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In today’s hypercompetitive real estate market, bidding wars on valuable properties are common. Fortunately, there are a few ways to resolve any challenges created when buyers compete against one another, as well as when multiple offers are placed on a property. Below, we’ll cover what a bidding war is, as well as the risks that some buyers and investors may be willing to take in a bidding war.
What is a bidding war?
A bidding war is when multiple buyers are competing to purchase a residential property. This happens when there are multiple offers on a single property, which then increases the property’s asking price.
How does a bidding war start?
Investors and realtors start bidding wars by deferring showings of the sale of a home. For instance, they might list the home for sale at the beginning of the week, but then may not show the house until Friday. Then, multiple cash buyers put offers on the property, thereby driving up the property’s price. The seller then puts up an offer deadline on the home.
Where are the most recent bidding wars occurring in New York?
In New York City, a bidding war is escalating in the luxury apartment industry with two- to four-bedroom apartments becoming hot commodities as of early this year. Specifically, the availability of inventory — as well as young people returning as the COVID-19 pandemic eases — is causing people to look for homes in Williamsburg, downtown Manhattan, West Village and Chelsea.
As an example, a realtor recently put a luxury apartment located in Greenpoint, two blocks from McCarren Park. and, within the course of 90 minutes, had already shown it to 18 people and secured six applications for rentals.
How can buyers avoid bidding wars?
The best way to avoid a bidding war is to have an adequate amount of cash on hand. This allows the buyer to avoid waiting for mortgage approval to secure the purchase of their home. That’s because a serious cash bidder is most likely to prevail over non-cash bidders in most bidding wars.
How can buyers obtain leverage in a bidding war?
Buyers can avoid bidding wars by agreeing to waive contingency clauses in the real estate sales contract. The most common contingency waived is the home repair inspection.
What is a home repair inspection?
Ordinarily, a home repair inspection requires the buyer to spend $400 to $1,000 to have a licensed inspector search for structural defects in a home. Inspectors often check for leaky roofs; defective heating or air conditioning systems; unsafe radon levels; or latent rodent or insect infestation. The inspection may also reveal undisclosed high levels of mold, asbestos or lead paint in the home.
How does waiving the home inspection contingency affect the typical buyer?
Waiving the home repair contingency usually makes the buyer more attractive to a seller in a bidding war because the seller won’t have to wait weeks for the inspection to be completed before closing on the property. However, while this may be good for an anxious buyer who’s eager to buy their first beach home in the Hamptons, they may also be walking into some obvious pitfalls after closing — which will raise their expenses moving forward.
What are the risks to waiving the home contingency inspection?
By waiving the home contingency inspection, the buyer risks immediately incurring the responsibility after closing for thousands of additional dollars to fix home leaks, deteriorating floors, and defective appliances potentially affected by faulty wiring or water damage.
In addition, the buyer also assumes the full risk for undisclosed defects. They may also be unable to secure property insurance or ever sell the property as it lacks a marketable title. Furthermore, the buyer also may be unable to negotiate a price reduction with the seller as the buyer assumed the risks of repairs in waiving this contingency.
Therefore, the buyer may lose their earnest money deposit and be held in breach of contract at the time of closing, as well as have to incur additional attorney fees if they don’t know when to walk out of the contract before it’s too late.
What is a mortgage contingency clause and how does it affect bidding wars?
A mortgage contingency clause is a condition in a real estate contract that requires the buyer to obtain adequate financing prior to purchasing a home. This clause also requires a statement of mortgage preapproval that is often contingent upon the buyer’s current income and credit standing. Buyers who are preapproved for a loan may also be required to submit a down payment to the lender.
What’s the difference between loan prequalification and loan preapproval?
Loan prequalification is not sufficient to secure lender approval for mortgage financing in the purchase of a home. Conversely, loan preapproval is sufficient to obtain lender financing or mortgage approval to purchase a home.
How does waiving the mortgage contingency affect bidding wars?
A buyer’s waiver of a mortgage contingency clause in their real estate contract may expedite their likelihood of closing on a home. However, buyers should be aware that this waiver could place them in jeopardy of defaulting on their contract. For example, a buyer who bypasses the income report and credit history may not actually be able to secure an appropriate mortgage or loan preapproval.
