7 Ways to Win a Bidding War on a House You Want

Although the term "bidding war" may conjure images of multiple homebuyers duking it out over who will be the successful purchaser of a new home, this process is actually much more civil. Even though this type of war isn't fraught with physical peril, it's often waged with a high level of emotional intensity. If your dream home is at the center of this drama, a strategic plan to win the bidding war can give you a leg up over the pool of potential buyers who all want the same house.

Savvy homebuyers know the value of getting a mortgage preapproval even before they begin a serious search for a new home. This homebuying strategy sends a clear message to lenders, real estate agents, and sellers that you are serious and not just casually browsing home sales, dreaming of "one day." This also gives your real estate agent something concrete to offer the seller's listing agent, confirming that you have secured preapproval for financing with a specific lender (or lenders if you have been shopping for a mortgage with multiple lenders).

You should understand the importance of being preapproved vs. prequalified. A prequalified buyer has only passed the first step toward a full mortgage approval by getting a lender's estimate of how much the buyer may be able to borrow. A preapproved buyer has gone far beyond this first step and received a lender's confirmation of how much the buyer will be able to borrow based on a review of creditworthiness and other qualifying factors.

One tactic that can stop a bidding war dead in its tracks is making a cash offer. Most homebuyers don't have enough cash on hand to use this strategy, but if you do, it's one of the surest ways to clinch a deal on the house you want. When you don't have to secure financing for a house, it eliminates lots of steps in the purchase process, including the need to qualify for a loan by producing sufficient income, a suitable credit score, and an acceptable debt-to-income ratio.

Go ahead and get a proof of funds letter from your banker to fast-track your cash offer even more. This letter supports your claim that you have sufficient cash reserves to purchase a specific home. Note that any money that may be invested in stocks and mutual funds isn't considered toward your cash offer; only money to which you have easy (or immediate) access counts here. What you can do, however, is transfer funds from investment accounts into a separate bank account that allows you to withdraw the funds upon request.

One type of bidding war for purchasing real estate occurs when an interested party ups the ante by offering to buy the property for more than the asking price. Not surprisingly, this maneuver will have a seller doing cartwheels at the prospect of receiving a higher purchase price. If this higher offer is bumped up even further by other competing offers, the seller will turn an even bigger profit.

The impact to buyers has the opposite effect, as more of their money is going out the door in an effort not to lose the house they love. Keeping emotions in check can prevent one hazard of offering more than the asking price. Also, it's important to note that if the property appraises for less than the amount of the purchase price, you may have to pay the difference out of pocket. Lenders won't pick up the tab by overextending themselves and financing more than the appraised amount.

If you really want to win a bidding war against other competing buyers, consider adding an escalation clause to your purchase offer. This addendum works by establishing the highest price — your best offer — for purchasing a property. Your preliminary offer will increase automatically with counteroffers that top other bidders' offers until your maximum limit is reached.

For example, you may initially offer $200,000 for a property, but the escalation clause in your purchase offer includes incremental increases of $10,000 until your highest and best offer of $260,000 is reached. Another buyer may outbid your opening $200,000 by offering $210,000. This is when your escalation clause kicks in and adds the first $10,000 increase to the other buyer's bid of $210,000, which puts a total of $220,000 in your court. The bidding war ends when the other buyer offers more than your maximum of $260,000 or when the other buyer folds with an offer that's less than your maximum of $260,000.

If you're maxed out with the highest offer you can manage under your escalation clause and another buyer makes a purchase offer that's above your limit, increasing your down payment amount may be your next best move. The upper limit of your escalation clause range may be determined by the amount your lender has approved for funding your mortgage, which means you may be unable to secure additional financing. You may still be in the game if you can come up with cash in the form of a higher down payment or earnest money. This move not only assures your seller that you won't have to obtain additional financing but it may even bump the other buyer out of the bidding war.

You don't want to wait, however, until the eleventh hour to throw only your promise of more cash into the bidding war ring. If you use the escalation clause strategy, keep documentation in your arsenal of paperwork that supports your claim of additional funds.

