We’ve been on both sides of real estate transactions where the evil subject of bidding wars came up. For some reason some buyers are terrified of this situation and they respond with the statement that they “do not intend to get involved in a bidding war” as if somehow this situation is going to cause them to overpay for a home. I’ve had this debate with a variety of buyers, some of whom are otherwise very sophisticated. Frankly, I’ve never understood the issue. It’s not like a “bidding war” is going to force you to overpay for a property. After all, you ultimately decide what the most is that you are willing to pay.
Think about it this way. Bidding wars usually result when a property is priced really low. Let’s say that we’re talking about a home that is priced at $400,000 with comparable properties priced at $425,000 (it’s usually not this clear cut but I need an example). You’d like to buy the home for $400,000 but you would be willing to pay as much as $415,000 because you really think it’s worth that much to you – you have not seen anything else you like in this price range. You are planning on putting in an offer for $400,000 when you find out that there is another offer on the table. You reasonably assume that if you bid $400,000 there is a good chance you will be outbid. At this point you basically have two choices: you can either bid $415,000 or walk away because you “do not intend to get involved in a bidding war”.
If you bid $415,000 and win you certainly haven’t overpaid. You rationally decided that it was worth that much to you so you haven’t lost anything and you were able to buy a home for $10,000 less than comparable homes. Seems like a good deal to me. If you are outbid at $415,000 at least you can rest assured that the other buyer overpaid by your standards and the only thing you lost was the opportunity to overpay for a home.
On the other hand, if you walk away from this “bidding war” you basically allow the other buyer to buy the home for $400,000 – they certainly aren’t going to raise their bid in a non-competitive situation. How have you gained anything by walking away? You might have been able to buy the home for $415,000. Are you really going to feel good about letting someone else buy a home that you wanted for $15,000 less than what you would have paid? Will you feel better when you end up paying $425,000 for another home that is not in a multiple bid situation? Will you feel even better if that alternative home was listed at $450,000 and you can buy it for $425,000?
The logic of avoiding a bidding war totally escapes me. Based upon conversations with the most sophisticated of my buyers, the only possible explanation that I have been able to come up with for this skewed thinking is that buyers are confusing not getting the best possible deal with overpaying. These buyers have told me that because there is another bidder you know you are going to pay more than you would have otherwise. That is absolutely true. However, the goal in buying a home shouldn’t simply be to get the best possible deal but to get a reasonable deal for a home you want to live in. As I just demonstrated in the example above, paying a little bit more than the best possible price doesn’t mean you have overpaid.
Am I missing something?
Perhaps the term “bidding war” is the misnomer. When I hear that term I think, in the context of your example, that I’ll offer $415K and the other party will match it and then I have to counteroffer and the other party will then counter offer, etc until we go beyond the $425K you mentioned.
I know it rarely if at all work like this, but this is the psychology that goes on in a buyer’s head.
Yeah, a couple of things…usually when both parties are informed that there are multiple bids the approach is to request your best and final so there is no back and forth and this is also believed to get the seller the highest price possible. However, I do have a strategy for giving my buyers another shot after this if they want it.
The other thing though is that I do believe that a lot of people believe exactly what you say…that they will somehow be tricked into going above $425K. I always found that odd because it assumes that the buyer has no self control. It’s kinda weird.
Is it legal for a seller to say there is another buyer who has put in a bid and there isn’t in order to try to get you to raise your offer price? That’s what would concern me.
It would be illegal for a realtor to do that. It is merely unethical for a seller to do that. There would be no way to enforce any kind of law against the general public doing that. However, from a buyer’s standpoint, in a case like this, as long as you don’t exceed what you think is a fair price then you would only end up paying more for a property but you would not necessarily overpay.