Tuesday, July 2, 2013

Bidding Wars



Bidding wars between prospective homeowners have become common in some areas like my native Seattle.  Home inventories are tight, largely because many properties are still deep under water, legacies of the bubble.  People believe (wrongly) if they do not buy now, prices will be higher later.

I've gotten a few questions such as "How can you win a bidding war?" and "What are some good strategies when you find yourself in a bidding war?" so I'd thought I'd answer them all this way.

Bidding wars are dumb.  Why buy anything in a seller's market?  A buyer should be negotiating with, and bidding against, a seller.  Offer, counteroffer, and so on.  When one buyer is bidding against another buyer the normal dynamic is wrong.  The seller just sits on the sidelines and smiles.  Assuming equal buyers with similarly strong offers (few contingencies if any, financing secured in advance, etc.) why play this game?

The reason is usually emotional, not financial.

We WANT THAT house.  Not we need A home.

We WANT to BEAT THEM.  No, they are playing into the same seller trap you are.

We WANT a home NOW.  If you have been renting or living with your mother-in-law, be patient.


Once people decide to pull the trigger and buy a home, they get antsy about the process.  Let's go find one and get it done.  Exhaustion sets in.  Ten weekends spent looking at thirty homes, still nothing, what a waste.  When a salesmen (of anything) asks "How long have you been looking?" they are measuring the degree of your exhaustion.  The more tired you are, the easier the sale.  Imagine selling cold ice water to a thirsty man.  More thirst, more sales.  Salesmen never want to hear "Oh, we just started looking yesterday...."

Bidding wars are signs of market froth.  If you buy a home in a bidding war, you almost certainly overpaid.  If you are rich and can afford it, you will be able to sleep at night.

If you aren't rich and can't, you bought a house for more than it was financially worth.  Instead of buying a stock at $50 per share like everyone else in the market, you paid $60.  This decision will affect your yield on the purchase and your risk associated with it for years to come.


When you get a wonderfully prepared latte from an expert barista, the frothy milk and rich coffee crema create a delicious sensation.  It looks and tastes great.  But the experience is gone in just seconds.  Air is air, and that is what latte buyers and participants in any bidding war buy.  Nothing but FROTH.  At least the coffee cost just $4 and tasted good going down.

I have no problems bidding against someone else at an auction.  I'm not going to get into a protracted trench fight with anyone anywhere OVER an asset.  That is the difference.  Competition between people over a painting, house, diamond, or storage locker is a recipe for a financial disaster.  Measuring the difference is easy but also tricky.  When you start focusing more on beating the opposition than why you need the asset, it's too late.


When I think real estate bidding wars and how to win them, I am reminded of this famous scene in the 1983 movie WarGames starring Matthew Broderick.  The subject of the film clip is how to win the game Tic-Tac-Toe.  The answer in the movie is also how to win a real estate bidding war 100% of the time.

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