What is a Real Estate Bidding War and How Does it Affect How You Sell Your Home?

  • 3 years ago

What is a Real Estate Bidding War and How Does it Affect How You Sell Your Home?

What is a Real Estate Bidding War?

Bidding wars as related to real estate are multiple competing, ever increasing offers for a single property by multiple buyers. Typically, they occur when potential home buyers are competing for ownership of a property in a market where real estate inventory is low. Usually, this phenomena does not occur across the market but instead with properties that have a specific feature that is in high demand and short supply. This could include properties in a specific part of a city, homes in a specific school district, properties that are being offered below market value, or any other number of features that are highly coveted but in short supply in a given geographical region.

With multiple offers on just one property, potential buyers compete to secure a highly coveted property. As a result, the final purchase price of the property can slowly but surely, and sometimes furiously, raise the final selling price of the property past the original asking price. Generally speaking, there are several conditions that must be met before a situation like this can occur. In this article we are going to take a look at what these conditions are and how it can affect your experience as a seller.

Why are bidding wars so rampant right now?

Today, bidding wars are so prevalent because most real estate markets have low inventory of residential property. Under normal circumstances, this can be enough to trigger a bidding war for most residential properties, but our present situation in Southern California is further compounded by record low interest rates. In addition to low interest rates, the unprecedented Covid-19 health crisis has placed a premium on having more space at home to live and work comfortably. This desire for more space has further driven demand for properties throughout the United States as new home buyers see an opportunity to enter the market while cheap financing is available. As a result, an increasingly smaller number of properties are being bid on by an increasingly larger group of interested buyers which pushes the final sale price of properties past their initial offering.

In addition to low-interest rates, workplace trends that initially started during Covid-19 are set to continue throughout several sectors of the economy. It is currently expected that 22% of the workforce will continue to work from home through 2025. Major companies such as Amazon, Dropbox, Facebook, Microsoft, Salesforce, Shopify, Square, Twitter, Verizon, and many others have now stated that they will allow large portions of their workforce to work from home permanently or have implemented policies which allow hybrid work where employees may split the week between home and office.

These changes to the very nature of work have caused a migration of people from major metropolitan areas to the communities of less populated states. These migrations are motivated by several reasons, but have become more common because the nature of work has changed. This trend has enabled a larger group of people to maintain their jobs while moving anywhere around the country to get more out of their dollars and take advantage of more favorable state income taxes and lower costs of living. 

This in and of itself does not necessarily cause a bidding war, but further increases the likelihood of a bidding war occurring as new incoming residents start to compete for a dwindling housing supply. This is further complicated by the fact that higher cost of living states typically have higher average incomes than the states in which these individuals are moving to. Therefore, new work-from-home policies enable employees to maintain their buying power as they move to lower cost of living states.

For example, a home buyer in California may afford to purchase a $600,000 condo in California but when moving to another state, such as Nevada, their buying power allows them to purchase a luxury home for the same price. The dwindling supply of properties being gobbled up by an influx of new buyers, coupled with much higher buying power than local residents, pushes already record high housing prices to new heights. This then causes bidding wars to occur in states where there have historically been an ample supply of properties to purchase but are now experiencing very low inventory and are flush with buyers that are willing to buy a home above the price demanded by normal market conditions.

How might this affect your selling experience and what to consider before selling?

So, as a seller, how does this affect you? Obviously, a bidding war raises the likelihood of selling your property at a higher price, but there are a couple of things to take into consideration before putting your property on the market.

Consider what your plan will be upon selling your home: have you already identified an area where you plan to purchase your next home? Are you planning to upgrade or downgrade your property? What is the area like in terms of available inventory vs demand for the area? Basically, do you have a clear understanding of the local real estate market that you are looking to move into. Do you understand how much above asking price you can reasonably expect to pay and are you financially ready for that? These are all questions that an experienced real estate agent can help you understand so that you go into the sale of your property prepared with plan for upgrading your real estate portfolio.

Why do you need an experienced real estate agent behind you?

An experienced real estate agent will help properly assess the value of your home and determine the proper strategy for putting the home on the market. Obviously, when selling your home, the hope is that it will receive enough offers that you have options when determining who to sell to. However, even under current market conditions a bidding war is not guaranteed.

There are a couple of ways to ensure that your house is sold at or above fair market value. If your goal is to encourage a bidding war, then consider this:

  1. You need an experienced real estate agent that understands the local market and can properly value your home.
  2. It is important to price your home correctly. In the past, this often meant setting your asking price slightly below market value. This would help generate interest due to the perceived built in equity for the home that should help drive up its exposure to a larger number of potential buyers. However, this is not necessarily the case and varies by market. Once again, an experienced real estate agent for a specific region can help properly set your asking price to encourage demand.
  3. Set a deadline for offer submissions. Being clear and open about the deadline will encourage offers as buyers can expect a reasonable timeline for finding out if their offer was accepted. This let’s individuals that might be on the fence about a property know that they have until this date to submit an offer.
  4. Marketing strategies should also employ a sense of urgency. They should be descriptive of the property and provide a clear understanding of the value that the pricing of the property is bringing to the table.
  5. The final – and probably most important – part of receiving a lot of offers on your property is to have a strong marketing team behind your property. This means having a real estate agent that understands your specific market, understands the potential buyer pool, and knows how to connect with these potential buyers. In this way, you can build up enough interest in your property to ensure you get many offers that may spark a bidding war.
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Zahn Properties and Lyon Stahl do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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