Bidding wars can be the most challenging part of the Bay Area home buying process, especially in high-demand neighborhoods where multiple buyers compete for a single property. With the right approach and strategic moves, you can increase your chances of emerging as the winning bidder. This article will provide a comprehensive guide to navigating real estate bidding wars, and attempts to address the question if Bay Area bidding wars are fair to buyers.
Understanding Bay Area Bidding Wars
A bidding war occurs when two or more potential buyers compete to purchase the same property by increasing their bids. This can push the final selling price beyond the original asking price, particularly in a seller’s market where the demand for homes exceeds supply.
In this scenario, the buyers must act quickly and strategically to outbid their competitors. Their tactics may involve raising the offer price, waiving contingencies, or including certain concessions to make their offer more attractive to the seller.
Are Bay Area Bidding Wars Fair to Buyers?
Bay Area bidding wars, common in hot real estate markets like Los Gatos, Saratoga, Sunnyvale, Mountain View, Cupertino, Santa Clara, San Jose, Campbell, and many others, can be challenging for buyers. While bidding wars are typically a delight for sellers, it needs to be asked: are Bay Area bidding wars fair to buyers?
The honest answer is that bidding wars are a natural outcome of supply and demand dynamics, their perceived fairness varies among buyers depending on their experience, preparation, and outcomes in the process. As a buyer, you should expect that your REALTOR provides guidance and clear information can help you navigate these challenges more effectively.
Buyers ought to understand that the list price is equal to the sale price only 5-10% of the time, and that the sale price of a home may be much higher (and rarely much lower) than the list price. In fact, depending on how hot the overall market is at the time, it may be that 25-70% of homes are selling over list price, often by hundreds of thousands of dollars.
Of course, it’s one thing to say that bidding wars are a result of supply and demand – that’s fair enough. But what about when a seller (or listing agent) intentionally sets a property at a list price that is far below fair market value knowing full well that a bidding war will result, and that the sale price will be far in excess of the list price? At first blush, that hardly seems fair to the buyer.
My advice is for buyers to put themselves in the shoes of the seller, and the listing agent. The seller, of course, wants to get the highest price the market will bear. The listing agent on the other hand has a fiduciary responsibility to get the seller the absolute best deal they can for the seller (so long as they do so legally and ethically). If the listing agent does anything which works against the seller getting that best deal, they are in violation of their legal and ethical responsibilities.
Bidding Wars can be Tough, but the Process should be Fair
Many savvy Bay Area REALTORS understand that the only way to be certain they are getting the best combination of price and terms for their seller clients is in fact to set the price lower than what they believe it will sell for, attract multiple offers, and sell to the highest bidder. The process itself is neither open nor transparent, as buyers are typically not privy to the bids that other buyers are making, and that of course is stressful and causes no end of heartache on the side of the buyer. It’s a bit like a blind auction, except that the seller is not limited to countering buyers at prices far higher than any bid they currently have in-hand.
But the process is fair so long as buyers are aware how the process works – and you should know that the buyer’s agent has their own fiduciary responsibility to the buyer to explain it to them. The bidding process is fair if the same rules are applied to all buyers who submit offers on a property, and the seller does not misrepresent anything to the buyers (like the number of offers, high bids, etc). Of course, misrepresenting facts to the buyers is both illegal and unethical, and from my experience, it is relatively rare.
Furthermore, fairness and transparency can be increased when the communication between agents is open and honest so that buyers know where they stand and are given the opportunity to compete by informing them their offer is not likely to be accepted and needs improvement for it to have a chance. But the transparency is by no means absolute: knowledge is power, and while the seller cannot lie or misrepresent anything, the seller is not required to give any information about the quanity or quality of the offers they have in hand – or even if they have any offers at all.
But at the end of the day, there can be only one successful buyer – and odds are, that buyer is simply the one willing to pay more for that Bay Area home than every other buyer out there.
Handling Bidding Wars as a Seller
When you’re selling a home, the essential ingredient in any successful sale is that you find a buyer who is ready, willing, and able to purchase your home. But what if you are only able to find one such buyer in the time period which you’ve allotted to get your home sold? And what if that one buyer doesn’t offer as much money as you’re expecting, or requires that you do a bunch of repairs to your property, or, god forbid, is asking you to provide some owner financing?
Now you understand one reason why it is so important, as a seller, to get a bidding war (or at least a skirmish) going among buyers: you want options. One buyer may offer you more money than another, but the somewhat-lower-buyer may offer superior terms. Another buyer may offer both the best price and agree to a completely as-is sale with everything else you’re looking for, except their purchase of your home is contingent on a home they themselves are presently selling.
If you’re a seller in a bidding war, it’s important to evaluate each offer carefully. Consider not only the offer price but also the buyer’s financial situation, the terms of the offer, and any concessions the buyer is willing to make. Cash offers are particularly attractive because they eliminate the risk of financing falling through.
In the end, the goal is to choose the offer that will result in a smooth and profitable sale. This may not necessarily be the highest bid, especially if the buyer’s financial situation is shaky or the offer comes with numerous contingencies.
The Role of Real Estate Agents in Bidding Wars
Engaging a trusted and experienced real estate agent is a vital first step in the home buying process, especially when you anticipate a bidding war. Professional agents can provide crucial insights into the local market, advise on the appropriate offer price, and help you understand the seller’s motivations.
In addition, real estate agents have access to valuable resources like multiple listing services (MLS) and professional networks, which can give you an edge in the competition. They can help you tailor your negotiation strategy, find common ground with the seller, and make your offer stand out among multiple bids.
Importance of Mortgage Pre-approval in a Bidding War
Mortgage pre-approval is a critical step in the home buying process, particularly when you’re in a bidding war. Being pre-approved for a mortgage signals to the seller that you’re serious about purchasing their home and have the necessary financing to back your offer.
