There are 101 articles out there that share different strategies on how to win the bidding war in real estate, but no one seems to talk about the most important factor… making sure your buyers are fully prepared for the current real estate market and that they are ready to put their best foot forward when there are multiple offers. Learn how to prepare your buyers for a bidding war in just a few simple steps:
- 1 – Understanding the Buyer’s Knowledge of Current Market
- 2 – Building Buyer’s Confidence in You + Their Decision to Buy
- 3 – Sharing Real Estate Market Stats with Buyer
4 – Helping Them Understand How Bidding Wars are Won
- How to Use Special Clauses (Escalation Clause, Appraisal Gap, etc)
- 5 – Crafting a Winnng Offer that Works for Your Buyer
Understanding Buyer’s Knowledge of Current Market
The first thing we highly recommend is that you have an HONEST conversation with your home buyer client. It starts by asking them some questions to find out what they know about the current market and what their expectations are.
Quite often the potential buyer may have a skewed view of the real estate market. Maybe they purchased several homes before and never paid more than the asking price. Or their friends purchased an investment property (with cash) and were able to get $20,000 off the asking price. Many are getting feedback from friends and family outside their local market and assume that’s the way it works everywhere. By asking them a series of questions, you’ll have a much better view of their opinion about the market overall.
Be sure to ask:
- What have you heard about the current real estate market?
- Do you have any friends or family who purchased a home recently? And if so what was their experience like?
- How are you feeling about the home search? (i.e. stressed, excited, worried, etc)
- Do you think we’ll have to make offers on multiple homes? What are your expectations?
- As we go through this process is there anything specific that I can do to make this as easy/fun/stress-free as possible?
Once you have the answers to these questions, you’ll have a much better idea of how to proceed through the next steps.
Building Buyer’s Confidence in You + Their Decision to Buy
Now that they’ve shared so much with you, it’s time to build their confidence in you AND their decision to purchase a home. Here are a few things you can do…
Reinforce their decision that now is a good time to buy a home (assuming that it is). For example, you could share stories about past clients who won the bidding war last year, and while they paid over the asking price, they’ve already built up over $40,000 in equity in the home.
Share your market knowledge and highlight current trends in the neighborhood(s) they are interested in.
Share recent successes with them so they know you are capable of helping them win in a multiple offer situation. Say something like “the last couple I worked with got their dream house on the first try. There were 7 other offers, but they used every strategy I recommended and it worked like a charm!”
Helping your buyers feel great about the possibility of buying a home that’s going to grow in value and choosing a Realtor who will help them win the bidding war is key.
Review the Real Estate Market Statistics
Most real estate agents just share market stats verbally. If you can share a print-out of the recent home sales from your local MLS, your buyers will be able to see the data for themselves – and just not take your word for it.
When you go into your MLS, select homes that sold in the last 90 to 120 days in the neighborhood or school district your clients are most interested in. If there is a wide range of prices in the neighborhood, be sure to narrow it down to homes that sold in the $350K to $425K range, for example.
Make an extra copy of the report so that your clients can take it home with them and study the numbers. If needed, make notes next to the homes that sold for way under asking due to major structural issues, flood plain, etc.
How Bidding Wars are Won: It’s All About the Seller
The key to winning in a multiple offer situation is understanding the “other side.”
Let your buyers know that home sellers are under pressure too. If they get multiple offers on their home, they have to pick the one that looks like it will make it to the closing table.
If they select the wrong one and the buyer backs out of an offer after a few days or weeks, many sellers lose much of their leverage and typically can’t generate another bidding war for their home. Why does this happen? Once the home has been on the market for several weeks, as there isn’t as much of a sense of urgency with other buyers and/or the buyers think there must have been something wrong with the property and that’s why the buyer backed out.
Let your buyer clients know that your goal is to make sure that your offer is presented in a way that will build confidence in the seller. We want the seller to know that you really, really want the house and aren’t going to back out over a small repair.
Elements of a Winning Offer
When it comes to pulling together a winning offer, there are multiple roads you can take. Here are some of the most common, but you don’t have to do all of them. Every situation in real estate is unique, so you have to craft your offer in a way that is appropriate for the specific situation.
