Bidding War: What It Means, Example, FAQs

Definition

• A bidding war in real estate is a competitive situation where two or more buyers increase their offers for a property, often driving the final sale price above the original listing price.

What Is a Bidding War?

• A bidding war occurs when two or more prospective property buyers compete through incrementally increasing bids.
• Often happens in real estate when housing stock is low in a popular location.

Key Takeaways

• Occurs when two or more entities vie for ownership of a property or business.
• Similar to an auction, happens rapidly, leaving participants vulnerable to ill-advised investment choices.
• Speculators may include an escalation clause to automatically increase their bid by a set amount up to a maximum limit.
• More common in a tight real estate market.

How a Bidding War Works

• Potential property buyers compete for ownership through increasing price bids, possibly exceeding the property's original value.
• Common in desirable locations or a seller's market.
• Similar to an auction, can lead to rash or emotional decisions.

Example of a Bidding War

• Alice and Brynne both want a house listed at $350,000.
• Alice offers the list price, Brynne counters with $360,000.
• Alice bids $370,000, Brynne counters $380,000.
• Alice's final bid is $400,000, and she wins, paying $50,000 more than the listing.
• Important: Escalation clauses can backfire if competitors know the maximum limit.

Special Considerations

• In competitive markets, escalation clauses are used to automatically increase bids if a higher offer is made.
• These clauses include a base bid and a maximum cap.
• Sellers may be aware of the maximum price, affecting negotiations.

How Do Bidding Wars Work?

• Occurs with multiple offers on a property, leading to price increases.
• The goal is to "win" the bidding war by buying the property.

How Do I Win a Bidding War on a House?

• Offer the most money or pay all cash.
• Preparation includes pre-approval for a mortgage, cash for downpayment, competitive offers, and waiving contingencies.

Is a Bidding War Better for the Buyer or the Seller?

• Almost always benefits the seller, especially in a seller's market.
• Sellers often receive more than the original asking price.

The Bottom Line

• In a seller's market with scarce housing, buyers feel pressured to offer above asking prices.
• Bidding wars benefit sellers with increased final sale prices.

Additional Resources

• Explore mortgage options and compare lenders for better financial decisions in a bidding war scenario.

This content is part of "The Complete Homebuying Guide," offering further insights into various aspects of the homebuying process.