How to win a home bidding war

September 1, 2021, 12:30 AM UTC

DeVon Chandler’s clients knew this was the house.

With four bedrooms, a big backyard, and an open floor plan, the suburban Chicago home was ready to go.

So, Chandler, a real estate agent with Compass, got to work with his hopeful clients. They quickly came up with an offer to buy the house for $45,000 over the listing price, a more than 10% premium. To get the deal done, Chandler’s clients were willing to even cover the seller’s closing costs and to pay half of their tax bill for the prior year.

But then, it hit: No thanks. The sellers got a better offer.

Home buyers have found themselves often in the trenches of bidding wars over the past 18 months. A perfect storm of rock-bottom interest rates, the economy reopening from the pandemic, and low numbers of homes for sale has resulted in what can only be described as a gold-rush-like frenzy where buyers are moving as quickly and aggressively as need be to buy a house—even if it means cutting out some of the hallmark features of the home-buying process.

“It’s almost without a shadow of a doubt: If it’s a home that’s updated [or] move-in ready with a good amount of living space, that thing’s going to have multiple offers,” Chandler told Fortune of listings in suburban Chicago. Chandler’s clients ultimately ended up landing the house after the previously higher bid fell through, providing them with some added leverage in the negotiations that led to the end sale coming in at about $25,000 above the original offer, not $45,000.

Data from Zillow show that homes listed for sale have been jumping off the market at staggering rates for much of the past year, often for well above their list prices. More than half of home listings in the U.S. were pending a sale in less than one week during the first quarter, versus just 30% in the same period of 2020, according to Zillow. Adding to the complications is the fact that buyers are seemingly willing to offer more than the asking price, with 49% of homes that sold in the second quarter going for above their initial list price, Zillow economic data analyst Nicole Bachaud said. Before the pandemic, only about 17% of homes would end up selling for above their first listing price.

Winning a bidding war in a competitive market can be tricky. Perhaps the most well-known strategy for at least making an offer more competitive is cutting contingencies like attorney review periods or even home inspections. But Chandler is wary of doing so, particularly for home inspections as it could open buyers up to flooding, roofing repairs, and other issues that weren’t known beforehand. Instead, Chandler recommends his clients first consider playing around with the thousands of dollars in earnest money that is included in the deal. Earnest money is, in effect, a deposit that buyers put down before the deal closes. Escalation clauses may also represent another tool for prospective buyers. The clause allows the buyer to indicate to the seller that they will up their bid, if another offer tops their own—typically to a certain point. But, in a market where houses are sometimes selling faster than the sign can go up in the front lawn, Chandler says it can be more beneficial to go in with the highest bid possible right out the gate.

The most likely way to win out in a battle of home buying one-upmanship is a relatively simple concept, though: cash.

A report from Redfin released in March found that homebuyers increased their odds of winning a home bidding war by 290% when using all-cash offers. The analysis used data from offers written by Redfin agents between July 2020 and February 2021. In fact, the report found that waiving contingencies like inspections and including escalation clauses had no “significant impact” on the outcome of the bidding, but that is because such strategies have become so commonplace, Redfin said.

Greg McBride, chief financial analyst at Bankrate, questions whether engaging in a bidding war is worthwhile altogether right now. A steady supply of houses has started to hit the market in recent months, helping satisfy some of the outsized demand from prospective buyers and ultimately shift the bidding war phenomenon. In July, Redfin agents faced competition on 60.1% of the home offers they wrote—the lowest amount since January. But it remains higher than the 57.9% “bidding-war rate” seen a year earlier, the Redfin report notes.

“If you find yourself having to outbid other perspective buyers, waive contingencies, or forgo an inspection, you might just be better off walking away,” McBride told Fortune. “Making the biggest financial commitment of your life under duress is not a recipe for success.”

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