How to win the bidding war in 2021 | The 1 1/2 things you can do to beat out other homebuyers

If you are losing bidding war battles in the real estate process, I’m here to tell you the “secret sauce” to how buyers are winning and how you can, too. Here are the one and a half things you can do to just about GUARANTEE you’ll win the bidding war.

How to win the bidding war

If you are on the hunt for your next home, it’s no news to you that you are competing with other buyers. This competition is driving up prices and also frustrations for buyers but here’s how you can win.

Of course, I know you:

Are approved with a local, reputable lender
Understand your budget and max purchase price
Accept the fact that most of the time, you’ll need to offer above the asking price
Already have the funds available for your down payment and closing costs
Will limit or omit non-essential contingencies
Shorten the timelines of essential contingencies
Understand the seller’s wants and needs in order to write a compelling offer
Have the mindset of a homeowner, not a renter.

If you are doing all of these things, you can seal the deal by:

Agreeing to bridge the gap between a low appraisal and the agreed-upon purchase price AND provide proof that you have the funds for your down payment, closing costs AND the appraisal gap.

This is the key to winning bidding wars. The bigger appraisal gap you can offer with proof of funds, the more likely the seller will take your offer.

What is this Appraisal Gap?

In the Northwest Multiple Listing Service where I am a member, we use the appraisal gap Form 22AD and I use this abbreviation because the formal title of this form is The Increased Down Payment for Low Appraisal Addendum to the Purchase and Sale Agreement.

This form states:

If the appraised value is less than the agreed upon purchase price, then the buyer agrees to bring in X number of dollars towards buyer’s down payment to close the sale at the agreed upon price.

Let’s look at an example:

Let’s say the house is listed for $350,000 and you offer $400,000.

That is a great offer! You are offering $50,000 over the asking price but since you are getting a loan, you’ll most likely have an appraisal. The seller would love to sell you the home for $400,000 but the seller may be concerned the home may not appraise for $400,000.

If the home doesn’t appraise for $400,000, then you cannot get a loan and you cannot buy the house. Even though you may be approved for a loan up to $400,000, you won’t be able to buy the home if it appraises for less.

This is where that 22AD comes in.

You could include a 22AD with your offer that states you agree to bring in up to $50,000 to cover a potential low appraisal. With this, the seller can really be assured they can sell you the home for $400,000.

This means that if the appraisal comes in anywhere between $350,000 to $399,999, then you are agreeing to bring in the difference at closing in cash to close the sale at $400,000. (This is where the other half of this comes into play: having proof of these funds.)

A seller would have a hard time passing up an offer like this.

How Much Do I Need?

In the 2021 real estate market, which is very much a seller’s market, buyers are needing a lot of cash to seal the deal.

Here is an example of the funds needed just to bid on an average-priced home in Olympia:

For a 5% down Conventional loan for a home sales price of $400,000, you’d need:

5% down payment = $20,000

3% estimated loan closing costs = $11,400

Earnest money = $5,000

22AD = ??

Buyers with this scenario are looking at bare-bones cost of over $36,000 and then there is the 22AD funds. The higher the dollar amount of the 22AD, the more likely you will win and beat out other buyers.

How Much Do I Need for a 22AD?

In the example above with a buyer offering $50,000 over the asking price and offering $50,000 for their 22AD – to cover the low appraisal – this is the perfect offer but most buyers do not have an additional $50,000 in cash. This form allows buyers to offer whatever dollar amount they are willing and able to do.

In this example, some buyers can offer $10,000 or $15,000 and depending upon the other buyer competition, that is enough to win the bidding war.

What are Proof of Funds?

Proof of funds are documents from US financial institutions showing that the buyer has sufficient funds (in US Dollars). This is usually a bank statement with the financial institution’s name, buyer(s) name(s), and the US Dollar amount.

Funds can be contingent or non-contingent but buyers must disclose the type.

Contingent funds are funds where the buyer would have to cash out stocks or a retirement fund. Contingent funds can also be a loan, a gift from someone else, or funds that need to be converted to US Dollars. These are just a few examples of contingent funds because these funds are not liquid nor readily available.

Non-contingent funds are liquid funds. These would be funds in your checking or savings account where you could immediately access the funds.

In my NWMLS forms that I use to write up your purchase and sale agreement, buyers will be asked to 1) provide evidence of the funds (bank statements, etc.), and 2) disclose if the funds are contingent or non-contingent. The boilerplate language states that if the funds are contingent, that the funds become non-contingent ten days prior to the close date.

This is another important term sellers will look for in your offer. Are your funds contingent or non-contingent? Ideally for a seller, they want to see a buyer with non-contingent funds.

What Happens if the Property does NOT Appraise?

Let’s say the house is listed for $350,000 and you offer $400,000 with a $10,000 22AD.

If the home appraises anywhere between $390,000 to $399,999, then you have agreed with your 22AD to bring in additional funds to cover the gap between the appraisal and the sales price of $400,000. (If the home appraises for $395,000, then you would bring in $5,000 at closing.)

But if the home appraises for less than what your 22AD will cover, for example, if the home appraises for $375,000, then we have another route to take.

If the home appraises for $375,000, you can only get a loan for $375,000 even though you are qualified for a loan of $400,000. On this particular property, you can only get a loan for a sales price of $375,000 because that is what the appraiser valued it as.

If the appraisal cannot be corrected or changed and the buyer cannot bring in an additional $15,000, then one of two things will happen: Either the seller will agree to lower the purchase price or the transaction will terminate. This means you don’t get the house, the seller will have to put the house back on the market and start the process all over again with another buyer.

This is why having a large 22AD is so important. It can guarantee the home sale will go through.