BOSTON (TheStreet) — The U.S. housing sector has rebounded strongly enough in parts of Boston, San Francisco and other popular markets that some properties are attracting bidding wars — and here's a look at how you can win them.
"I wish it were as simple as just offering the most money, but there are about a dozen factors that make up your offer — and the highest bid doesn't always win," says San Francisco agent Mark Colwell of brokerage giant Redfin, which recently studied thousands of bidding wars to see which negotiating tactics work best.
Bidding wars involve two or more parties making competing offers for the same house or condo. Sellers often play bidders off of each other to get the highest price for a property, sometimes getting more money than the homeowner originally listed for.
Although the housing bust put an end to bidding wars in many cities, the battles have returned with a vengeance in some markets.
"Here in San Francisco, list prices are really just [artificially low] prices that are designed to create bidding wars," Colwell says.
But Redfin's study, which looked at some 10,000 deals that its agents participated in last year, found that there are ways to improve your odds of winning.
Colwell says buyers who offer things that will speed up a sale — such as paying cash instead of relying on mortgage financing — can often beat out higher bids.
"There are a lot of cases where the sellers are willing to give a bidder a huge discount in exchange for the certainty that a deal will go through," he says.
Here's a look at the tactics (other than simply offering more money) that Redfin concluded work best. The firm, whose agents fill out detailed surveys about every deal, calculated how much each method improves your odds by comparing how many bidding wars its agents won using a given tactic vs. how many they won without it.
Fourth-best way to win a bidding war: Include a personal letter
How much this improves your odds: 9%
Colwell says bidders who write sellers letters about how much they love a home not only show they're committed to the deal, but also tug at owners' heartstrings.
For example, one young couple he represented recently won a bidding war by including a sonogram of their unborn baby with their offer.
"You want to convey that you love the house and aren't going to simply shop around for other places while home inspections are going on," Colwell says.
Third-best way to win a bidding war: Waive inspection/financing contingencies
How much this improves your odds: 15%
Inspection contingencies let you back out of or try to renegotiate a deal if a home inspector you hire uncovers problems, while financing contingencies allow you to nix a sale if you can't finalize your mortgage.
Colwell says waiving one or both of these terms boosts your odds of winning by giving sellers confidence that the transaction will close.
Bidders who waive these contingencies must finalize deals no matter what their home inspectors find, while those who can't get loans must forfeit their deposits (often 3% of a sale's planned price).
Colwell says sellers don't want deals to fall apart at the eleventh hour, as rival bidders will have likely moved on and research shows putting a house back on the market will drop its value by up to 8%.
Second-best way to win a bidding war: Do a pre-inspection
How much this improves your odds: 21%
Often tied to waiving an inspection contingency, a pre-inspection involves buyers hiring home inspectors to look over properties before house-hunters make offers.
Colwell says this tactic demonstrates a buyer's seriousness about closing, both because home inspections cost money and because the house-hunter will generally also agree to waive the inspection contingency.
"This tells the seller that you're really committed to buying the home and aren't just throwing out an offer willy-nilly with plans to renegotiate later," he says.
Best way to win a bidding war: Make an all-cash offer
How much this improves your odds: 28%
Cash really is king when it comes to bidding wars.
Colwell says all-cash offers frequently beat out equal or higher bids that require rivals to finalize mortgages before closing sales.
"With a cash offer, the seller knows it's a done deal," he says.
The agent adds that bidders will typically back up all-cash offers with bank statements showing they really have the money. "That way, sellers can move on with their life plans," Colwell says. "They can start to move money around to pay off their mortgage, pay for their kids' college educations — whatever."