What is a real estate bidding war, and why is it back in Metro Detroit?
It is a supply and demand issue. When there’s not enough supply for the demand, prices get pushed up. The way that this happens is often through bidding wars. If you are just starting to get out and look for homes, you probably are not aware of what has been happening lately. If you have been out looking and maybe even put in an offer or two you have already realized it's not as easy as just finding the perfect home. You have to WIN the perfect home.
When a lot of home buyers want the same property and write purchase offers for it, we have multiple offers. In some markets, multiple offers come in at or under list price (I have seen this in cooler markets). But when the realty market is an overheated sellers market, inventory is too low for the demand, prices rise with those multiple bids. Then you have bidding wars.
This can happen intentionally, as when home sellers knowingly under price the property to attract multiple buyers, or it can happen unintentionally, when the owner and agent priced the home in line with the comps and the market, but there’s an unexpected avalanche of interest. (The latter just happened to me when I priced a listing to be exactly in line with the market, but got 13 offers and a lot of overbidding.) Either way, the result is similar. Buyers up their price and sweeten their terms to win the deal.
Here’s what I have seen buyers do to win a competitive bid situation:
- Come in over list price
- usually the inspection period is very short, to assure the seller it’s a “done deal”
- if owner occupied, often there’s a free rent back to the seller of a month or two
- some buyers may offer to pay costs that customarily are paid by the seller, such as an owner’s policy of title insurance, the escrow fee, transfer taxes, and in some cases, even the commission
- most of the time, “CASH IS KING”, and the all cash offers will win the deal (or large down payments) – very hard for 20% down or less to compete against cash offers because they usually include an appraisal contingency (with prices escalating, many homes won’t appraise)
- many times we will see offers with no contingencies for inspections, loan, and appraisal – non-contingent offers can be dangerous, most of all if there are no presale disclosures or inspections
- In todays world where many homes are having appraisal issues because prices are going up faster than appraisals can keep up with, waiving your appraisal contingency or willing to pay $________ over the appraised value is one of the strongest things you can put in an offer
- In my opinion the strongest thing you can say or at least side by side with waiving your appraisal contingency is waiving your mortgage contingency
- most offers will come with proof of funds
- offers will have all the disclosures already signed too
- some will include a letter from the Realtor, the buyer or both – buyers may also include a photo, sometimes sellers will choose an offer based on emotions or they will say "these buyers just feel right for my home"
But let’s focus on the bidding part in particular for a moment. How is all of this a bidding war? Is it just that offers come in over the asking price? Yes, but sometimes even more is going on too. Let’s look at that now.
Sometimes an offer is submitted when it appears that there are only 2 or 3 others, but within a day there are 10 offers. That is a very different landscape! The buyer who submitted the offer earlier may submit a new offer, without even knowing what the prices are – often it’s just a new page 1 of the contract since that’s where the pricing information is.
As more offers pour in, the listing agent may tell the buyers’ agents what the status is. More buyers may “improve” their offer, essentially bidding up the price before there’s ever a presentation to the seller or a counter offer to be seen (or hoped for). The bidding can be self-inflicted, in other words.
Once the seller sees the offers, there may be a counter offer to one or more of the bids – though perhaps not. Sometimes the listing agent may call for "Highest and Best" with a deadline. Buyers should NOT count on the opportunity of getting a counter offer or Highest and Best deadline (a mistake I see all of the time). The old saying that “you only get one chance to make a first impression” counts here. Some sellers will simply pick the best offer and be done. Seeing a stack of contracts and all the ancillary documents can be overwhelming and exhausting for sellers – so many do not want to deal with countering a lot of them.
During the counter offer period, if it happens, some buyers may accept the seller’s price and terms. But some buyers will go a step further and up their offer and terms further – either in a new counter or yet again with a new page 1 of the contract. Here you really see “bidding wars” in action!
My buyer specialists are experts in bidding wars, because of how many offers we write. If you need any help feel free to shoot me an email email@example.com and I'll be glad to help or just comment below with any questions you may have.