How to Win a Bidding War on a Home in the Portland Market
Portland housing market for 2015-2016 have been brutal for home buyers. Bidding wars have taken place in most reasonably priced homes and there are some horror stories about 10 plus offers and losing out on every home bidding. For those who waited for the competition to slow down, now they are buying homes for more money. On top of that, 2017 is already getting competitive. According to the 2017 Portland housing market forecast, it will still be a hot market although not as much as last two years. Supplies are still very low. As a matter of fact, I’ve been involved in several deals since January of 2017 and I’ve already seen so many bidding wars in Southeast Portland homes. Lots of home buyers are lurking around for a good deal on a good property and when one pops up on the market, the house doesn’t last more than five days. They could be sold in a day but due to those “deadlines” of offers, it takes about 4-5 days until being off the market. Of course in those days, multiple offers are received and real estate buyer’s agents are struggling to find out any clues of what the highest bid looks like. Everyone waits until the bitter last moment to put the offer in. Listing agents only tell you things like, “The asking price has been met.” or “They are significantly over the asking.” It’s a madness.
Of course in a case when there are only less than two other offers, it could be wise to wait till the last moment and assume the other offer is at the asking or slightly above is there is more than one. How about when there are more than three offers? That’s when things get crazy and you may not need to wait till the last moment and utilize other strategies since you will have no idea what other offers look like.
Let’s face the truth. Some home sellers purposely under-price their home to attract lots of interest from buyers. When you are looking for homes on Zillow and find that perfect house with a low enough price, you are going to really look at that listing for hours and talk to your spouse about how exciting it is you found this home. The only problem is that there are lots of buyers doing exactly the same. In a multiple offer situation, you need to understand what the true home value is. If you understand the true value of the house based on recently sold comps, and you are comfortable with the value, that should be your offer price. If you lose out, you will still feel like you won because you didn’t over pay for a home.
If the highest bidder on a home has put an offer so high that it is way over the market price, the seller and the buyer will face another big hurdle later: Appraisal. If the purchase price is 390K, and the appraisal value is only 360K, the buyer’s lender will not lend the value unless somebody pays the difference in cash. In a highly competitive market, sellers will want buyers to pay for it. The buyer can also back out of the deal or try to negotiate for the seller paying for the difference at least partially. If the buyer has to pay for some portion of it at least, then the amount will be taken out of the down payment and payments will be recalculated. If that pushes the down payment below 20%, say hello to monthly PMI premium payments and that may not be a very desirable situation for a while.
So that means after a certain point of purchase, higher offer price doesn’t mean all that much unless the it’s a cash offer, which will skip through appraisal. Moreover, the seller will start looking for other favorable terms other than the purchase price such as the amount of down payment, rent back options, and read cover letters. If your offer is solid on all other terms but not the highest price, but it may be the highest price a possible appraisal value might be, then at this point, you have a good shot at getting your offer accepted.
Use an Escalation Clause
If you want to make sure you beat out all other offers up to a certain amount, which is your best price, but don’t want to quite commit to that price without knowing what other offers actually look like, then using an escalation clause might be your ticket. Be careful that some sellers do not like escalation clauses for whatever socioeconomic reasons so make sure you check with your agent whether this is a safe method to use on your particular deal.
Make sure your agent crafts the language very carefully covering a variety of situations including your maximum cap, increments, multiple increments, showing proofs of other offers, and your cap being lower than other offers. Using my prior attorney experience, I have crafted some air tight escalation clauses, which helped many of my buyer clients to win the bid. It can be a powerful tool when used right. Some buyer’s agents may shy away from using escalation clauses because it’s too much of contract drafting rather than filling forms. Escalation clauses should contain many detailed paragraphs.
Be Flexible on Closing for Owner Occupied Homes
In addition to the purchase price, ask what’s important to the seller especially if the home is owner occupied currently. Home owners may need to buy a home after selling their house. In many cases, sellers put an offer on a house after accepting an offer on their current home. That means they can really use an extra two to four week rent-back. If you are okay with being flexible with possession dates, it can really pay off because it will make things so much easier for the seller. It is a stressful and time-sensitive process to sell and buy at the same time so flexibility can go a long way in that situation.
Write a Cover Letter
We know that cover letters help. Does it work? It depends on your deal and who the seller is. Sellers want the most money period. However, when offers are very similar to each other and the seller has to choose one, it helps for your offer to have a touching letter with a nice family photo. Your emotional touch will win the bid in that case. Don’t attach your emotional cover letter if you are low balling on your offer. That would be an insult or weird at least to the seller. Also don’t expect this cover letter to have much power if your offer price is not competitive.
In conclusion, fighting through a bidding war is tough. You will likely lose if you are not willing to pay for a competitive price by offering a minimum on a property that is already priced below the market value. You need to talk to your real estate agent to really talk about your strategy and figure out what the property’s true value is and what the maximum price you are comfortable with. If you are a home buyer, I hope you get to buy your perfect home this year.