Mystoura “Misty” Afolabi, a real estate agent in the Los Angeles area, was working with a young family for more than a year, trying to find them a home. But every time they saw a house they liked, they were outbid.
Then in March, the couple decided to bid on a house even before they had a chance to see it.
The two-bedroom, two-bath property was listed at $585,000, well below market value – a tactic increasingly used to trigger bidding wars in a super-competitive, pandemic housing market.
The couple offered $620,000, or $35,000 above asking. Their offer was rejected.
“We couldn’t believe it,” says Afolabi, an agent for Redfin.
However, the homeowners, who had received 32 other offers, reached out to the five prospective buyers with the highest bids, including Afolabi’s clients, and asked them to come up with their best offer.
Having made the shortlist, the young couple, who have three kids, decided to see the house.
“We met with the seller’s families, and both families got along really well,” says Afolabi. “They loved the house even more.”
The couple sent in their next offer at $650,000 with reduced time frames on inspection, appraisal, and loans. They increased their down payment to 50% from the standard 10% to 20%. They also wrote a letter to the sellers highlighting the specific things they had loved about the house.
Challenges of buying a home during COVID
Everyone knows that buying a home is a challenging process. Lately, the market in many places is extremely competitive and getting outbid is a problem.
In the end, the couple beat out the competition, some of whom were investors and developers offering all cash.
Nearly three-quarters (74%) of offers written by Redfin agents in April faced bidding wars, according to the real estate brokerage. On average, every home sold in March had nearly five offers on it, according to the National Association of Realtors.
Stacy Levey, a real estate broker with William Raveis who primarily sells in Westchester County, New York, says the bidding wars this time around are different from boom times past. One of her clients paid $300,000 above asking on a house listed for $1.065 million.
“What is different is the people’s appetite to go crazy,” says Levey. “Now everyone’s like, ‘I don’t care that I’m overpaying. …. Just sign me up anyways.’”
The housing market continued to break records in April, as home prices rose 21% year-over-year and the median home-sale price soared to $348,500, according to a report by Redfin.
The report also found that 48% of homes sold for more than their list price, with the average home selling for 1.4% more than the asking price.
But be warned. “Winning is not everything if one goes way beyond budget,” says Lawrence Yun, the chief economist at the National Association of Realtors. “One should have normal cash flow left over.”
Here are tips to win a bidding war, and some notes of caution:
Getting preapproved for a mortgage is an important first step in the home-buying process because it gives you an idea of how much you can borrow and how much home you can afford.
The process could even shed light on potential problems that could prevent you from getting a mortgage so you can address those issues before purchasing a home.
“It also shows the seller and their real estate agent that you’re a serious potential buyer who obtains the borrowing power to back up a purchase offer,” says Andy Taylor, general manager of Credit Karma Home. “You’ve basically done everything that would typically go into getting the real loan.”
It is important to research what homes are selling for in the market and if your budget is realistic. It might mean looking at home prices below your budget so that when they eventually get bid up, you can still afford it.
Think through exactly what your budget is.
“What are your must-haves? What are your nice-to-haves?’ says Daryl Fairweather, the chief economist for Redfin. “How much do you value different pieces of a home? How much are you willing to pay for more square footage versus a bigger backyard?”
Be prepared to present as complete a memo as you can when you make an offer, with the names of your lawyer, home inspector and pool inspector and a note that they’re ready to go. Shortening times for the various steps in a home inspection will go a long way in making your offer attractive to a seller.
“You should say in your memo, ‘I’m going to inspect your pool with let’s say, Sunrise Pools and, here’s a date. I already have an appointment. If you pick me, I’ll have an inspection tomorrow morning so I can sign a contract quickly,” Levey says.
Gone are the days when buyers were renegotiating on everything, says Levey.
Now it’s reserved only for issues involving structural damage.
“If a pool is leaking, we’re going to discuss it. If the septic is no longer functioning, we’ll have to discuss it, or if there’s mold in the house, it will have to be taken care of,” says Levey. “But you can’t bring up a broken window. You should have seen that before you made the offer..”
The terms are as important as the price itself. The more flexible you can be with the closing date, the better you will look in comparison to other potential buyers.
Often the sellers are in the process of buying a home themselves. It helps to be flexible around move dates.
“I know buyers who offered the homeowners rent-free stay for two months while they found a new home,” says Levey.
“Be aware that it’s easy to get swept up in a really competitive market, so try not to fall in love too quickly because that can lead you to do something irrational,” says Fairweather. “Stick to what your budget was. You don’t want to pay more than what you can afford.”
Pace yourself Fairweather advises. “If you are unsuccessful, and keep losing out on bidding wars, it might be a good idea to take a break, reset and go in with fresh eyes.”
Swapna Venugopal Ramaswamy is the Housing and Economy reporter for USA TODAY. Follow her on Twitter @SwapnaVenugopal