Pre-approval involves a thorough evaluation of your financial situation by the lender, including your income, employment history, credit score, and assets. This process gives you a clear understanding of your budget and financial capabilities, which can be a decisive factor in a bidding war.
One pro tip is to get a pre-approval from a well-known local lender. I don’t mean a bank or other mortgage company that has local offices: I mean that the loan officer who issues the pre-approval is located in (or at least adjacent to) the market where the home is located. This loan officer should have a good reputation and is known in the real estate community as a capable and trustworthy lender. Trust matters, and having a trusted lender doing your pre-approval can prove to be the decisive edge in a competitive bidding situation.
Beyond just a pre-approval, you should also be prepared to furnish proof of cash for your down payment, closing costs – and a healthy cushion too which demonstrates your capacity to close even in the (rare) event of a low appraisal.
Making a Competitive Offer
The offer price is a crucial element in a bidding war. It is common for buyers to bid above (sometimes, far above) the asking price to stay competitive. However, you should always keep your budget in mind and avoid overbidding, which could strain your finances and potentially lead to a mortgage you can’t afford.
One thing to keep in mind is that there’s more to a competitive offer than just the price you offer: terms are often just as important. Terms like:
- Is the purchase offer as-is?
- Will you waive all contingencies?
- Can you close quickly?
- Can you offer the seller a free rent-back?
- Is it OK for the seller to just leave behind anything they don’t want to take with them?
While you may not be able to offer the highest price for a property, you may at least be able to offer an excellent price, and superior terms…which may end up getting you the deal even if it’s not quite as much as what someone else is willing to pay.
Waiving Contingencies to Win a Bidding War
Contingencies are conditions that must be met before the sale of a home can proceed. They provide a safety net for buyers, allowing them to back out of the deal under certain circumstances without losing their earnest money deposit. Common contingencies include home inspections, financing, and appraisal.
In a bidding war, however, contingencies can make your offer less appealing to the seller. Waiving some or all of your contingencies can make your offer more attractive. However, this strategy carries risks, and it’s essential to understand what you’re giving up before deciding to waive any contingencies.
Escalation Clauses in Bay Area Bidding Wars
An escalation clause in real estate is a provision in an offer to purchase a property, stating that the prospective buyer is willing to outbid other offers by a certain amount, up to a maximum price. While escalation clauses are not inherently unethical or an explicit violation of the Realtor Code of Ethics, they can raise ethical concerns, depending on how they are used, and also pose practical complications which cause many Bay Area real estate brokerages to frown on or even disallow their use.
The REALTOR Code of Ethics, enforced by the National Association of Realtors (NAR), emphasizes fairness, honesty, and transparency in all dealings. Problems with escalation clauses can arise in relation to these principles:
Confidentiality: Escalation clauses can inadvertently lead to the disclosure of confidential information. For example, a seller’s agent might reveal the details of other offers to a buyer with an escalation clause, which could breach confidentiality owed to other clients.
Transparency and Fairness: There can be a lack of transparency in how escalation clauses are executed. Other buyers might not be aware that an escalation clause is in play, which can create an uneven playing field.
Duty to Client: A REALTOR has a duty to act in the best interests of their client. If the use of an escalation clause doesn’t align with the client’s best interests or goals, it could be seen as a violation of this duty.
There are significant issues surrounding the use of escalation clauses, and buyers should know that many listing agents will not look favorably at them. If your agent suggests using an escalation clause, you may wish to seek the advice of that agent’s broker to see what that brokerage’s guidance is on the topic.
Cash Offers and Bidding Wars in the Bay Area
In a bidding war, cash is often king. Sellers tend to favor cash offers because they eliminate the uncertainty and potential delays associated with mortgage financing. If you’re in a position to make a cash offer, it could significantly boost your chances of winning a bidding war.
However, this strategy isn’t feasible for everyone. If you can’t pay in cash, you can still make your offer attractive by increasing your down payment, offering a substantial earnest money deposit, or just showing that you have a lot more cash than you’re putting down, which you can use to make up for any appraisal shortfall.
Of course, many people who do make cash offers for homes in the Bay Area often refinance them once the sale has closed. Of course, doing so means that the buyer will have to pay a higher mortgage rate, because cash-out refinances do typically cost more than purchase-money loans.
One tactic I have seen is where buyers will make cash offers with a two week close, but then switch to a mortgage right after their offer is accepted. This is not what I would consider to be ethical or working in good faith, as the contract does define the type of financing the buyer is to use. The buyer can of course ask the seller to switch to a mortgage loan, but many buyers will just switch without asking, several days into the process.
But many mortgage lenders who work for very-well-qualified buyers with big down payments can in fact close a loan in as short as 15 days, and at the end of the transaction, the seller gets paid in cash regardless of how the buyer pays for the property.
Using Personal Letters to Win a Bidding War
Sometimes, a personal touch can make a difference in a bidding war. Writing a heartfelt letter to the seller explaining why you love their home and how it fits your needs can create an emotional connection and sway the seller in your favor. However, it’s important to tread carefully here. Revealing too much personal information could potentially influence the seller’s decision in a way that violates fair housing laws.
Also, buyers should understand that the standard California Residential Listing Agreement contains language in paragraph 10-C which, by default, prohibits the listing agent from presenting these offers.
The Bottom Line
Bidding wars can be intense, emotional, and stressful – and many people feel that the intense bidding wars and competitive pricing strategy are not fair to buyers. However, with the right preparation, strategy, and professional guidance, you can navigate this competitive landscape successfully. Remember to stay within your budget, be flexible, and make your offer as attractive as possible to the seller. Whether you’re a first-time homebuyer or an experienced investor, winning a bidding war requires a combination of strategy, patience, and perseverance.