Congratulations, you're a homebuyer who has finally found the perfect home and you're ready to make an offer. But the combination of limited housing inventory and increased buying activity means your work may just have begun. For many house hunters, it's a perfect storm that's sparking an increase in "bidding wars."
According to the National Association of Realtors, home-sale contracts are up 8.4 percent compared to last year.
Janice Leis, an associate broker with Prudential who serves the Pennsylvania, New Jersey and Florida markets, says bidding wars are taking place in the desirable communities with good schools. "I find them with primary housing (as opposed to an investor property)."
If you're in the hunt for a home, it's important to be prepared for a multiple-offer situation. Here are five strategies to put yourself in the best position to win.
No. 1: Work with local Realtors. Since each market is unique, you need to find someone with local experience, says Leis.
In the Northeast, for example, higher-end homes seem to be receiving multiple bids, says Leis. But in areas like Phoenix, it's the moderately priced and starter homes that are more subject to bidding wars, says Michael Orr, director of the Real Estate Center at Arizona State University's W.P. Carey School of Business.
A Realtor can tell you upfront if the houses you're looking for may receive multiple offers, says Leis.
No. 2: Get preapproved. Unless you're paying cash, sellers need to know you can secure financing, especially when you're entering a multiple-offer situation, says Leis. You can be a preferred buyer if you prepare beforehand.
As the buyer, make sure you are preapproved for a loan, but don't stop there.
If your bid is accepted and you go under contract, it would still be contingent on the approval of your mortgage, says Leis. Take the time now to prepare what financial information the mortgage lender will need from you in order for the loan to receive final approval.
No. 3: Reconsider contingencies. Many buyers make contingencies on their offers that allow them to back out of a deal if certain conditions aren't met. Common contingencies include the ability to secure financing (if you don't get the loan, you're not obligated to buy the house), the success of the potential buyer selling their current home, and making sure the home passes inspection.
A contract with fewer contingencies is more attractive to buyers because there are fewer roadblocks to a successful sale, says Neil Garfinkel, a real estate attorney with Abrams, Garfinkel, Margolis, Bergson, LLP in New York City.
No. 4: Understand your contractual obligations. If you do remove a contingency, make sure you are able to meet the terms of the agreement. This is obvious advice, but a lot of buyers get caught up in bidding wars and make emotional decisions -- and sign contracts -- that are difficult for them to honor, says Garfinkel.
If you choose not to include a financial contingency in your offer, you have to come up with all the cash needed at closing, he says. If you're not able to meet the terms of the contract, you may be able to back out of the sale if the contract allows, but you could lose money, including the down payment which is customarily paid when a buyer makes an offer.
"In New York, that could be a loss of 10 percent of the purchase price," says Garfinkel.
No. 5: Give your best offer first. If you find yourself in a bidding war, make sure your first offer is your best offer. Otherwise, the seller could turn you down and accept a different bid which went above the asking amount without giving you a chance to negotiate, says Orr.
"You have to expect to bid market price and even slightly above it and hope it is one of the top bids," says Orr.
With the real estate market recovering in many parts of the country, more buyers will find themselves in the middle of bidding wars. It's important to be strategically ready. And, if despite your best efforts the sale goes to someone else, don't give up, says Garfinkel. "If it doesn't work out, there will always be another property."
Margarette Burnette is an Atlanta-based freelance writer who specializes in personal finance and real estate topics. In her twelve years of corporate and journalistic experience, she's written for dozens of publications, including Good Housekeeping, American Express, Essence, Black Enterprise and many others.