“Highest and Best: How to win the bidding war when purchasing or renting a new home”
You finally found it! The home or apartment of your dreams! Unfortunately, you’re not the only one that found it…
If you’re planning to purchase or rent a new home, especially during peak season and if the property appeals to a wide market due to its features or price, there will most likely be multiple offers or applications to contend with. In this article, I’m going to break it down into six key factors that will come into play in any multiple offer situation and how you can increase your chances of winning the bidding war, or avoiding it altogether. The six key factors are timing, price, terms, your credentials, other offers, and your level of interest. Each plays their own individual role, but it is always the combination of these that will determine the outcome. The only exception to this will be an apartment that is rented through a management company that works on a first come first serve basis, in which case, your timing and credentials (and sometimes terms) will be the only variables in getting the apartment.
Timing is the number one factor in actually avoiding a multiple offer situation but can also play its part during the bidding war. In many cases, it is also the key factor in which you have the most control over. If you’re able to submit your offer or application a day or more before anyone else does, you increase your chances of them accepting it before any others are taken into consideration. As soon as you see a new property come on the market that interests you, go see it as soon as humanly possible!
Many people have to lose out on one or more properties before they’re ready to be aggressive, which can be frustrating, take up a lot of valuable time, and often can put you in a precarious position. The best way to avoid this is to be as well informed on the current market as possible, so that you are prepared to be able to make a quick and confident decision.
Lastly, have all necessary documents ready. Filling out an application or an offer to purchase contract really should only take a few minutes, but having all other necessary documents readily available will make this step go much faster. For an offer to purchase, you will either need to have your pre-approval letter available if you are financing or proof of funds if you are submitting a cash offer. For rental properties, you will need your ID, your current and previous landlord contact info, and your proof of income. Your proof of income can be your two most recent pay stubs, offer letter, W2, or proof of funds showing a substantial amount of money at your disposal for housing.
Price is fairly obvious and often the number one factor that will determine the outcome, especially if all else is equal. Before submitting your offer or application, your agent should inquire into how much action there has been on the subject property. Having this information will help you to determine how aggressive your initial offer should be. Keep in mind that even if there is very little action on the property, they could still receive multiple offers, so you should use your instincts and knowledge of the market to tailor your offer based on market values and your interest level. Sometimes being aggressive from the start will save you money in the end. If your initial offer is strong enough, the seller or landlord will often accept it without asking for highest and best, out of concern that they could lose other offers on the table and therefore their ability to leverage a higher price.
Another effective tool at your disposal is an escalation clause. This clause essentially states that if anyone submits an offer higher than your initial offer, you will pay X amount more than the highest offer, up to X amount. For example, your initial offer is $300,000, and your escalation clause states that you will pay $1,000 more than the highest offer received from anyone else, and will cap at $320,000. If another offer of $310,000 is received, then you are offering $311,000. If someone offers $321,000, then of course your maximum offer has been eclipsed. If using this clause, be sure that it is carefully drafted, as there are other conditions that should be clarified such as applying only to bona fide offers, competing on the basis of net proceeds, etc. This can be used for rentals as well, but keep in mind, some sellers and landlords won’t accept escalation clauses.
Terms of the offer will be the other major determining factor. As “highest” refers to highest price, “best” refers to the most appealing terms of the contract. For sales, this boils down to the method of financing, contingencies (or lack thereof), and length of time needed to close. I’m sure you’ve heard the saying “cash is king”, which usually means that if you are financing, then you’re going to have to exceed the cash offer by a good amount and have very appealing terms in order to contend. As far as contingencies and length of time until close goes, generally, the fewer contingencies and faster the close, the better. If you’re limited by your financing, you might decide to add an “As-is Clause”, which means that you will take care of any minor repairs (mostly cosmetic), however, if the inspection reveals that the condition of the real estate is unacceptable, meaning big ticket items needing repair or replaced, you are still able to cancel or renegotiate the contract.
For renting, items such as a more preferable move in date, lease length, pet situation, or requests for improvements could sway the landlord’s decision. Generally, an earlier move in date, longer lease, and fewer pets are preferred by landlords. If another applicant is requesting for them to paint the apartment and you are not, then that will give you a huge advantage.
Your credentials won’t really be a factor in a multiple offer situation when buying a home, as you’ve already gone through the pre-approval process for the loan and determined your eligibility for financing. However, they will be a factor in a multiple application situation on a rental property. If there is a drastic difference between credit scores, income, job stability, and landlord references, the landlord will always favor the strongest applicants. If all are in the same ballpark, then it will come down to price and terms.
Other offers on the table are obviously a huge factor, since this is who you are competing with. This is really the only component you don’t have any control over, so it is a bit like playing poker when trying to predict what the other offers are going to be. As I mentioned before, your agent should be able to provide some insight and help to understand what it’s going to take to be the victor. How many offers are on the table and whether they are cash or financing is a good place to start. For rentals, you should try to find out what the landlord cares more about: price, move-in date, lease length, etc.
Level of interest. The value of anything is determined by how much someone is willing to pay for it. Most of us are limited by our resources: the loan amount you’re approved for, the funds you have available, or your rent to income ratio. If those aren’t a factor, then it really boils down to how much you want the property. Is this a one of a kind property that is absolutely perfect for you and your family, or are there other properties out there that will satisfy your needs and desires just the same? Determining the absolute maximum amount you’ll pay for a given property before you’ll walk away from it can be a very difficult decision, so I suggest giving this a lot of thought as early on in the process as possible. If you’re not the only one making this decision, this is certainly something that should be discussed in depth beforehand.
Multiple offer situations can be discouraging and stressful, but if you’re prepared and you’re working with an experienced realtor, then you are in better position than most to effectively win the bidding war at the price and terms you’ll be happy with. Or better yet, your preparedness and your experienced realtor might give you enough of an edge to avoid the bidding war altogether!
If you are planning to purchase or rent a new home in Chicago or surrounding neighborhoods, feel free to call me anytime and I’d be happy to assist you with any initial questions and help you begin the process of finding a new home.
Kyle Aldrich
912.401.3914
[email protected]