Rules of Thumb for a Bidding War?

Buying & Selling Real Estate
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Rules of Thumb for a Bidding War?

Neil Polehn
Investor · Capitola, CA · Member since 2020 · 52 posts · 19 votes

Hello All,

I found a SFH that fits the formula I have for buying property and the asking price is good. Unfortunately since it's in a hot market, there are already multiple offers. I dont want to dramatically over pay and win, or underpay and lose. Last time I was in one I know I overpaid so I dont want avoid that. I am hoping you'll might know some rules of thumbs or guidelines for how much over asking price you are willing to pay?

Right now there are 4 offers and they close offers and pick tomorrow at noon.  Thanks!

Neil

1Reply
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Anthony Angotti
Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes
5y
Originally posted by @Neil Polehn:

Hello All,

I found a SFH that fits the formula I have for buying property and the asking price is good. Unfortunately since it's in a hot market, there are already multiple offers. I dont want to dramatically over pay and win, or underpay and lose. Last time I was in one I know I overpaid so I dont want avoid that. I am hoping you'll might know some rules of thumbs or guidelines for how much over asking price you are willing to pay?

Right now there are 4 offers and they close offers and pick tomorrow at noon.  Thanks!

Neil

  • You're realtor should guide you, but: Escalation Clause, Waive Inspection, remove appraisal contingency, provide the best possible financing/waive mortgage contingency, Make Deposit nonrefundable, higher than average deposit, as few contingencies as possible, quick closing, and a few other things, but basically just think about everything that reduces risk to the seller and put those in your agreement. It's not always just the highest price. 
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  • Kevin Hoodwin
    Dallas Fort-Worth · Member since 2019 · 64 posts · 33 votes
    5y

    Calculate your minimum acceptable ROI, calculate the numbers (purchase, rehab, closing costs, and other expenses), and that should be your maximum bid.

    It also helps to offer several options.  I would suggest a lower cash option (if you are able to do that), an average acceptable option with bank financing, and an owner financed option with a higher sales price.  Buyers will accept less for cash because it's less likely to fall through.  You can afford to pay more for the house with owner financing because you can negotiate acceptable terms for all parties.

    1Reply
  • Neil Polehn
    OP
    Investor · Capitola, CA · Member since 2020 · 52 posts · 19 votes
    5y

    Hey Kevin,

    Thanks for the reply.  The property I found got 15 bids because they put a low enough price to start a bidding war at 399K and it's in a hyper appreciation area. It was a 5 bed room house converted to 4 bed room with a guest unit, so the numbers really worked up to 450K.  I couldn't do all cash, but I also needed a super clean offer to win so I went up to 446K and won fortunately.

    The owner just put in 50K in upgrades, so i lost the battles and won the war (so far).  It cash flows about $600 +, and is near a lot of tech companies and the guest unit has a private st entrance.  Also, since it's been upgrade I don't need to do construction to rent it out.  I wanted a really clean deal my first time back in the game after taking a break.  Thanks again,

    Neil

    2Reply
  • Neil Polehn
    OP
    Investor · Capitola, CA · Member since 2020 · 52 posts · 19 votes
    5y

    I hear you.  My approach is just about the numbers, if they still look good at ask + 10% and cash flow out well, I dont mind making a bid.  Especially if finding properties that cash flow positive in a hot market isnt easy and it's just been upgraded so I dont have to do any construction.  I wanted an easy remote deal after being burned in my last remote deal's construction costs/quality.

    0Reply
  • Doug Pintarch
    Rental Property Investor · Harrisburg, PA · Member since 2018 · 369 posts · 406 votes
    5y

    My rule for bidding wars is not to participate in them.  There's always another house right down the street. (Figuratively speaking, of course.)

    2Reply
  • Patricia Steiner
    Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
    5y

    #1 Rule for a Bidding War:  Don't

    Leave those to the emotional buyers...investing is anything but that.