As a result, they may lose their earnest money allowance or any deposit that they put toward the purchase of the home, which often equates to about 10% of the value of the home.
What is an appraisal contingency?
An appraisal contingency is a condition in the buyer’s real estate contract that requires the buyer to obtain a home appraisal evaluation before they can purchase a home. This often requires a fee of $400 to $1,000 and may take several weeks to complete. In the meantime, other buyers who waive this contingency may jump ahead.
This contingency protects the buyer by allowing them to get an appropriate valuation of the property’s true appraised value, as well as to secure a mortgage that appropriately finances their purchase — without having to obtain other means of financing to purchase the home.
What happens when a buyer waives the appraisal contingency?
Buyers who don’t have to satisfy this contingency before heading to closing can move much faster in a bidding war. However, lacking a formal appraisal of the property, the buyer may also be setting themselves up for failure if the appraised value of the home proves to be substantially less than the asking price.
This may then leave them unable to secure mortgage approval of the total purchase price agreed to with the seller — which could be especially troublesome in bidding wars with multiple purchasers during a housing boom.
What is an appraisal gap clause?
This clause is typically found in real estate contracts during bidding wars. In the event that there is a difference between the property’s sale price and its appraised price, this clause requires the buyer to cover the difference between the two.
What are the most common ways for cash buyers to avoid bidding wars with other buyers in the real estate market?
Affluent buyers have an inherent advantage when buying a home in a bidding war as they often have more than enough cash to offer. So, to avoid a bidding war:
- Offer 10% to 15% or more over the asking price of the home without the need for loan approval.
- Waive all contingencies before closing on the home, including financial, home repair, appraisal, environmental or title contingencies.
Wealthy buyers can also leverage their interests in a bidding war by getting ahead in line by:
- Covering one-half of the earnest money payments or deposits upfront (or sometimes even in full).
- Settling the full amount of transfer or real estate tax recordation fees on the property.
- Paying all appraisal fee gaps that may result from differences between the appraised value and the requested sales price of a home.
What are some common contingency waiver clauses used in real estate contracts?
Clauses waiving home inspection repairs may state:
“Buyer hereby waives and removes his or her inspection contingencies as referenced in the above purchase and sales contract and elects to proceed with the closing without delay. In removing these contingencies, buyer hereby makes the $100,000 earnest money deposit non-refundable per the terms and conditions of the above-referenced purchase and sale agreement.”
Clauses waiving financing contingencies may state:
“Purchaser’s obligations under this agreement are contingent upon his or her securing adequate financing from a financial institution upon terms acceptable to purchaser, in purchaser’s sole discretion, within a reasonable time, which shall be no less than ___ days from the execution of the agreement. Nothing contained herein shall obligate purchaser to make any specific efforts to make any particular inquiries or applications with respect to financing. In the event that purchaser fails to obtain adequate financing, purchaser may provide notice to seller within ____ days and terminate this agreement.”
What other contingencies do real estate contracts have to protect buyers?
Contracts may also have contingencies mandating that sellers provide adequate utility services, adequate access to public roads and satisfactory condition of any improvements on the property.
Taso Pardalis is a founding partner of the Law Offices of Pardalis & Nohavicka, a leading full- service NYC law firm with offices in Manhattan, Queens and WeWork. Taso may be a well-known attorney with many cases making headlines in major media outlets, but at heart, he is a true entrepreneur that believes in supporting the small business community. His areas of concentration are: Intellectual Property, Trademarks, Corporate, Business Law and Real Estate Law.
Jacqueline Weiss, a graduate of Union College, received her Juris Doctor from Albany Law School and is admitted to practice in the States of New York and New Jersey. She has completed NYS Basic Mediation Training for Community Mediation and interned with Justice Pineda-Kirwan in the NYS Supreme Court of Queens County and is now a full time attorney at Pardalis & Nohavicka. Ms. Weiss has experience in healthcare and the defense of professional liability claims involving physicians, hospitals and nursing homes.