Bidding Wars in Real Estate - What, Why, and How to Win
In the real estate world, bidding wars are what create the most excitement, anticipation, and anxiety in the entire home-buying process. Many buyers have been here before: you find your dream home, submit an offer, and then discover that other buyers want the same property.
A bidding war ensues. It’s a whirlwind of competing offers, escalating prices, and a battle to secure the buyer’s place as a rightful homeowner. Only one buyer wins.
So, why does the situation escalate to this point in the first place? And how can you best position yourself to come out on top? Our team of experts is here to shed some light on the subject.\
Understanding Bidding Wars
At their core, bidding wars on homes are competitions between multiple buyers all vying for the same property. They compete against each other by making increasingly higher bids.
Typically, bidding wars occur when a desirable home hits the market, capturing the attention of several buyers simultaneously. A bidding war starts with a buyer making an initial bid on a home, and other interested buyers follow suit. Each bidder aims to outbid the others to secure the property, often resulting in a quick escalation of the property's price.
Bidding wars are influenced by economic conditions, demographic shifts, housing policies, and market dynamics. In the last 100 years, the end of World War II and the market boom in the early 2000s marked two of the most competitive housing markets to date, and bidding wars were common.
More recently, the COVID-19 pandemic has had an immense impact on the housing market. Remote work encouraged homeowners to search for more spacious living situations or led people to reevaluate their lifestyles altogether, sending many into the suburbs. These consistent buying patterns coupled with low mortgage rates have made bidding wars increasingly commonplace today, and it doesn’t look like they’ll be stopping anytime soon.
What Causes A Bidding War in Real Estate?
One common catalyst is scarcity. Without a surplus of high-quality properties, the housing market becomes competitive. It’s Econ 101! When demand surpasses the supply, buyers are forced to compete for limited options. In the housing market, limited options inevitably lead to bidding wars.
Another cause is limited contingencies. Contingencies are the needs that the seller must meet to keep the buyer interested. Examples of common contingencies are home inspections, mortgage approvals, or the sale of another home. Buyers with numerous contingencies may be seen as unfavorable, as they have higher standards or more needs to be met by sellers. Multiple buyers may limit their contingencies to make their offer more competitive, in turn increasing the likelihood of a bidding war.
Markets with low mortgage rates have a habit of increasing competitiveness and encouraging bidding wars, too. Lower rates mean that more buyers have the financial means necessary to compete, widening the pool of interested buyers even further.
Of course, unique or highly sought-after properties often attract multiple offers that spark competition. Homes that are in desirable locations, like great school districts, or with exceptional features or a compelling history, create the necessary conditions for intense bidding wars.
Be prepared: Check the list of competitive housing markets to find out if you’re at high risk for a bidding war!
The Role of Emotional Attachment
Emotions always play a role in fueling bidding wars. Often, when a buyer makes a bid, they have spent a long time searching for that property and have envisioned themselves and their families living in the space. Developing an emotional attachment to a property is inevitable when a buyer finally finds a property that ticks all their boxes!
When the property matches the mood board that a buyer has been building inside their head, they are willing to go above and beyond. They’ll likely feel ready to do almost anything to secure the property, even if that means offering more than the property's appraised value. These emotions will push prices beyond initial expectations. While this may be great for the seller, it ends up putting the buyer even more on edge.
Consequences and Strategies
Bidding wars have consequences for both buyers and sellers. On one hand, sellers benefit because they maximize their profit. On the other, buyers face financial strain as they push their limits trying to win a bidding war.
To navigate a bidding war to the best of their ability, buyers should aim to establish a clear budget, set a maximum offer, and maintain open communication with their real estate agent.
Local real estate agents are well-equipped to understand internal market dynamics and tested strategies that help buyers act swiftly and confidently. During a bidding war, an experienced real estate agent will give buyers a much-needed competitive edge.
Whether or not a buyer chooses to work alongside a real estate agent, it’s prudent to do some personal research on how to win a bidding war on a house, to stay prepared for anything that might happen.
The Aftermath…
Bidding wars happen quickly, so always prepare in advance. The experience can leave emotional scars for the losers and financial wounds for the winners, but remember that real estate markets are ever-changing. More opportunities will arise for buyers who didn’t close on their ideal property. For those who are unsuccessful, it’s crucial to be positive and stay motivated as the search continues.
It’s no secret that today’s housing market is fierce. Find out exactly what winning a bidding war in real estate takes. Take a look at our free guide on How to Win a Bidding War to stay prepped and ready for competition.
For all other inquiries, please get in touch with our award-winning team of experts. We live here. We work here. We know Pittsburgh.