Are you planning to buy a home in a competitive market? If so, this article is for you. It explains when to walk away from a bidding war to prevent financial hardship and buyer’s remorse.
If you’re in a competitive real estate market with limited supply and strong demand, there’s a good chance you could get caught up in a bidding war with other home buyers.
There’s an equally good chance those other buyers could drive up the sale price, to the point that it exceeds your budget. Which begs the question:
When should you walk away from a real estate bidding war?
Here’s the short answer: Before entering the housing market, you should determine how much you can afford to pay each month in total housing costs. If a bidding war increases the sale price to the point where it stretches your budget, it’s time to walk away.
What Is a Bidding War in Real Estate?
Within a real estate context, a “bidding war” occurs when multiple buyers are competing to purchase the same property at the same time. This can happen in a hot seller’s market, when there is more demand for homes than there is supply.
Buyers in a bidding war will typically submit offers that are higher than the initial asking price. They might also waive certain contingencies, such as the home inspection or appraisal, in order to make their offers more attractive to the seller.
Here’s a realistic scenario where a bidding war drives up the price:
- A single-family home in a desirable neighborhood is listed for sale for $500,000.
- The home is in good condition and receives multiple offers within days of being listed.
- Two buyers are particularly interested in the home and each submit offers of $525,000.
- The seller then counters with an offer of $550,000 to each buyer, asking them to respond by the next day.
- One buyer is willing to go up to $575,000, while the other buyer is willing to go up to $580,000.
- The seller accepts the offer of $580,000, and the home sells for $80,000 more than the asking price.
In this scenario, a real estate bidding war drove up the sale price of the home by $80,000. That’s because the two buyers were willing to pay more for the home than the asking price, in order to secure the purchase.
Bidding wars tend to be more common in a highly competitive real estate market where homes sell quickly. We saw plenty of this a few years ago, during the pandemic-fueled home buying frenzy that swept across the nation. Bidding wars became a common occurrence back then.
In a slower real estate market, on the other hand, bidding wars tend to be more of a rarity. When there are fewer buyers and plenty of properties available, you might be the only one submitting an offer on a home at a given time. So a bidding war is less likely to occur.
Knowing When to Walk Away from a Bidding War
Currently, housing markets all across the United States are experiencing inventory shortages. This increases the likelihood of a bidding war between competing buyers. So it’s something you want to prepare for before entering the real estate market.
Most importantly, you should know when to walk away from a bidding war. Having a good exit strategy will help you avoid stretching your budget or creating financial hardship for yourself. So let’s talk about how and when to walk away from a real estate bidding war.
Step 1. Establish a home buying budget.
The first thing you’ll want to do is establish a basic home-buying budget for yourself.
But don’t worry, you don’t need to be a personal finance guru to tackle this project. All you need to do is compare your net monthly income (or “take-home pay”) to your recurring expenses. Subtract the latter from the former and work down from there.
Many financial advisors recommend using the 28/36 rule when establishing a housing budget for yourself. This rule states that you spend no more than 28% of your gross monthly income on housing costs. And you should spend no more than 36% on all of your debts combined (mortgage payment, credit cards, car payment, etc.).
But this is just a general guideline that might not apply to all borrowers. The most important thing is to determine how much you can comfortably afford to spend on your monthly housing costs, before making an offer on a house.
Your budget can also help you determine when to walk away from a bidding war. If competing buyers drive up the sale price to the point that it exceeds your comfort zone, it’s time to walk away and find another house.
Step 2. Research your local housing market.
Pop quiz. What’s the median home price in your city? If you cannot answer this question off the top of your head, or at least provide a close estimate, you have some homework to do.
Before entering the real estate market, spend some time reviewing recent sale prices in the area where you plan to buy a home. This kind of insight is always helpful, but it becomes mission-critical in the case of a real estate bidding war.
Local market awareness can help you determine how much to offer on a home. It will also help you recognize the warning signs that a bidding war is getting out of control.
Step 3. Work with your agent to create an offer strategy.
A real estate bidding war can be a hectic situation for the home buyers involved. So, if you happen to be in a competitive real estate market where bidding wars are likely, you’ll want to create a plan ahead of time.
Work closely with your real estate agent to develop an offer strategy. This kind of forethought can maximize your chance for success. A knowledgeable real estate agent can prove invaluable when it comes to making an offer, dealing with bidding wars, and negotiating with sellers.
