Which Bidding War Strategies Are Most Effective?
By Rachel MusikerJanuary 18, 2018
Nearly one in four (23.6%) homes that sold in 2017 went for more than their asking price, up from 21.8 percent in 2016. These stats provide an indication of how competitive the market is, because prices are most likely to escalate when more than one buyer bids on the same home. But she who offers the highest price is not always the winner. It’s often a lot more complicated than that.
“I try to avoid the term ‘bidding war’ because there’s rarely any fighting, nor do traditional home sales take place in live auctions,” said Kyle Moss, a Redfin agent in Seattle. “Rather than prepare for battle, I help my clients gather and analyze as much information as we can about the home, the seller and the seller’s situation. I advise my buyers in crafting their strongest offer, both in terms of price, and in terms of earning the seller’s confidence that the transaction will close smoothly.”
Beyond offering the highest price, buyers have an array of strategies to consider, from offering all cash, if you’ve got it, to waiving the inspection, financing and appraisal contingencies. They are often used in various combinations, depending on the situation.
“I see each strategy as a lever we can pull to customize our offer so it meets the seller’s individual needs,” said Moss.
So if you’re thinking about buying a home in a competitive market, you should start to familiarize yourself with some of the strategies that can help your offer stand out. We recommend talking to your local agent to come up with the right combination of strategies for the home you’re bidding on or for the seller you’re trying to woo.
We looked to the data on about thousands of offers Redfin agents wrote in the last two years to see how the strategies we track affected buyers’ odds of winning a bidding war:
|Rank||Strategy||Improves a Competitive Offer’s Likelihood of Success by…||Improves a Competitive Offer’s Likelihood of Success in the Luxury Market (Top 10% by List Price) by…|
|#2||Waived Financing Contingency||58%||76%|
|#3||Personal Cover Letter||52%||No Significant Gain|
|#5||Pre-Inspection||No Significant Gain||No Significant Gain|
|#6||Waived Inspection Contingency||No Significant Gain||No Significant Gain|
Cash, of course, is king. All else equal, offering with all cash nearly doubles your chance of getting your offer accepted in a competitive situation. In the luxury market, which we defined as the top 10 percent of the market by list price for the purpose of this analysis, an all-cash offer increases a buyer’s odds of success more than fourfold.
“Cash gives buyers a leg up in the negotiation because it ensures the fastest and most seamless transaction, without the involvement of a loan or an appraisal, which, if things don’t go according to plan, can quickly stymy a deal or delay a closing, even for the most well-intentioned buyers,” said Redfin chief economist Nela Richardson.
Of course, not everyone has the luxury of making an all-cash offer. That’s where the financing contingency, which makes your offer dependent on your loan’s approval, can come in handy. Waiving it increases a buyer’s odds of success by 58 percent. It works by making an offer nearly as ready to close as an all-cash offer by guaranteeing that the buyer will come through with the money if their lender doesn’t. One way buyers who waive their financing contingency reduce their risk of winding up on the hook for the cash is by getting a fully-underwritten loan pre-approval from their lender before they submit their offer. Some companies, like Redfin’s wholly-owned mortgage company, Redfin Mortgage, offer a fully-underwritten pre-approval letter for their borrowers, but not all lenders can or will do this, so it’s an important question to ask when choosing a lender.
Fortunately for most buyers, cash is not the only way into a seller’s heart. We found that a personal letter from the buyer to the seller is nearly as effective at increasing the odds of bidding war success. Often referred to as “love letters,” they can forge a powerful connection between the buyer and seller, highlighting shared hobbies or interests, earning a seller’s compassion or trust, or ensuring that the home will be loved and cared for in the years to come.
For Redfin agent Tony Wright’s buyers, the personal letter ultimately resonated with the listing agent.
The letter introduced the five family members, including a seven-year-old son with severe disabilities, for whom the home’s accessible layout was a perfect fit and a rare find in Salem, Mass., a highly competitive Boston suburb. As his clients were finalizing their offer, Wright learned that there were several other offers being considered by the seller, which happened to be an investor group.
“I always advise my buyers to write personal letters–except when the seller is an investor–as those deals are all about the bottom line,” said Wright. “But in this case, my clients had already written a letter by the time we learned the seller was an investor, so we submitted it anyway. And I’m glad we did, because the letter tipped the scales in our favor, even though there were higher offers. The listing agent quickly responded saying that she had a background in special education, and to let the buyers know that if they brought their price up by $2,000, the home would be theirs.”
Waiving the inspection contingency and the pre-inspection, typically conducted to mitigate the buyer’s risk when waiving said contingency, come with no significant gain in the odds of winning a bidding war. But this won’t stop Redfin agents from advising their clients to use them in appropriate situations while considering the associated risks. Instead, the absence of an odds increase is more likely a reflection of the fact that these strategies are used in some of the most competitive situations in which the seller will only seriously consider offers that waive the inspection contingency.
“A waived inspection contingency is practically required for entry when bidding on a home in San Francisco and in extremely hot neighborhoods in other parts of the country,” Richardson said. “It becomes part of the local real estate culture in very competitive markets.”
“For nine out of every 10 homes I helped clients bid on last year, the seller hired an inspector to conduct a pre-inspection and shared the inspection report with interested buyers as part of the property disclosures,” said Miriam Westberg, a Redfin agent in San Francisco. “This has become common practice here because it makes things easier for sellers by encouraging buyers to waive the inspection contingency and reducing the likelihood of requests for repairs or credits. It also simplifies the process for buyers, who should still do some research and ask their own agent to ensure the seller has chosen a trusted inspector.”
Analysts used data on offers Redfin agents wrote in 2016 and 2017 that faced competition to determine how each bidding war strategy affected the associated offer’s odds of getting accepted.
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Posted on April 8, 2018 at 1:28 pm by Joni McClintock