When you enter a contractual agreement to buy a house, your contract may be populated with certain contingencies that protect you against defaulting on the contract and allow you to back out without incurring financial penalty. Common contingencies include a home sale contingency (which gives buyers a window to settle their own home sale before financing a new one) and an appraisal contingency (which guarantees that a home will appraise for a minimum value, otherwise the deal falls through). You'll even get a refund of your earnest money if you have a financing contingency clause, which confirms that your ability to buy a house is contingent on being able to obtain financing for the property. In other words, if your financing falls through with the lender, you're not contractually obligated to purchase the house.

You can waive any or all contingencies in your contract (including the financing contingency clause) in an attempt to win a bidding war, but be aware of the potential consequences of doing this. Sellers benefit when contingencies are waived, because these waivers typically shorten the time frame from contract to closing. And sellers also stand to benefit financially if you waive the financing contingency and your financing falls through. If this happens, you'll lose your earnest money, which goes to the seller.

Sellers may have recourse to sue you for breach of contract depending on your state laws, and sellers may also have the legal right to sue you for financial losses that they suffer because they took their property off the market when they entered into contract with you to buy it.

Before becoming homeowners, buyers want to make sure that the house they want is free of structural problems or other issues. Because of this, a home inspection is generally one of the key contingency components of a real estate contract. This inspection contingency financially protects a buyer against any unforeseen problems, including things like outdated wiring, corroded piping, or shifts in the foundation. Just like other contractual contingencies, such as a financing contingency, an inspection that doesn't pass muster (because of a significant problem that needs curing) results in the return of earnest money and releases the buyer from the purchase contract.

Like other contingencies, an inspection contingency is optional. A buyer may waive the right to inspection in order to secure a contract and win a bidding war. However, forgoing a home inspection is another potential buyer-beware pitfall. This is a risky move, but it will strengthen your offer.

For example, if a seller has more than one offer and all but one potential buyer requests the inspection contingency (which is a smart move for the buyer), the seller often accepts the offer from the buyer who waives the inspection and is "on go" to move forward with the closing. Waiting for an inspection can be a lengthy process, and then waiting for an inspector to submit a report adds more time to the process. Then, if the inspection reveals issues that need resolving before the property is acceptable (according to contractual terms), the seller may have to go out of pocket to cure any deficiencies (again, depending on the contractual terms). So most sellers jump at the chance to accept an offer from a buyer who waives the inspection.

Should you choose to forgo the home inspection, at a minimum you should do a walk-through of the home and check to see that:

• Lights and electrical receptacles work.
• Faucets, showers, and toilets don't leak and don't emit unpleasant odors.
• The appliances work.
• The foundation is free from cracks.

Money — and the more the merrier for most sellers — is often a seller's bottom line in a bidding war but not always. Although all sellers want to sell their home for the highest purchase price possible, there are often mitigating factors for which a certain seller may agree to a slightly lower offer in exchange. For example, the promise of an earlier (or later) closing date to facilitate the seller's move to a new home can be enticing.

Don't overlook the value of writing an effective cover letter when submitting your purchase offer. A cover letter increased a buyer's odds of winning a bidding war by 52.2 percent. This personal gesture appeals to many sellers, and it's sure worth the effort. Include details about yourself and your family, comment on why the home specifically appeals to you and connect with the seller by sharing common interests that you noticed when you walked through the house or around the property.

However, what's referred to as a "love letter" from a potential buyer to a seller is not always the move to make. The Fair Housing Act protects buyers against discriminatory decisions made by sellers; for example, this law prohibits a seller from selecting a buyer based on age, gender, race, chosen political party, etc. And although a buyer is absolutely not in violation of the Fair Housing Act by presenting a letter to a seller, the seller potentially violates this law when choosing (or not choosing) a buyer slanted toward illegal bias(es). Another heads-up about writing a cover letter is that your real-estate agent may be the only authorized representative to deliver all written communication to a seller on your behalf.