.

    in 2021, Every Home Owner that had a mortgage refinanced that mortgage at around 3.5%. I saw friends and family take equity out of their homes here to purchase additional houses for rentals or vacation homes. The money had to go somewhere.

    Now here is the riddle: Inflation is still running slightly above 3%, not under 2% as it did during the last 10 years. If inflation were under 2%, I could see the argument of housing prices returning to moving faster then baseline inflation. I know people think the difference between 2% and 3% is not that much – but said another way the inflation rate is 50% higher today than it was between the GFC and Covid. The market (prices) looks much different in an economy where we have 3% baseline inflation as opposed to < 2%. We cannot assume inflation rates are returning to 2010 – 2020 levels. And if inflation rates are going to be higher moving forward – interest rates are not going to come down to what those Home Owners refinanced their houses at in 2021. Essentially you had a pull forward of the entire decade + credit cycle in 2021.

    Interest rates go down, home owners refinance debt / liquify house equity, house prices are bid up…. repeat… as interest rates go down year after year continue the cycle.

    I don't think we are here anymore. Covid was the end of this 2010 – 2022 interests rates always go down cycle.

    The other argument is there are not enough houses…. but actually I'm not so sure it's just the same forces… the challenge is the declining interest rate and final zirp bubble cycle made it look like it was easy for home owners to become investors – leveraging up and buying multiple properties to capture equity gains and cash flows from rents and short term rentals. We cannot assume inflation rates are returning to 2010 – 2020 levels and we cannot assume the price of money will return to these levels. Interest rates don’t matter, until you have to pay them.

    If Home Owners are carrying debt at around 3.5% – why are they going to refinance at a higher rate? And if Home Owners do refinance at a higher rate – how exactly are housing prices going higher – where does the new money come from? House prices and the price of money are not fully understood.

    I think the future does not look like the past here… GLTA!

  5. I’ve read a lot about how having a mortgage pre-approval can be really beneficial for putting in a bid on a home. But holy smokes I had no idea that pre approval is not the same thing as being pre qualified. I feel like a lot of people use the terms interchangeably and like me probably don’t realize the differences between the two. Good to know thank you! It will be nice to see some strength come back in the real estate market.

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