House hunting? Tips for winning a tough bidding war

If you've been looking for a house to buy, you probably already know this, but the market is tight. The limited choice of homes for sale, while disappointing for buyers, is nothing new.

With reduced availability of homes for sale, many buyers are more likely to need to compete with other buyers for the home they want. The most important way to train for the competition is to be fully financially prepared for the purchase. In addition, you should do your research and have a real estate agent working with you so you know what you want and what you don't want.

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Nine ways to compete for a house

Once you have your finances in order and a solid sense of your price range and priorities, try these tips for a better chance at offering the winning bid.

• Get preapproved for a loan. Don't just talk to a loan officer to check out your potential loan qualifications. To get preapproved, you will need to submit all the documentation you need for the loan all the way to the underwriter who will review your file and then provide you the all-important preapproval letter.

• Better yet, have cash. While very few buyers can do this, an all-cash offer typically wins a bidding war. Frankly, all offers are cash to the seller whether you have a mortgage or not — it is the speed to settlement and the removal of the financing uncertainty that make your cash offer feel stronger to the seller. If you hate the idea of tying up every bit of your cash, you can buy the house and take out a mortgage on it after the closing. But there are limits to that, so see a mortgage professional ASAP to make sure your plan will work.

• Consider making a larger deposit. A larger earnest money deposit with your offer shows sellers you are serious and have the funds to buy their home. But make sure you meet every deadline and contingency in the contract so you can get your money back if the transaction doesn't go through.

• Waive the financing contingency — maybe. If you are 100 percent certain of your loan approval, you can waive the financing contingency. Just make sure the loan really will come through, because if your offer is accepted and the loan falls apart, you'll have to come up with the full price in cash.

• Make your offer fast. While sellers won't necessarily take their first offer, see the property as early as possible and make an offer quickly so you are at the front of the line. Also, figure out when the seller wants to settle. If the property is vacant, the answer is probably “right now,” so make your proposed settlement date as quickly as your lender and title company can make it happen.

• Consider an information-only home inspection. While it's not recommended to buy a house without a home inspection, if other buyers waive the inspection contingency you may be pushed out of the potential buyer pool. You can have a home inspection before you make an offer if you have a home inspector immediately available. Sometimes, sellers provide a home inspector's report or you can have an information-only inspection after your offer is accepted. You are taking on some risk here, so make sure you have enough money set aside for unplanned repairs and use this plan with caution if you will be cash-strapped after settlement.

• Waive the appraisal contingency. If you have plenty of cash reserves to cover a gap between a low appraisal — which will limit the amount you can borrow — and your offer, you can waive the appraisal contingency. But be careful — you don't want to overpay for a property or be forced to drain your savings. A good real estate agent can help you evaluate the value of a property.

• Personalize your offer. Now that offers are typically sent in electronically, a personal letter to the sellers could make them feel emotionally drawn to selling to you over another buyer. You can also offer to rent back the home to the sellers, close when they want and meet any other reasonable requirements they may have.

• Consider an escalation clause. An escalation clause is an addendum to your offer that allows your buyer's agent to increase your offer to a certain amount above the best offer the seller receives, such as $1,000 over any other offer, not to exceed X dollars above your initial offer. Before you use an escalation clause, make sure you can comfortably afford the extra money if the price goes to your limit and your offer is accepted. If the amount is above your approved loan limit, you may have to come up with the difference in cash.

When multiple offers are made on a property, it can be easy to get drawn into the competition and overpay or overextend yourself. While buying a house is an exciting, emotional time, it should also be a time when you're financially careful. Remind yourself of the maximum amount you were willing to pay, and if this bidding war gets too pricey, you may want to move on to the next.

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Coile, chairman of Rockville, Md.-based multiple-listing service Bright MLS (formerly MRIS) and president of Champion Realty in Annapolis, writes the occasional commentary on the Washington area housing market.