Bidding War Strategies

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Overview:

The real estate market is red hot. In metropolitan centers, suburban cities, small communities, and even the countryside, the demand for housing, space, and undeveloped property is high. Homes are selling fast, and they are going for well above the initial asking price.

Low inventory and high demand have created the perfect mixture for a hot market, causing more bidding wars than we have ever seen. It can be frustrating if you are trying to find a home, but there are ways to win your next bidding war.

But first, let’s explore why the market is so hot in the first place…

Why are Bidding Wars so Common Right Now?

It seems like we have a “perfect storm” (for lack of a better term), creating a hot market in real estate. There isn’t a single reason why the market is so hot; rather, there’s a list of reasons for the state of the industry.

For one, lumber prices have increased significantly. Lumber prices have increased as much as 300% according to some sources, making new homes, a usual outlet for inventory pressure, less affordable to homebuyers. While building permits are up, starts to construction are actually down. This is due to the uncertainty of costs for available building materials. It seems, essentially, that companies are preparing to build, but waiting for lumber prices to level off before starting.

Part of the issue for lumber prices are COVID-related supply chain restrictions. While restrictions are starting to lift, it is still difficult to get supplies for homebuilding, al least quickly and at an affordable price.

These construction problems have caused homes for first-time buyers (usually smaller, more affordable properties) to come in at the cost of construction, which is currently high. Until this problem is addressed, you’ll see the trend continue.

Low inventory and high demand is one of the top concerns for the market. There are numerous restrictions, including fires that burned down lumber mills in Oregon and California. Trade wars, profiteering by providers, and countless other factors are contributing to a low inventory at a time when demand is high.

The truth is, you can’t do much about the current nature of the real estate market. But you can prepare yourself with bidding war strategies that may help you secure the home of your dreams!

Bidding War Strategies: How to Win the Home of Your Dreams

Use To-Be-Determined (TBD) for Approval

Instead of finding a home, then going to the lender for approval on the purchase (which is dependent on the house itself), a TBD approval moves the loan as far as possible without actually knowing which property is being bought.

This benefits virtually everyone involved, including the buyer, seller, and real estate agent. Agents know they are showing the property to a viable candidate, sellers know the deal will be closed with relative swiftness, and buyers have greater confidence because they know their offer has added heft.

Use a 2-to-1 Buydown Mortgage on a New Home

A 2-to-1 is a mortgage-loan option where the seller or home builder reduces the buyer’s interest rate for the first two years of the loan. Usually offered by lenders to connect new-home builders and buyers, these programs knock down the initial monthly payments so you can build equity as you ease into your new payments.

The specific details will vary, but essentially you’ll get a lower price on the first 24 months (give or take) for your loan, leading to better affordability at the beginning of homeownership, a time when finances are often tight. Using this option can help expand your housing selection and may help you avoid bidding wars entirely. (More options, after all, mean less pressure to buy.)

Shorter Inspection, Repair Period

Inspections take time. They cost money. They hold up the home-buying process. Inspectors can also be backlogged with homes, especially in the spring and summer, further adding to the total closing time. Despite all that, we can’t advocate for skipping the inspection; there’s just too much at stake.

We can, however, recommend a shorter inspection period.

Expediting the inspection period, and eliminating unnecessary or frivolous inspections can help you close the deal faster, making your offer more attractive to sellers.

You can also speed the process by not including repairs less than a certain amount as a contingency on your offer. For example, you may state that you’ll only request repairs over $3,000; anything estimated below that amount you will handle yourself. This will eliminate many small-scale repairs that can delay a sale while still ensuring major issues, like roof replacements and foundational repairs, are handled before you take possession.

Use an Escalation Clause

In today’s market, it’s typical for a seller to get multiple offers for a home. As a buyer, it can be hard to make the right bid, as you often only get one shot at making an offer. However, you can use an escalation clause to address this situation.

In essence, an escalation clause is simply a written statement that you will offer a higher amount if the seller receives a legitimate bid that is above yours. For example, you may offer to pay $400,000 for a home with an escalation clause stating that if you are outbid, you would be willing to go up to $425,000.

Write a Buyer’s Letter

Sometimes a seller can be motivated by more than just dollars and cents. Crafting a well-written buyer’s letter, which highlights your desire to purchase the home, whether you plan to raise your family there, or just live there for years to come, can make the difference.

There are many “dos” and “don’ts” for a buyer’s letter, but in general you should describe what you love about the house and why. Avoid descriptions about how you plan to remodel, which can come off, even when unintended, as insulting to the seller.

Reliable Support for Your Next Purchase!

We believe an informed borrower is a successful borrower. Contact our team today and you’ll get excellent advice and support so you can choose the right loan for your specific needs!

 

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