- From a local, reputable lender
- Ideally your buyers should submit all paperwork to underwriting so they are fully approved
- If needed, use an escalation clause
- Waive the financing contingency or shorten the timeframe
- Removed, shortened, or buyer willing to make up the difference between sale and appraisal price
Repairs / Inspection
- Offer to buy home “as is” with the right to inspect
- Shorten inspection timeframe
Offer money if buyer backs out for any reason
- Option money or earnest money non-refundable after a certain number of days
Free Rent-Back or Moving Costs
- Seller is allowed to stay in the home for xx number of days after closing
- Buyer pays sellers moving or closing costs (rare)
- Appeals to the sellers’ emotions
- Buyer Covers Own Closing Costs
How to Use Special Clauses in the Offer
Depending on where you are located, special clauses to the contract may be referred to as “Special Stipulations”, “Addendums” or some variation of the two. Most state-approved Purchase and Sale Agreements have a section that allows you to write in additional terms to the contract.
When there is a multiple offer situation and you’re submitting an offer, there are several clauses you can add to the contract to make it more attractive to the seller and listing agent:
- Appraisal Gap Clause
- Escalation Clause
- Inspection / Repair Clause
Appraisal Gap Clause
This is used when your buyer is willing (and able) to cover the gap between the contract price and the appraised value.
For example, if the buyer offers $525,000 for the home and the lender appraisal comes in at $505,000, the buyer would need to bring another $20,000 to the closing table, in addition to their downpayment and closing costs.
The Appraisal Gap clause guarantees the seller that the buyer will cover the difference between the appraised value and the contract price.
If your buyer has limited funds, you can also add a cap to the clause, stating that the buyer agrees to cover the difference between the appraisal price and purchase price up to $15,000, for example.
This clause is used to protect your buyer from over-bidding on a home in a multiple offer situation. While escalation clauses vary significantly, the general clause has a few basic components:
- The buyer’s original offering price
- How much will that price be escalated above any other competitive bid?
- What is the maximum amount the purchase price can reach in case of multiple offers?
- Request proof of the other highest offer
Example of how Escalation Clauses Work
Buyer Bob offers $200,000 for a home. His real estate agent adds an escalation clause that, in the case of a higher competing offer, Buyer Bob agrees to pay $2,000 over the highest offer – up to a maximum purchase price of $223,000.
If no other offers are submitted, Buyer Bob’s offer remains at $200,000.
When Buyer Katie offers $205,000, then Buyer Bob’s offer would automatically escalate to $2,000 above that, bringing Bob’s offer to $207,000.
If Buyer Bryan offers $225,000 for the home, then Brown’s maximum of $223,000 will be exceeded, and Bryan will have the top offer.
Please note that this doesn’t mean Buyer Bryan automatically wins the bidding war. The listing agent and seller have to look at the other terms in the contract (i.e. closing date, contingencies, downpayment, etc) to see which offer they feel most comfortable accepting.
Inspection / Repair Clause
Helping the seller understand that the buyer is not going to back out of the contract over a minor repair is key. Many agents add a clause that states the buyer will purchase the property “as is” with the right to inspect the home. Others may include a clause that states “Buyer shall not request repairs during the Due Diligence Period (or Home Inspection Period) with the exception of major undisclosed issue(s) discovered in the inspection.”
Most buyers are comfortable using this clause, assuming that the home isn’t 80 years old, in disrepair or the buyers don’t have the financial means to make expensive repairs. It’s important to talk through all of these options with your buyer in order to submit those winning offers.
Crafting a Winning Offer that Works for the Buyer
When you prepare your buyers for a bidding war, help them understand that you don’t need to do all of the items listed in the section above, but that you’re going to walk through each one together and discuss what they feel most comfortable doing.
Let them know that their lender is also part of the team and that we will have to make sure that the lender is on board with whatever offer strategy you agree upon.
The lender may also have some creative options that will give the buyer some flexibility when it comes to the offer price and/or appraisal issues.
Summary | Prepare Your Buyers for a Bidding War
The inventory shortage issue isn’t going to resolve itself anytime soon. As a real estate professional, you need to have honest conversations and truly understand the needs of your home buyer clients. Once you’ve established that trust, you can help them make some informed decisions and fully prepare your buyers for a bidding war.
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