Step 4. Compare the asking price to comparable sales.
You’ve probably heard the term “comps” used in a real estate context. This is short for comparable sales.
A comparable sale is a home that has sold recently in the area where you are planning to buy. Specifically, it’s a house that is similar to the one you are considering. By reviewing these comps, you can get a better sense of how much a particular home is worth in the current market.
If you get caught up in a bidding war that drives the sale price well above those comparable sales, you should consider it a warning sign. In this kind of scenario, the buyer who ends up purchasing the property might end up overpaying to the point of having negative equity.
Negative equity occurs when the outstanding balance on a mortgage loan exceeds the current market value of the property. This situation is also known as being “underwater” or having an “upside-down” mortgage. Negative equity could make it harder to sell or refinance the home later on down the road.
Step 5. Make a strong initial offer based on your research.
Housing market inventory is tight right now, and that probably won’t change anytime soon. Because of this, sellers in many cities typically receive multiple offers from buyers shortly after listing their homes for sale.
From a buyer’s perspective, this means two things:
- It increases the chance that you will encounter a bidding war.
- It underscores the importance of making a strong first offer.
If you encounter a multiple-offer scenario—where several buyers put in offers on the same property at roughly the same time—you won’t get a second chance. You have to get it right the first time, by submitting your strongest offer based on your market research.
Your real estate agent will help you prepare your offer, using comparable sales and factoring for those other competing buyers. Ultimately, however, you’ll be the one making the call. So make it a good one.
Step 6. Be prepared to revise your offer due to competition.
When you submit an offer to buy a house, you’ll encounter one of three outcomes:
- The seller will accept your first offer as-is.
- The seller will reject your offer in favor of another buyer.
- The seller will present some kind of counteroffer.
But in a competitive real estate market, there can also be a fourth scenario: the seller just sits back and watches the competition.
In this scenario, the listing agent will tell all of the interested buyers that there are currently X number of offers being considered, and some of them are higher than yours. And would you like to make a higher offer?
Buckle up. You’ve just encountered a bidding war!
This is where your budget and market research come back into play. Your budget will help you avoid offering more than you can realistically afford. Your market knowledge will you determine if you’re bidding more than the home is worth, and by how much.
These insights will also help you determine if and when it’s time to walk away.
Step 7. Consider that you might be overpaying for the home.
Home buyers involved in bidding wars often end up overpaying for a home. In this context, “overpaying” occurs when a person pays well above the market value for a house.
For instance, if the comparable sales data show that similar homes have sold for $450,000—but you end up paying $550,000 for the house—you’ve probably overpaid.
Overpaying is one of several reasons why home buyers end up with “buyer’s remorse” after making a purchase. But that’s not the only concern.
Paying more than market value can lead to a lack of equity in the home. If the property value doesn’t increase going forward, you might find yourself in a situation where you owe more than the home is worth.
Paying above market value can also cause problems when it comes to the home appraisal. If you’re using a mortgage loan to buy a house, your lender will have the property appraised to make sure it’s worth the amount you’ve agreed to pay. If the home appraises below the purchase price, you might have to pay the difference out of pocket.
Bottom line: If your instincts and data tell you that you might be overpaying for a home, it might be time to walk away from the bidding war.
Step 8. Remember there will always be another home to buy.
Buyers who get sucked into bidding wars often feel like they’ll never find another home as “perfect” as this one. But even in a tight real estate market with limited inventory, buyers can almost always find another home to purchase.
It might take time. In a competitive housing market, the house hunting process can take months. Even so, you have to remember that another suitable property will come along eventually. And it might have a lower price tag.
Warning Signs That You Should Pull Back
Here are some warning signs that it might be time to walk away from a bidding war:
- The price has exceeded your budget. It’s important to set a budget before you start shopping for a home—and to stick with it. If a real estate bidding war pushes the sale price over your budget, it’s probably time to walk away.
- You’re feeling pressured. A bidding war can be a stressful experience. If you’re feeling pressured to make an offer that you’re not comfortable with, it’s probably time to move on.
- You have doubts about the house. If you’re having doubts about the house, don’t feel like you have to stick to your offer in a bidding war. It’s better to walk away now than to regret your purchase later.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author