Here's What Happens When You Enter a Bidding War

During periods when there are plenty of homes for sale (also known as a buyer's market), bidding wars don't tend to come into play as often. But during periods when housing inventory is low (a seller's market), bidding wars have a stronger tendency to arise.

Such is the housing market we're in right now. As of the end of April, there was only a 2.9-month supply of homes on the real estate market, as per the National Association of Realtors. For context, it commonly takes a four- to six-month supply of homes to meet buyer demand in full.

In 2021, when mortgage rates plunged to record lows, bidding wars were a mainstay of the housing market. Now that it's gotten more expensive to sign a mortgage loan, bidding wars aren't quite as common, but they're still happening.

Entering a bidding war may be necessary if there's at least one other buyer interested in a home you're looking to purchase. But you may want to think twice before subjecting yourself to a bidding war.

The problem with bidding wars

During a bidding war, two or more buyers duke it out for the same property. What'll generally happen is that the competing buyers will keep raising their offer amounts until all but one buyer backs out, leaving the seller to enjoy a higher sale price.

Clearly, bidding wars are a great thing for sellers, as they commonly result in offers that are way over a given asking price. But bidding wars are not a great thing for buyers, so you may want to try to avoid one.

First of all, entering a bidding war can be very stressful. You might have to sweat it out for a number of days as you go back and forth with other buyers.

Secondly, if you engage in a bidding war, you might end up paying more for the home you're bidding on than you really wanted to. That could not only lead to an affordability crunch, but also cause you to regret your decision.

Let's say a home is listed at $500,000. If you and another buyer both want it, you might offer $510,000 initially, and they might counter with $520,000.

At that point, you could back out or keep up with the bidding war. If you opt for the latter, you'll then make a higher offer to stay in the game.

At some point, in this scenario, the offer price might rise to $570,000. If that's your latest offer and the other buyer backs out, you win. Only you don't win financially, because now you're paying $70,000 more than what the seller asked for in the first place.

Furthermore, let's assume the home in question is really only worth $500,000. If you buy it for $570,000 and need to sell it a few years later, you could end up taking a pretty big loss if you're only able to get $500,000 for it.

Try to avoid a bidding war

In 2021, it was pretty difficult to steer clear of bidding wars. But that's not the case today. Buyer demand isn't what it was two years ago, so it's more than possible to avoid a bidding war in the course of buying a home. And doing so could really work to your advantage.