    2Reply
  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    5y

    Base it on numbers and comps. If you are financed you are protected by appraisal unless you waive it. Also have higher earnest money, quicker close, and as is on inspections 

    2Reply
  • Anthony Angotti
    Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes
    5y
    Originally posted by @Neil Polehn:

    Hello All,

    I found a SFH that fits the formula I have for buying property and the asking price is good. Unfortunately since it's in a hot market, there are already multiple offers. I dont want to dramatically over pay and win, or underpay and lose. Last time I was in one I know I overpaid so I dont want avoid that. I am hoping you'll might know some rules of thumbs or guidelines for how much over asking price you are willing to pay?

    Right now there are 4 offers and they close offers and pick tomorrow at noon.  Thanks!

    Neil

    • You're realtor should guide you, but: Escalation Clause, Waive Inspection, remove appraisal contingency, provide the best possible financing/waive mortgage contingency, Make Deposit nonrefundable, higher than average deposit, as few contingencies as possible, quick closing, and a few other things, but basically just think about everything that reduces risk to the seller and put those in your agreement. It's not always just the highest price. 
    4Reply
  • Neil Polehn
    OP
    Investor · Capitola, CA · Member since 2020 · 52 posts · 19 votes
    5y

    "Patricia Steiner Real Estate Broker from Hyde Park Tampa, Florida

    replied 5 minutes ago

    #1 Rule for a Bidding War: Don't

    Leave those to the emotional buyers...investing is anything but that."

    You probably get your deals off the MLS? I am still working off the MLS at this point, so a good deal will be seen by others and thus a bidding war happens for the good props. I should dig deeper for the next deal and get something off the MLS. I love the Austin market, but it's red hot right now. The new tech companies coming into the area mean there are plenty of good jobs and growing population there.

    Neil

    0Reply
  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    5y

    There's nothing wrong with putting in an offer.  Just don't offer more than you're willing to pay, and then stick to your number.  It's only a problem if you get caught up in the bidding frenzy and pay more than you were originally intending to (or more than the property is worth).

    3Reply
  • Marcello Di Gerlando
    Investor · Colorado Springs, CO · Member since 2011 · 322 posts · 238 votes
    5y

    No reason this has to be emotional at all. What's your BATNA? - Best Alternative to a Negotiated Agreement. simply speaking, what is your best-and-final offer before you walk away and start looking for other deals. I agree with @anthnoy angotti  on this, In most cases its not only the sale price that's is important to the seller. lots of other factors can be addressed in your offer that may tip the balance in your favor. Good luck.


    0Reply
  • Jeff Riewer
    Member since 2020 · 16 posts · 8 votes
    5y

    @Neil Polehn...learn to set your max price and walk away...Bidding out of emotion rather than hard facts is a no win situation...realize something else will come up so don't fall in love with the property

    1Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    5y

    See if there is anything else the seller is looking for besides price. Sometimes price isn't the biggest concern and they will accept the cleanest offer with the shortest/longest time period to close instead.  

    0Reply
  • Neil Polehn
    OP
    Investor · Capitola, CA · Member since 2020 · 52 posts · 19 votes
    5y

    Thanks everyone!  I had my offer accepted out of 15 other offers and didnt give away the farm, plus my numbers all worked at that price. I think many of the other buyers went lowers because they didnt run their numbers and  see that the numbers still worked at a higher price.

    1Reply
  • Storm S.
    Real Estate Agent · Santa Barbara, CA · Member since 2016 · 518 posts · 283 votes
    5y

    @Neil Polehn there are two and only two rules for bidding wars. I’ve presented them below.

    Rule number 1:

    Don’t get into bidding wars

    Rule number 2:

    If in doubt refer back to rule number 1

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y

    I'm glad your offer was accepted. I agree with what the others suggested-escalation clause and knowing what your max is and not getting caught up in the bidding.  The escalation clause will allow you to do that.  The higher deposit and flexible closing date to suit the seller are also good.

