6
How to Handle a Bidding War
I have been warning my buyers for years about what I call “The EBay Mistake.” It is natural to get caught up in the competition for a house; losing stinks. But, when winning over-rides your financial sense, you lose. If you understand the basis of this article, you understand bidding wars.
If you want to see for yourself that people behave this way, go to EBay. Choose a “perfect” item, like box of pens. (Perfect, in this sense, means that one box of pens is exactly like another box of pens. It is a perfect comparable: pens = pens.) Watch a couple of auctions and compare to the “buy it now” price for the same pens. It won’t take long to see someone start at $.01 and go on to overpay.
If another buyer is making an offer on the house or condo you want, you are in a bidding war. A seller’s agent with any sense will pit you against the competition to get the best price for the seller.
As a buyer’s agent, I have to take the “hurry up” call seriously. I wish I could call a boycott of bidding wars for the duration of the season. But I can’t; I follow the instructions of my clients. So, when you buy a house in the heat of battle, you must plan ahead to avoid overpaying.
Which houses sell quickly and why?
The factors that separate the places that are swarmed and those that get no offers the first week are:
1. Location
2. Price
3. Staging/presentation
In that order.
Location: There are only so many houses in specific neighborhoods. This creates a pent-up demand and uneven supply/demand balance. If you want a three- or four-bedroom house in the quiet part of Lexington, or a three-bedroom condo within a four-block walk to the Red Line, or a large single family house with a yard in any town that has mostly small single family houses and small yards, you are likely to run into other buyers seeking the same thing.
Price: Pricing houses below their market value in order to attract bargain hunters works when demand is high. Before the snow stopped falling in March 2015, I heard a tale of a house selling for $50,000 over asking price. I asked the tale-bearer whether the house had started underpriced, he reluctantly said, “yes.” When I asked how much underpriced he said, “I don’t know.” If you don’t know what the fair market value of a house is before you make an offer, prepare to be hosed.
Staging and Presentation: When you see a place at a busy open house, it is easy for staging to deceive you. Staging makes up for some flaws in a property. A well stage place can feel bigger, brighter, and quieter than it will be when you move in.
How do you know when you need to make an offer the first weekend?
When a seller’s agent says “Eighty-five parties came through last week,” I hear “Eighty-five parties rejected this house at this price.” A swarm of buyers at an open house does not always lead to a bidding war. How can you discern if it is the real thing, or just a fantasy of the seller or the seller’s agents?
Watch the other buyers.
Real buyers are serious in manner. They go in the basement. They are looking at the house, not the stuff in the house. They are discussing furniture placement. They are asking questions about the house. They are meeting with their agents outside to talk.
Sight seers are casual in manner. They are having fun. They are joking around about style or personal items. Sometimes, you’ll see these people taunting the agent running the open house. They behave like the buyers in the movie American Beauty (who mocked the agent’s description of the back yard). If you what you are watching is a clump of nosy neighbors, you may see them adjourn to another house on the street.
If you see two or more parties that look serious in the time you are at the open house, the sellers may have multiple offers.
Look at the house.
If the house is competitively priced, well located, a useful size, and in good condition, it is a candidate for a quick sale.
Well located: Great commuter spots and toney neighborhoods draw a crowd.
Competitively priced: Agents are slightly underpricing housing. This, they hope, will draw buyer(s) who will lose their head(s) in competition.
Useful size: Condos that are bigger than average for an area and houses that are right-sized for a family with a couple of children are popular.
Condition: If a place is renovated and attractive, it will draw a crowd.
If one of those dimensions is off, the likelihood of a bidding war goes down. Properties that are overpriced from the start miss out on bidding war momentum. Houses in bad locations, or ones that are a little too small, or ones that need work get rejected by more of the potential buyers. The houses will still sell, but for a reduced price.
To figure out what the demand is for a particular place, your agent studies the sale time for similar properties this season. This gives some data on whether this neighborhood or type of property is “hot.”
Buyer demand also increases when there is a recent article or post about real estate that discusses high demand or rising prices or rising interest rates. These perceptions increase the panic of buyers and makes some more irrational.
How do I buy in a bidding war without losing my shirt?
- Establish a maximum price that you are willing to pay for a specific house. Do not go over that.
- Maintain control of what you offer
- Treat the counter-offer as you would any other counter-offer. Do not get caught up in how many other people are also making offers.
Before making any offer, our agents establish a fair market value and discuss this with you. Then together, we plan the negotiation. This planning includes a starting price that is likely to keep your offer in competition. Then a final price that you choose to not exceed. Keeping these figures in mind help you ignore the competition.
You must ignore the cues that feed your need to win. One of the most harmful sentences in real estate is “On the scale of things, a few thousand dollars is nothing.” If you hear it, repeat to yourself, “This is not the only house I can live in. This is not the only house I can live in…”
Houses are all different, but almost everyone can find more than one that is “perfect” for them. (Perfect, in this sense, means that it fits your life.)
Most importantly, tune out messages that will make you desperate. This is too big a decision to do in a state of fear. Consider the long-term results of your decision and choose well. Getting a house that doesn’t suit you will cost you more in the long run.
- Buy for the long term whenever possible. Starter homes waste your money because of transaction costs.
- When house-hunting, do not accept something you can’t change that will interfere with your daily happiness.
- When you go to make an Offer, have the research handy that tell you what the top price the market is bearing for a place like this one. Do not pay too much; you will hate yourself for it in a couple of years.
- When you go to make an Offer, calculate your Principle, Interest, Tax and Insurance PITI at the price you are offering to pay. Add another one percent per year to that mortgage payment for repairs. Do not pay too much; you will hate yourself for it in a couple of years.
King Solomon asked his advisers for a phrase to help him modulate his emotions. When he was sad, he wanted to remember happiness; when he was happy, he wanted to modulate it with sadness. His advisers made him a ring. Inside it said, “This, too, shall pass.”
