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It was spring 2005, and it was a sellers’ market out of hell, at least for buyers like us.
We were getting married, and couldn’t find a house to buy in our neighborhood that didn’t immediately get multiple offers, with many buyers willing to pay far above the asking price. It was getting close to our wedding day, and it became increasingly clear we would not be able to buy our new house before that day.
Here’s what we did to win the bidding war.
What Is a Sellers’ Market?
Intuitively, it’s clear that when more people are looking to buy homes than there are homes available to buy, sellers can increase prices and refuse to accept contingency clauses such as buyers’ previous homes selling before the deal finalizes.
According to Zillow, a sellers’ market is officially defined as having less than 5 months’ worth of available inventory in your area.
Here’s how you calculate that number for where you live.
- Find how many homes are on the market in your zip code (you can do this easily on e.g. Zillow or Redfin).
- Find out how many homes sold in the past 30 days in your zip code (you can do this e.g. on realtor.com).
- Divide the first number by the second number. If the result is less than 5.0, you’re in a sellers’ market If it’s above 7.0, you’re in a buyer’s market. If it’s between 5.0 and 7.0, you’re in a balanced market.
For example, looking up our zip code this morning I found there are 73 homes currently listed, and 57 sold within the past 30 days. This means the ratio is 1.28, which is about 4 times lower than the 5.0 threshold. We’re solidly in a sellers’ market.
If You’re a Buyer in a Sellers’ Market Consider an Escalation Clause
Back in 2005, our realtor recommended we add an escalation clause to our offers (the first overlooked secret to winning a bidding war).
What’s that? Simple. It’s a clause in your offer that specifies:
- Your offer price. This should be at least the seller’s asking price. If that asking price is way higher than the market says it should be, find a different home because you’re not likely to get this one.
- How much you’re willing to pay above the highest bidder. This should be somewhat significant, because if you make it higher by $1, the seller may well choose the other bidder for reasons unrelated to the offer price. We offered $500 above competing offers.
- What your maximum offer price can be. Try to avoid a round number because many others may choose that round number, so going $750 above it is likelier to beat other offers even if they have escalation clauses with numbers close to yours.
To activate the escalation clause, the seller would need to show there was another legitimate offer that was higher than your initial offer price.
In most sellers’ markets, this should have been enough to bring us the win in our bidding war. Unfortunately, too many buyers were getting too desperate and were offering prices far above the market. The result was that we lost out on three homes that we had our hearts set.
It was devastating.
If Escalation Clauses Aren’t Enough, Submit the First Offer with a Limited-Time Bonus
After our realtor failed to secure the win for us three times in a row, we decided to try working with a different realtor.
The new agent told us she didn’t believe in escalation clauses, at least not in a market as hot as we were bidding in. Instead, she suggested a different tactic. She guided us to do this:
- See the house the same day it comes on the market (we did this, along with at least 11 other couples), and submit an offer that same day at least somewhat above the asking price. The second overlooked secret to winning a bidding war. We did this, offering $5,000 above asking, and were the only ones to submit that same day.
- Offer a bonus if the seller accepts your offer within 24 hours. The third overlooked secret to winning a bidding war. We offered a $15,000 bonus above our offer price. This may sound like a lot, but each home we didn’t win had listed at a higher price than the previous one, and the winning bids all had escalation clauses of $30,000 or more.
The seller knew they were likely to get competing offers from at least some of the other 11 couples who saw the home that first day plus however many more came by during the following day. However, they couldn’t know for sure if any of those would exceed our offer price plus the bonus, $20,000 above asking.
They tried to stall us by claiming the husband was out of town and out of reach for a few days.
The problem was that (a) we knew they were lying because we had seen him walking into a neighboring home just before we were scheduled to see the home (we were parked outside 10 minutes before our scheduled visit to make sure we wouldn’t be late); and (b) in the era of cell phones and email, unless they’re in a coma, nobody is out of reach for more than 24 hours, even if they’re overseas.
Our reply was simple – they were welcome to take as long as they needed to make their decision, but 24 hours after they received our offer, the bonus would go away.
They accepted our offer before any competing offers could jack the price up higher than we’d be willing to escalate. We won our bidding war and likely ended up saving ourselves at least $10,000 in the process.
The Bottom Line
Obviously, it’s better to buy a home in a buyers’ market, when there are far more homes available than buyers willing to buy them. However, if you need to buy during a sellers’ market like there was in 2005 and there is again now, the above three overlooked secrets will help you defeat your competitors in the bidding war.
About the author:
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.