    0Reply
  • Patrick Britton
    Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes
    5y

    @Neil Polehn  I think I'm gonna say something here that a lot of others must be thinking but nobody has said just yet: If your offer defeated 15 others there's no way that your numbers are actually truly and honestly accurate or reasonable. Presumably, at least a handful of those 15 others were investors and it's reasonable to assume that a couple of those are more experienced investors. If those people walked away, so should you. If you're looking for a general rule of thumb, here is one: The only people who should ever get into a bidding war are people who intend on living in the house. for them it's not necessarily a financial investment but an emotional one.

    Let those who let their emotions run their lives be the first to overpay.

    However, I would hope that you still have an inspection contingency and after having a home inspection you can attempt to renegotiate.  

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Kyle J.:

    There's nothing wrong with putting in an offer.  Just don't offer more than you're willing to pay, and then stick to your number.  It's only a problem if you get caught up in the bidding frenzy and pay more than you were originally intending to (or more than the property is worth).

    when i was buying courthouse steps this was a constant battle..   And I had no business if i could not buy.. just to do all the work show up and bid only to never get anything well that does not work when its our business..

    So what i found out is most investors had a number and it was usually a round number..  IE  we will only go to 405k.. I won a lot of bids

    at 405k plus 500.00   I rationalized that with Hey would i pass on that deal for 500.00 ??  But it was a volume play.

    If your just one off buying IE going to buy a home or two in a year then I think you look at it differently.    And there is a reason some markets have multiple offers and others dont..  the reasons are obvious to most investors.

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    Just like any war, everyone ends up loosing something. Either you lose the deal or you win at a premium. My advice is run your numbers, find your top price that works and stick to it. If your top price is $300K and someone else bid $301K, that has no bearing on you changing your top price. The entire purpose of a bidding war is to use emotional response to get you to do irrational things.

    Rather than compete on price, I like to adjust the terms to make the offer stand out:

    - No inspection contingency

    - No financing contingency (ability to close with cash required)

    - Large down payment so they know I am serious. In may area people put $500 as earnest money, we do $5000

    - Fast closing - usually requires cash offers

    Using these four tactics, I have had my lower offers accepted. People think it is all about price, but that is not always what is most important to the seller.

    4Reply
  • Doug Haiar
    Hudson, CO · Member since 2014 · 6 posts · 16 votes
    5y

    @Neil Polehn the last one we bought we made a cash offer with an escalation clause that said we would bud $1,000 over the highest bid up to our ceiling.

    0Reply
  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    @Neil Polehn the list price doesn’t matter. The property is worth what a buyer will agree to pay a seller. Find out what it’s worth *to you*. There are many reasons one buyer might be willing to pay significantly more than another, ie an investor sees a value add opportunity that others don’t, etc. Find out what the property is worth to you and be willing to pay up to that price for it, regardless of what other’s may offer or be willing to pay. Value is in the eye of the beholder, ie some buyers can see value others do not and can realize that value, thus paying more than others might to get the property under contract might make total financial sense. My $.02

    1Reply
  • Neil Polehn
    OP
    Investor · Capitola, CA · Member since 2020 · 52 posts · 19 votes
    5y
    Funny, I did the exact same thing.  I offered 446 instead of 445, and I am pretty sure a couple of the finalists (there were 2 rounds) were prob 445, and with the other terms it might have been just enough...

    Originally posted by @Jay Hinrichs:
    Originally posted by @Kyle J.:

    There's nothing wrong with putting in an offer.  Just don't offer more than you're willing to pay, and then stick to your number.  It's only a problem if you get caught up in the bidding frenzy and pay more than you were originally intending to (or more than the property is worth).

    when i was buying courthouse steps this was a constant battle..   And I had no business if i could not buy.. just to do all the work show up and bid only to never get anything well that does not work when its our business..

    So what i found out is most investors had a number and it was usually a round number..  IE  we will only go to 405k.. I won a lot of bids

    at 405k plus 500.00   I rationalized that with Hey would i pass on that deal for 500.00 ??  But it was a volume play.

