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Winning a Real Estate Bidding War

The low supply of homes for sale in many markets means buyers must be prepared for bidding wars. Buyers should be strategic in how they present their offers, and avoid paying too high a premium for their "perfect" property.

Obtaining written confirmation of preapproval for a mortgage is a must, real estate agents say. Sellers looking over multiple offers will likely discard those on which financing is not assured.

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In highly competitive markets like New York City, where bidding wars are now the norm, buyers should look in a price range slightly below their maximum in case they have to bid up, said Gea Elika, the principal broker at Elika Associates in Manhattan. "Today, you usually have to overpay to get something that you like," he said. "The question is: How much do you overpay and how quickly will you recoup that premium?"

Paul Bradbury | Calaimage | Getty Images

Making that calculation can be difficult, but at the very least, Mr. Elika advises buyers not to overpay by much if they plan to stay in a property for only a few years. He usually strikes a verbal agreement with the seller's broker that his clients will be given a chance to counter in the event of a competing offer. But buyers in many markets are formally inserting that option into their offers in the form of what is known as an escalation clause, said Don Frommeyer, the president of the NAMB, the Association of Mortgage Professionals (formerly the National Association of Mortgage Brokers).

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An escalation clause stipulates that a buyer will increase a bid by a set increment — say, $5,000 — if the seller receives a legitimate higher offer. The clause sets a cap on how much more the buyer will pay. Buyers should not set the cap higher than they can comfortably afford if they are relying on a mortgage lender.

"What people don't realize is that when you overbid above the value of the house, you have to come up with that extra money out of your pocket," Mr. Frommeyer said, because the bank will not lend more than the amount on the appraisal.

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Stephanie Mallios, an associate with the Towne Realty Group, in Short Hills, N.J., says she doesn't like escalation clauses. She says the offers she submits on behalf of clients include an attachment prohibiting the seller from showing the offer to another buyer for the purpose of activating the other buyer's escalation clause. "That's just allowing someone else to get the house," she said.

She advises structuring offers with as few strings attached as possible, depending on the buyer's circumstances. For example, she said, buyers who have the liquidity to back them up might waive the usual mortgage contingency, which provides an out if the buyer cannot obtain financing. They might also provide the seller with proof of their liquid assets as an extra assurance.

Buyers with an existing home might opt not to make the deal contingent on the sale of that home — that is, if they can afford the risk of carrying two mortgages if their home does not sell right away.

Similarly, the buyer's agent should get details on the seller's needs, then try to work those into the offer. Have they already selected another property? And, do they need to close quickly or later?

"Being accommodating to the seller can sometimes make a difference," Mr. Elika said.

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Finally, in rare instances, a personal plea, in the form of a letter, might do the trick. Some sellers are so emotionally invested in their property that a buyer expressing a similar appreciation can win them over, Mr. Elika said.

After all, he added, "there are those eccentrics for whom money is perhaps a little less important."

By Lisa Prevost, The New York Times

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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