It’s no secret that many aspire to live and own a home in Los Angeles. With its balmy climate, stellar lifestyle offerings, and proximity to both land- and water-based recreation, it’s truly a complete package.
As a result, there is a high demand for residential properties across the city– and a housing inventory that is struggling to keep up. It’s not uncommon for multiple homebuyers and real estate investors to compete for a single property. This triggers a bidding war, where the best and often highest offer wins.
So– how do you win a bidding war and is it possible to avoid it altogether?
Table of Contents:
THE EARLY SIGNS OF A BIDDING WAR
Home sellers are more likely to recognize if a bidding war is about to brew, with signs such as early interest before listing and buyers inquiring about who else has offered. Identifying the signs is trickier if you are the buyer, which is why it’s highly recommended to work with a real estate agent.
Real estate agents often run in each other’s networks if they’re not already part of the same teams or brokerages. Your agent may be able to hear through the grapevine if the home you want to buy is already receiving a lot of attention and inquiries. The following situations can also indicate that a bidding war is about to break out:
- The property is listed for a lower price: Sellers often use this pricing strategy in hopes of selling their home for a higher amount. Sometimes, it works so well that a bidding war occurs.
- “Coming soon” listings: Another method for some sellers to generate more interest for their property is by marketing it as “coming soon” instead of outright putting it on the market. It can also be a real indication that the seller has already received multiple inquiries and is preparing to accept bids.
- Back-to-back tours: Sellers – or their agents – booking multiple home tours in a day doesn’t automatically mean a bidding war is imminent, but it’s an obvious sign that you’re not the only one interested in the property.
- There is a deadline on offers: Another sign that can point to a bidding war is if the seller has imposed a deadline on offers. It creates a sense of urgency among homebuyers, causing some of them to offer amounts above the asking price and, eventually, snowball into a bidding war.
Can you avoid a bidding war?
Yes, absolutely. Bidding wars can result in protracted homebuying experiences where buyers can also find themselves paying significantly for overpriced homes. It can be stressful and, in the end, the house might not even be worth it.
But some factors, including the interest your dream home is generating, are beyond your control. If you want to avoid a bidding war altogether and secure that Los Angeles home without having to deal with competition, here are several things you can do:
- Make sure you’re financially ready: Before you hit the Los Angeles real estate market, your finances should already be in order. Pre-qualification? Done. Pre-approval letter from your preferred lender? Secured. Proof of financial capacity and other documentation if you’re making an all-cash offer? In an envelope and ready to be handed to the seller’s agent for review.
- Keep your ears open: When it comes to buying a home in a market like Los Angeles, it pays to be a little more aggressive with your search efforts. Instead of relying on online listings to scope what’s in the market, listen to community news and even updates from people you know. You might find various opportunities to seal an off-market deal when you keep tabs on your personal network. (Your agent does this, too!)
- Make your first offer your best offer: A healthy– and realistic– perspective to take on when buying a home in Los Angeles is to assume that you only have a single chance to impress a seller with your offer. Go all out: set a good price, waive certain contingencies to fast-track the sale, offer more earnest money, and include an escalation clause, among other things.
If a home you’d like to buy is already in the middle of a bidding war, it may be in your best interest to skip it and search for another property. In this scenario, you are already a latecomer and the price has already been driven up. While you can try your luck, you will already be paying for an overpriced home.
WINNING A BIDDING WAR
What if a bidding war is simply unavoidable? Here are several tactics to help you win that dream home.
Learn everything you can about the seller
Sellers have their own priorities in mind when listing their home on the market. They could be operating on a tight schedule or need some flexibility when it comes to move-in dates. Some prefer all-cash offers, others want to close the sale as soon as possible. There are also sellers who could care less about prices, but would like to pass on their homes to those who will love it as much as they did– or still do.
So, before you put together an offer, identify the type of seller you’re dealing with, their motivations behind selling, and what they would like to get out of the sale. This can be tricky especially if the seller is private, in which case you can entrust the task to your agent.
Use the information as parameters when putting together your offer– or don’t. Such details, after all, can also help you decide whether you would like to pursue the property.
Be ready with your pre-approval letter
Just like in normal circumstances, a mortgage pre-approval can be your ticket to home-buying success. It shows the seller that you’ve done your work and have already been vetted by your bank or preferred lender. Basically, having mortgage pre-approval shows that you are halfway done to securing a loan.
The challenge lies in processing times and validity. Lending institutions follow different pre-approval processes, affecting just how fast they can issue you a letter. Moreover, they have your financial details to scrutinize. If they find the information you submitted wanting, you might need to wait a little longer to be pre-approved and get that coveted letter.
