Bidding War

Updated on March 27, 2024
Article byKhalid Ahmed
Edited byKhalid Ahmed
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Bidding War?

A bidding war refers to a competition wherein multiple property bidders bid competitively for buying the same premium property at a prime spot. They do it by offering a price higher than listed by the seller leading to high demand and the high price of the property. It is a ploy that the sellers use in real estate to get the highest price for their property which is higher than the listed market price.

Bidding War

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It usually occurs for properties in hot market areas with high home demand, but such homes are scant. Often big cities like New York witness bidding contests by the buyers for properties. It is profitable to the seller and a loss for the buyer.

Key Takeaways

  • A bidding war meaning is often described as a war between multiple buyers to buy a single premium property or business in a posh and metropolitan city.
  • It happens rapidly, so it leaves the buyers vulnerable to making irrational financial decisions.
  • It is best suited to benefit the seller, and the buyer does not gain out of the deal as initially, the seller deliberately keeps the price below the market price.
  • Like auctions, bidding contests happen when multiple buyers offer full cash on sale, abide by sellers’ terms and conditions, and offer to forego contingency in case of deal failure.

Bidding War Explained 

A bidding war meaning describes a situation where multiple potential buyers bid to buy the ownership of the same property at any price to defeat other contenders in the race. It means a property’s location is in a posh area where a suitable home is difficult to find. If any property comes up for sale, everybody wants to buy it at the highest price. As it is a competition between the real estate bidding war buyers, the bidding action pushes up the final price beyond the property’s original value.

It often happens in a tight real estate market during housing booms. After a property in a posh competitive, highly developed area is sold in the real estate market, many interested buyers come forward to bid for the property. Quite often, the selling price of the property is kept below the market price by the sellers to attract more buyers and start a bidding contest. Many bidders give the seller’s agent a written bid with the highest quoted price. The buyers often sent the below-bidding offer to the seller containing the conditions which compel the seller to wait for triggering the bidding contest for his property to get the maximum price and best terms and conditions for the sale of their property. 

As it happens rapidly, it leaves the buyers vulnerable to make irrational financial decisions.

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Bidding War Decision-Making Factors

Here are some decision-making factors that the sellers consider while bidding war on house

  • First, an offer letter to buy the property in full cash. 
  • Terms to accommodate the sellers’ conditions like time for searching for a new property by the seller.
  • Buyers show an emotional connection with the seller’s property.
  • Offering the contingency in favor of the seller in case the deal from the buyer fails.

All the above-listed offers by buyers contribute greatly to converting a bid for the property into a bidding contest. However, per a survey, many buyers are forced to pay 1% to 3% above the listed price of the properties they buy using bidding contests.

Moreover, many sellers are quite innovative in pricing their property to take the maximum out of the deal through the bidding process. Therefore, participating buyers should carefully recognize any fictitious offers that the sellers may make to increase the final selling prices. 

One must note that the shark tank bidding war is not related to a property bidding contest.

Example (Bidding War On House)

Let us consider a bidding war on house example to get a clear picture of the concept.

Let’s assume that a house listed by seller A in the most demanding locale of New York City with an initial list price of $500,000. The place has high demand amongst buyers who keep on looking for purchasing good properties for buying.

As soon as the property is listed, seller A receives offers from multiple homebuyers with an escalation clause stating the maximum price they would pay to buy the property. As a result, a bidding contest between the buyers gets initiated. Hence, the property owner can increase the price to get the maximum selling price for its property. 

Furthermore, this will push the listed price to a higher side. And seller A will get much more than he expected from selling his property. Consequently, he could get upto $50,000 more than the listed price he had hoped for the property. However, buyers will end up paying more than the actual market price for the property. So, in such cases, bidding contests always benefit the sellers more than the buyers.

Causes

The bidding contests do not result overnight for a listed property randomly everywhere. Instead, the real estate bidding wars happen due to the following reasons:

  • The listed property is in a market with an acute shortage of quality properties for sale.
  • There is a lack of decent property in that area for sale.
  • Home buyers have a deadline to buy homes for their personal needs.
  • The listed price of a property might be purposefully underpriced to stimulate bidding contests.
  • Multiple home buyers submit the offer price in writing to the seller by adding the escalation clause triggering bidding contests. An escalation clause ensures the willingness of the buyer to pay more than the property’s original value.
  • The homebuyers do not make the all-cash offer for the property to the seller.
  • The closing dates from the buyers might be similar, leading to bidding contests.

Frequently Asked Questions (FAQs)

How to win a bidding war on a house?

For winning a bidding war on the house, one must – 
1. Have supplementary cash to pay in cash 
2. Have a pre-approval for the loan
3. Arrange for a good lawyer and asset details
4. Eliminate all contingencies
5. Insert clauses of escalation 
6. Customize the bid 
7. Offer a promised closing date 

How does a bidding war work?

A bidding war gets initiated when a house, property, or business gets listed for sale in a location where the demand for such property is high and supply is low. If there is no single winner of the bid, it becomes a full-fledged bidding contest between the buyers; hence the prices continue to rise. In such cases, multiple bidding series takes place for the buyer to decide the winner of the bid.

How to avoid a bidding war when buying a house?

The best method to avoid a bidding war while buying a house is to make the first buy offer the best one in a way that is above the asking price. The buyers should pay in full cash.

How high to go in bidding war?

The best higher limit to go for in a bidding war is to offer a minimum of 1% to 3% above the seller’s asking price. 

This has been a guide to Bidding War and its meaning. Here we discuss Decision-Making Factors for bidding war with example and causes. You can learn more from the following articles – 

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