If you bought a home in the past year, you might have had to deal with stiff competition from other homebuyers. It’s helpful to understand how bidding wars work, and when you should participate or drop out of one.
Definition and Example of a Bidding War
A bidding war is when multiple bids on the same property drive up the price of the home. Bidding wars are common, especially in a competitive housing market. According to real estate brokerage Redfin, 59% of home offers were subject to competition in September 2021. This figure may sound high, but it was actually the lowest level in nine months. In 2021, the highest month was April, with 74% of offers facing competition from other buyers. In competitive housing markets, bidding wars usually happen quickly. Multiple buyers will submit offers for the same property, driving up the price of the home. For example, let’s say you’re looking to purchase a home that’s listed at $300,000. You submit a bid for the listed price, but another buyer quickly counters by offering $310,000. With multiple buyers involved, the home price quickly escalates until someone cedes on the price.
How a Bidding War Works
A bidding war occurs when multiple buyers make offers on the same property, driving up the price of the home. The bids often come in quickly. When a homebuyer submits an offer letter in a competitive housing market, they will often include an escalation clause. An escalation clause states a buyer’s willingness to pay more than a competing offer on the home. Many homebuyers will include a maximum amount they are willing to pay to outbid another person. When multiple buyers submit offers with an escalation clause, a bidding war will ensue. There are pros and cons to including or failing to include a maximum price point. The problem with an escalation clause is if you don’t specify a maximum price, you could end up paying more for the property than you can afford. If you do include a final price, however, you compromise your bargaining position and could potentially lose out on the property to another bidder. There have also been instances in which sellers will make up a fictitious offer to drive up the sale price of the home. So if you do participate in a bidding war and submit an offer with an escalation clause, you should do so with care.
Bidding War vs. Multiple Bids
In comparison, a bidding war is when the seller starts receiving multiple offers quickly, and it becomes a competition among different homebuyers. Many of the offers will include escalation clauses, which can quickly drive up the price of the home.