    If your just one off buying IE going to buy a home or two in a year then I think you look at it differently.    And there is a reason some markets have multiple offers and others dont..  the reasons are obvious to most investors.

    0Reply
  • Neil Polehn
    OP
    Investor · Capitola, CA · Member since 2020 · 52 posts · 19 votes
    5y
    Great advice I ended up doing exactly what you said; making the other parts of the offer as clean as possible. The only other thing was the bidding ended up coming down to the price + appraisal waver.  The other bidder offered way more then I did, but didn't agree to a appraisal waver if the value didnt come in right for him and I waved the appraisal protection and assumed that risk.

    Originally posted by @Joe Splitrock:

    Just like any war, everyone ends up loosing something. Either you lose the deal or you win at a premium. My advice is run your numbers, find your top price that works and stick to it. If your top price is $300K and someone else bid $301K, that has no bearing on you changing your top price. The entire purpose of a bidding war is to use emotional response to get you to do irrational things.

    Rather than compete on price, I like to adjust the terms to make the offer stand out:

    - No inspection contingency

    - No financing contingency (ability to close with cash required)

    - Large down payment so they know I am serious. In may area people put $500 as earnest money, we do $5000

    - Fast closing - usually requires cash offers

    Using these four tactics, I have had my lower offers accepted. People think it is all about price, but that is not always what is most important to the seller.

    1Reply
  • Sam L.Pro Member
    Rental Property Investor · Joliet, IL · Member since 2014 · 163 posts · 85 votes
    5y
    Originally posted by @Neil Polehn:

    I think many of the other buyers went lowers because they didnt run their numbers and  see that the numbers still worked at a higher price.

    You may be happy with a 3% return, others won't get out of bed for 20%...

    0Reply
  • Luke Weber
    Investor · Las Vegas, NV · Member since 2015 · 44 posts · 33 votes
    5y

    Keep emotion out of it!  That's the biggest rule.  There will always be more projects, so don't pay too much for this one and get burned.  Keep making your offers and don't pay more than the max price.  Just because someone else is willing to pay more for it, doesn't mean you should too.  They may have a different exit strategy, cheaper money, less or more experience, etc.  Run your numbers and don't pay above what you set as your top limit.  NO EMOTION!

    0Reply
  • Neil Polehn
    OP
    Investor · Capitola, CA · Member since 2020 · 52 posts · 19 votes
    5y
    Hello Patrick,

    I respectfully disagree in that for me it's all about numbers, so if they work at list + 10%  (399 list & my offer was 446) and you feel good about the deal, it can still make you money.  This property is in Austin Tx and it's a very hot market, but what I love about it is all the tech companies who are building new facilities or expanding existing ones. I am just getting back into RE after being burned on a remote deal  few years ago, so i want this one to be solid and as simple as possible to get my mojo back.

    It's a SFR with a guest unit on a corner lot, so the guest unit has a private entrance and a conservative estimate of cash flow is $500 a month net.  Its very hard to find a "hidden deal" there so most deals will have competition, but the protection from recession and positive cash flow mean I can sit on this for a few years. They just bought it in 2018 and upgraded and converted it so i get the benefit of 50K in remodeling plus the guest unit.
    I will put all the numbers up when I have a moment to come up for air, so you can see the details. thanks
    Neil



    Originally posted by @Patrick Britton:

    @Neil Polehn  I think I'm gonna say something here that a lot of others must be thinking but nobody has said just yet: If your offer defeated 15 others there's no way that your numbers are actually truly and honestly accurate or reasonable. Presumably, at least a handful of those 15 others were investors and it's reasonable to assume that a couple of those are more experienced investors. If those people walked away, so should you. If you're looking for a general rule of thumb, here is one: The only people who should ever get into a bidding war are people who intend on living in the house. for them it's not necessarily a financial investment but an emotional one.

    Let those who let their emotions run their lives be the first to overpay.

    However, I would hope that you still have an inspection contingency and after having a home inspection you can attempt to renegotiate.  

    0Reply
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