With rates still hovering at near historic lows, it's a great time to buy. However, believe it or not there are bidding wars going on for some homes, driving prices up, leaving would be buyers angry and frustrated after they are unable to get the home they want. Losing a house you had your heart on buying is emotionally draining.
Some bidding wars happen because a particular house strikes the fancy of a number of buyers who love a specific neighborhood. Others because of certain features of the home. Yet encouraging multiple offers on a home is also a marketing tactic used by some who under price the home and state they will not accept any offers until a specified time. The goal is to get a number of offers simultaneously and take the best one. HUD is currently doing this on their inventory of homes they have foreclosed on. Many times in the HUD case, unsuspecting buyers get excited about buying a home that seems to be in their price range, when in truth it's likely to sell for much more than they can afford.
These tactics should at least be good for the sellers right? Maybe not. Many Realtors say that multiple offers on homes that are under priced don't necessarily net a higher price than if the home had been put on the market at its fair market value in the first place. Often many of the bidders can't afford the home and are only involved because the house was priced so low in the first place.
Some argue that the under pricing strategy is unethical because the seller has no intention of accepting an offer at the price the home is listed at. But some real estate agents defend the practice as a way to get the best price for their client, which is their contracted duty. Sellers have the right to list their property for whatever price they wish.
So if you're shopping for a home and have fallen in love with that impossibly cheap home in a great neighborhood that you just must have how do you know if you should place an offer?
First of all, remember the wise saying, if it sounds too good to be true, it probably is. Educate yourself about value of homes in the community by looking at the sale price of comparable homes or finding out from your Realtor what other homes sold for recently. If it's clear that the house is being under priced to create multiple offers you then have a choice to make. You can participate or walk away.
There's a lot to be said for refusing to participate in a bidding war for a home. Normally when thinking about buying a home there is time to look at the place carefully, come back a few times to make sure it's what you want, compare to other homes, have an offer accepted and a home inspection done on the property. In a bidding war you may not have time to do any of this. If you are bidding against others you likely will have to come in with a offer having no conditions. If there isn't time to get a home inspection done before the offer dead line you may have to buy without one. You have no real way of knowing if the home has any hidden problems. If you try to get an inspection done before hand, the expense is yours even if your bid isn't accepted.
What if you are absolutely sure this is the house of your dreams and you have to have it? First, before you even start looking, get a pre-approval letter on your mortgage. Shop around among mortgage brokers and financial institutions to get the best deal for your circumstances. You'll know exactly how much you can afford to spend and when to say no. Your total housing costs including mortgage payments, property taxes and utility payments should be no more than 30% of your household income.
For the best opportunity to buy a home when there are multiple bids is to make an offer over the asking price. The more offers that are coming in it becomes more likely more you'll have to pay. In a bidding war you should make your best offer immediately because you may not get a second chance. Put as few conditions in the offer as possible. Use the closing date that the seller is asking for. Come up with a good deposit for the earnest money to show the seller you are serious. In the end, if you don't get the house, let it go and move on. Don't worry you'll find another one!
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