When it comes to applying for mortgage pre-approval, the most sound advice is to do it just before you enter the housing market. This gives you ample time to complete the application, as well as enough days to search the market for a house you want to purchase. Most pre-approval letters are valid for 90 days. Should it expire before you find a home, you can request to have it renewed.
If you can, make an all-cash offer
Many sellers are enthusiastic about receiving cash offers. After all, it can speed up the home selling process significantly. Apart from eliminating the need to go through lenders, it poses less risk for home sellers, which is why cash offers tend to immediately jump on top of the pile. You can make the offer even sweeter by removing the appraisal contingency.
Parting with such a huge amount in one go, however, can be a scary and uncomfortable experience. In this case, consider getting delayed financing. This enables you to proceed with buying a home in Los Angeles through cash while remaining liquid. In simplest terms, you purchase a home with cash. After six months, you can take out a mortgage and your cash back through cash-out refinance.
Note that this tactic only works if you already have a sizable amount of money in your bank account. If your funds aren’t up to par with the house you want to buy, apply for a mortgage or explore other types of financing instead.
Waive contingencies
To win a bidding war, you’ll want to keep your offer as clean and straightforward as possible. Doing so might include removing certain contingencies, which some sellers might like since it can lead to a faster closing. That said, it’s understandable if you’re on the fence about waiving a contingency or two. After all, they’re designed to protect you– the buyer– from hiccups and issues.
The following contingencies pose the least amount of risk, making them relatively safe to waive:
- Early move-in: Waiving this contingency is beneficial for sellers because of two things: it gives them more time to sort out their next living situation and adds a layer of protection during the closing period, when the sale might fall through. For these same reasons, agents often advise their selling clients to never agree to this contingency.An early move-in contingency might seem advantageous for buyers, but removing it might be for your own good, too. In case the sale falls through, you avoid the possibility of being evicted and being homeless.
- Appraisal: This only works if you are making a true all-cash offer as most lenders require their borrowers to include this contingency.If you’re getting a mortgage, consider adding an appraisal gap guarantee instead. With this inclusion, you’re offering the seller additional payment in the event that offers for the house are higher than its appraised value. For example, you offered $1 million with a $10,000 gap guarantee, but the house only has an appraised value of $995,000. In the end, you’ll be paying $1,010,000.
- Home inspection: Home buyers are often advised never to skip home inspections, but if you are determined to win this bidding war, this is another contingency that you should consider waiving in certain situations.First, you are fully aware that the house in the middle of the bidding war is not in tip-top condition and are prepared to tackle the repairs. Second, you can skip inspection if your plan is to completely renovate the home or demolish it.But if you can’t find it in your heart to waive the home inspection contingency, consider a softer version where the seller is no longer responsible for the necessary repairs.
When it comes to removing contingencies, don’t just consider the seller’s wants. Think of your personal comfort level, too, as this will involve you taking on more risks. Your agent will be able to walk you through the importance of each contingency and associated risk level.
Increase cash payments
Another tactic to stand out in a bidding war is to offer to increase your initial cash payments.
On one hand, you can give a higher earnest money deposit, which shows your utmost commitment to buying your dream home in Los Angeles. Earnest money deposits are offer add-ons that usually cost 1% to 3% of the house’s asking price. They’re kept on escrow until closing, when you can choose to apply the funds on certain expenses, such as closing fees.
In a hot market like Los Angeles, you can give as much as 10% of the home price to serve as your earnest money deposit. But to be sure, consult your real estate agent as the amounts can vary based on market conditions.
The other option is to maximize your down payment which, at the same time, lowers your monthly mortgage payments. In a way, it’s a win-win situation: you lessen your debt and demonstrate your financial capability to the seller in just one move.
WHEN TO WALK AWAY FROM A BIDDING WAR
When it comes to bidding wars, it’s important to recognize when you’ve been defeated by other more aggressive buyers. Doing so saves you from sinking more time and resources on a particular property that might not even be worth the effort in the long run. Here’s how to tell if it’s time to wave a white flag:
- The offers for the home are already much higher than its market value, which might entail a financial loss on your part should you win.
- There are too many buyers bidding for the same house.
- You’re not in love with the house.
PARTNER WITH JAMES RESPONDEK WHEN BUYING A HOME IN LOS ANGELES
James Respondek and his team are skilled negotiators who can guide you through even the most intense bidding wars in Los Angeles– or avoid them completely, with your dream home secured. With over 35 years of experience buying and selling homes in Los Angeles and over $1 billion in total sales, you’re in extremely capable hands.
Get in touch with James today at 310.488.4400 or email him here.