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How to Win a Bidding War

Contrary to what most people believe, it's not all about money. Sellers will sometimes take a lower offer, if it means less hassle.

"What sellers really don't want to do is waste time," says John Walsh, president of the Connecticut-based lender, Total Mortgage. This means having all the paperwork - pre-approval, proof of income, bank statements, and work history - all organized and ready to go. However, you still have to beat out all the other bidders.

The best way to catch a seller's attention is by paying cash. Ever since the housing bubble burst, getting a mortgage has become an arduous task, and securing a loan, even with the uncertainty of not being approved, can take weeks. With all-cash offers, sellers know that the buyer is qualified, and the long loan-approval process is bypassed.

Another way to ensure your spot in the short-list is by getting your mortgage pre-underwritten. Lenders take the pre-approval process a step further by reviewing all of the income and asset documentation that they would need to approve a mortgage. Sellers will pay attention to pre-underwritten offers because they know the buyer's mortgage application won't be denied. After the contract is signed, the only thing that needs to be done is complete an appraisal.

Being flexible with contingencies can also boost your chances of winning the bid. Contingencies allow buyers to back out of the deal, provided specific conditions are not met. For example, a bidder might sign a contract to buy a home contingent on the appraisal coming in at or over the selling price. Another common contingency is the right to back out if the sale if the buyer can't find a buyer for their own home. However, being flexible does not mean being foolish. Bypassing a home inspection in favor of expediency can cost far more monetarily than what you save in time.

Try to be first, and see the home as soon as it comes on the market. That way, you can preempt later offers by getting your bid in early. Real estate website, Zillow, has a new service called "coming soon" that enables real estate agents to indicate they're about to put a home on the market.

If you really want the place, and are willing to outbid everyone, you can write an "escalation clause" into the contract, which states that you will pay increments of either $1,000 or $10,000 more than the highest bid. For example, if an offer of $200,000 comes in, your bid will jump to $201,000. There are two main risks with an escalation clause. First is the uncertainty of whether the higher offer is real or not. "You never really know," says Wei Min Tan, an agent with Rutenberg Realty in New York. "Sellers can ask someone to submit an offer just to get the buyer to raise their bid." The second problem is that the final home price might be higher than the appraised value of the house, which could force you to come up with more cash to compensate for the shortfall in the mortgage. One way to prevent this from happening is to institute a cap of 10 or 20% over the asking price. However, this may mean you don't end up winning the bid. Source

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