This Multiple-Offer Bidding Trick Could Stop You From Losing Your Dream House

When you're house shopping in a buyer's market, the list price on a house can often be the top of what the purchase price will hit. But the current property shortage means it is very much a seller's market. In a seller's market, the list price on the house is generally the minimum you can expect to pay.

More than 3 in 4 houses wind up with multiple offers, and at least a quarter will have four or more offers. (In my personal experience the last few months, nearly every house in decent shape had multiple offers within days of being listed.)

In multiple offer situations, it's common to have a deadline for everyone to submit their best and highest offer. Then, the seller frequently (though not always) chooses the highest offer. This is a good process for the seller -- but it is very harrowing for the buyers. 

Going into a best-and-last deadline

There's a fine balance you need to walk when you're putting in a bid on a house with multiple offers. You obviously don't want to go too low, because then you'll likely lose the property. And this would sting twice as much if you were willing to pay more but just didn't offer high enough.

But you also don't want to go too high, either. For one thing, who wants to feel as if they could have paid less for something? Then there's the actual value of what you're buying. You don't want to pay more for the property than it's worth compared to the real market, especially if you're getting a mortgage loan. 

Most lenders will have a clause that states the property must appraise at, or over, the purchase price. Even if your offer gets accepted, you'll still lose out on the house if you lose your financing.

Utilizing an escalation clause to avoid overbidding

An escalation clause is a tool you can use to better navigate in multiple-offer situations where there's a deadline for final offers. 

Essentially, you generate an automatic bidding war by providing both your starting offer, as well as your highest offer. If there is another offer that beats your starting offer, your offer is automatically raised, in set increments ($1,000 or $2,000 is most common), until you either have the top offer, or you've met your offer cap.

Escalation of your offer price only happens if there is a legitimate offer higher than your own, so you don't need to worry about overbidding for something you could have won sooner.

An example of an escalation clause

Say a house is listed at $200,000, and there are multiple offers. You can assume it will go for higher than list price, but you don't think it's worth more than $220,000. You want to use an escalation clause with a starting offer price of $210,000, a maximum offer price of $220,000, and an increment of $1,000.

If no other buyer offers $210,000 or higher, your offer stays at that price. But if someone else bids more than $210,000 and less than $220,000, your offer will automatically outbid them by $1,000. For instance, if someone else offers $214,000, your offer would automatically increase to $215,000. At no time will your offer rise above $220,000.

Thanks to the escalation clause, you didn't lose out on the house because of $5,000 you were willing to pay. You also didn't pay $5,000 more than you would have needed to pay to win the bid.

Set your offer limits carefully

While using an escalation clause can have its benefits, you still need to be wary of the usual multi-offer mind eraser. (That's the thing that makes you go way over your budget because you're letting FOMO fog your math skills.) Set a maximum offer amount that is rational, based on how much house you can afford -- as well as what the property is really worth.