Here’s how to negotiate in a bidding war
Economists love a seller’s market. It’s the perfect example of a demand and supply scenario. And it also means bidding wars are a common occurrence.
Where supply is scarce and demand is high, prices are bound to shoot upward. In a real estate market, when the number of houses with ‘For Sale’ signs is less than the number of prospective buyers, get ready for a spirited competition.
What does this mean? The ball is in your court if you’re a seller. Even so, it’s not uncommon for sellers to overplay their hands and lose out on great deals during bidding wars. Quoting the Peter Parker principle here, “With great power comes great responsibility.”
While negotiating a property sale in a bidding war, you can’t be reckless. If you’re lucky to receive multiple offers on your property, negotiating is akin to performing a delicate dance until you close the deal.
Know your prospective buyers
For each buyer, collect as much information as necessary.
- How are they planning to pay: cash or financing?
- If they’re opting for mortgages, do you have their preapproval letters from established financial institutions?
- What is their debt-to-income ratio?
- Are they flexible on the closing date?
This will help you choose the best buyer. Moreover, if the deal falls through, you’ll have good backup buyers to look into.
Understand that the highest offer is not always the best offer
Does the highest offer on your home include financing or is it all cash? A cash offer is usually a lot stronger than the one that involves financing as the former will take less time to close.
On top of that, if the financial profile of the prospective buyer is doubtful (hint: look at their credit score), they may not be able to secure their financing at all. Hence, you should consider a lower bid that’s willing to pay cash for your home.
Determine what your home is worth
During a bidding war, you may receive an offer that’s way higher than the list price of your home. You may be thrilled to think about the profit you’ll make from this property sale.
But a problem may arise if the market value of your home doesn’t justify the amount offered by the buyer. When your prospective purchaser approaches a lender, a home appraisal follows soon after.
Lenders do this to make sound business decisions – to ensure your home is worth that much before funding the loan. If you receive a low appraisal, the buyer will not obtain the loan and the deal will fall out.
The higher you go over your home’s actual market value, the more likely you will run into problems during the home appraisal. Hence, it’s extremely important to determine your home’s real value before you move forward with a deal.
Take a close look at contingencies
In order to win the deal, a prospect may waive some contingencies.
- Appraisal contingency: when the home appraises for less than the amount offered, or if financing falls through, etc.
- Home sale contingency: when buyers indicate they must first sell their current home, usually within a 30- to 60-day window
- Financing contingency: when buyers discover they don’t qualify for the requisite home loan
- Home inspections: when a major repair or other significant expense is uncovered
If you can draw a contract without any contingencies, you’re golden. It may even be better than your highest bidder. The secret to navigating a bidding war and sealing the best deal? Price your home right and understand prospective buyers’ profiles.