Here's What Happens When You Compete With Multiple Offers on a House

According to Zillow, around 75% of folks selling their homes in 2022 received multiple offers, and more than a quarter of sellers received four or more offers. And based on reports that the U.S. housing market is still short millions of homes, that trend is likely to continue for some time.

For folks looking to buy a house, this is bad news. Not only will it be harder to find a home you like thanks to shortages, but when you do find a home, you'll likely be forced to compete against multiple offers.

So, what happens when you're in a bidding war for a house? In short: The seller has all the power. But there is still room for buyers to make sure they're protected. Let's look at what happens in a multiple-offer situation.

The best-and-final deadline

Arguably the most common scenario in the current housing market is a multiple offer deadline. Basically, the listing agent will set a date and time by which every interested buyer needs to submit their highest and best offer.

Once the deadline passes, the agent will present all of the offers to the sellers. Then, it's up to the sellers to make a choice.

Often, the sellers will simply choose the highest offer. However, there are some cases in which the biggest number doesn't actually win. Here are a few common examples:

• If there is an offer that waives inspection. Some bids may waive the inspection contingency, meaning they won't require a home inspection before closing. While this isn't ideal for the buyers -- you won't know about potential problems ahead of time -- it means the sellers won't need to worry about being asked to fix (or pay to fix) any of those problems.
• If there is a cash offer. Buyers who need a mortgage loan need to go through final approval before the contract can be finalized. This can not only slow things down (banks aren't known for their speed), but it could also derail the whole thing if something goes wrong with the financing. A cash offer is faster and has far fewer potential hiccups.
• If other offers can close sooner (or later). If the seller needs to be out of their home ASAP -- or if they need more time to find another home -- then an offer with a more flexible closing date could win out over an offer with a higher purchase price.

In the end, it's entirely up to the sellers which offer they accept. And they can choose to accept, or reject, offers on any grounds they feel like using.

Escalation clauses

One neat contract trick you may be able to use in the best-and-last offer situation is called an escalation clause. This allows you to essentially say, "My bid is $X, but if there is another verifiable offer higher than $X, I will go up to $Y."

For example, say you want to bid $200,000, but you're willing to go up to $215,000. You can put in a bid of $200,000, with an escalation clause up to $215,000. Then, your bid will automatically increase -- usually in increments of $1,000 -- if there are offers higher than your initial bid.

So, if the highest offer is at $201,000, your bid would automatically increase to $202,000. Similarly, if the highest offer is $214,000, your bid would automatically go up to $215,000. But it will only go up to the cap you put in place.

An escalation clause can be a good way to make sure you don't miss out on a house by a few dollars. (Because who doesn't hate when that happens on Price is Right?) And best of all, the sellers must prove there was a higher offer in order for the escalation clause to kick in.

Counters and bidding wars

Not all multiple-offer situations are quite as clear-cut as the best-and-final deadline. For instance, the sellers may choose to counter a particular offer (or multiple offers) hoping to get more money or more favorable contingencies.

Perhaps the worst case scenario is if there is a back-and-forth bidding war. In this case, the listing agent may reach out to tell you there is another offer, and to see if you want to bid higher than that offer. Then, they could do the same for the other seller(s). This could go back and forth until there's only one offer standing.

Know your maximum budget, and stick to it!

I know, it's hard to think you may lose a house you like over a few thousand dollars. But it's all too easy to let emotions carry you away -- and take your budget along for the ride.

Long before you start looking at houses, it's vital to know how much house you can afford. You need your ideal budget (what you want to pay) and your max budget (the most you'd be willing to pay).

Then, stick to your number. Don't budge for anything, even your dream house. Because a dream house you can't afford is really a nightmare in disguise.