How to Win a Bidding War on a House

How to Make a Competitive Offer on a House

Winning a bidding war has everything to do with convincing a seller that you're the best buyer they're going to find. A recent TD Bank survey found that 19% of competitive bidders were prepared to offer up to $50,000 more than the asking price of a home. It likely isn't the best strategy to present an offer that's at or below the home's asking price, as most sellers will be drawn to higher bids. Of course, offering too much right out of the gate could win you the bid but leave you paying more than you'd like. Bidding above asking can be especially prohibitive if your offer exceeds your mortgage lender's appraisal. In this case, you may have to cover the difference in cash before the lender will approve the transaction.

An experienced real estate agent or broker who's familiar with your local market can help gauge the seller and clarify what a competitive offer looks like. Some questions to ask yourself include:

• Are there any competing bids?
• Are there many other similar properties on the market, or is this property one-of-a-kind?
• Are you prepared to offer enough to meet, and likely exceed, the fair market value of the home? A trusted real estate agent should be able to clue you in to average market prices.

Get a Preapproval Letter

Coming to the negotiation with a preapproval letter in hand shows the seller that you're serious about closing the deal—and that you're financially prepared to do so. Think of the mortgage preapproval process as the first step toward getting a home loan. It involves a thorough review of your finances, which includes your income, assets and credit information. The lender will then provide a letter that states your anticipated loan amount and interest rate based on the information you've provided.

Having a preapproval letter puts muscle behind your offer because it tells the seller that you're in a strong position to secure financing and have a lender ready to extend the funds to you. If they accept your offer, you'll still need to undergo the formal mortgage application process, but getting preapproved beforehand can help speed things along. What's more, most sellers won't even consider your offer unless you've been preapproved.

Make an Offer Over the Asking Price

When there are multiple bids on the table, dialing up your offer can help you stand out from the competition. In some cases, sealing the deal may require a bid that's only a few thousand dollars over the asking price, which shouldn't increase your monthly payment too much when you spread that out over a 15- or 30-year mortgage.

This strategy can certainly catch a seller's attention, but it's wise to keep your emotions in check to avoid overbidding to the point that you break your budget. Even if you have a preapproval letter for a certain amount, that doesn't mean you ultimately have to borrow that much. Think in terms of your projected monthly payment. When considering how much house you can afford, a common rule of thumb is to keep your monthly housing expenses at or below 28% of your gross (pretax) monthly income.

Limit the Contingencies

During traditional home sales, buyers can make offers that are contingent upon certain requirements being met first—like selling their current home before closing on the new one, for example. Other contingencies allow a buyer to back out of a real estate transaction if they're unable to secure financing, or an appraisal reveals that the home's fair market value is lower than their offer. Contingencies can take many forms, but they're often related to inspections, appraisals, financing and insurance.

Doing away with contingencies could tip the scales in your favor during a bidding war. From the seller's point of view, it can make the deal more appealing, as a smoother and less complicated transaction generally leads to an easier and quicker closing.

Just keep in mind that contingencies are designed to protect buyers, so eliminating them does come with some risk. An inspection contingency, for instance, gives the buyer an out if they aren't satisfied with home inspection results. Waiving this contingency could come back to bite you if the home ends up requiring costly repairs or renovations. A real estate attorney can best advise you in navigating contingencies for a specific offer.

Make an All-Cash Offer

If you're financially able, an all-cash offer can give you a serious leg up in a bidding war. Unlike buyers who need to finance the transaction, cash buyers are able to close the deal without needing final approval from a mortgage lender. This can accelerate the process and set the stage for a much quicker sale—which can be very attractive to sellers as mortgage applications can take up to 60 days to process.

Cash offers are often prioritized even if they aren't as high as other non-cash offers. Before draining your accounts to pay for a home in cash, however, consider your financial big picture. Will making a cash offer deplete your emergency fund or drive you into credit card debt? If you're withdrawing from a tax-advantaged retirement account like a 401(k) and you're under 59½, you'll also have to pay taxes on that money plus a 10% penalty. These are important details to consider before making an all-cash offer.

The Bottom Line

No two sellers are alike, which means that every bidding war is different. No matter what, getting your financial house in order before buying a home is the best way to go. Doing so can enable you to navigate related expenses with ease, from covering your down payment and mortgage fees to addressing home repairs and maintenance. Remember, you can review your credit reports from all three credit bureaus through AnnualCreditReport.com to see where you stand in the eyes of lenders. Experian can help you prep your credit ahead of a home sale. By creating an Experian account, you can check your free credit report and credit score, which is a great first step toward securing a low interest rate on a home mortgage.