My Friend Just Lost a Bidding War. Here's What He Learned

There are times when it just pays to say no.

There's a reason bidding wars were a mainstay of the housing market in 2021. Housing inventory was extremely limited at that point, so those who wanted to purchase a home often had to duke it out with competing buyers. And even though bidding wars were less common in 2022 as rising mortgage rates drove some buyers out of the market, they still led to more than 25% of homes selling above asking price last year, according to the National Association of Realtors.

Meanwhile, demand for homes is softer this year because borrowing rates are so expensive and property values are still high. But that doesn't mean bidding wars are over.

That's unfortunate, though, because they have the potential to be very stressful. Take it from a friend of mine who lost one last year.

That said, this friend learned a valuable lesson in the course of that experience. And I'm here to share it in case you wind up competing with other buyers for the same home.

It's important to know when to pull out

My friend made an offer of $520,000 for a home with an asking price of $500,000. He thought he'd get his offer accepted, but lo and behold, another buyer entered the fray and offered up $525,000. At that point, my friend was ready to play ball. He raised his bid to $530,000, and then all the way up to $545,000 at one point during the negotiations.

But when his competing buyer came back with an offer of $560,000, my friend was done. Not only was that past the top of his price range, but he didn't think the home was worth that much money. And also, due to higher borrowing rates, he was looking at a more expensive mortgage loan to begin with. He didn't want to run the risk of taking on housing costs that would end up being too much for him.

Was my friend disappointed to lose the home? Yes -- especially since, to this day, he's still looking. But did he do the right thing by pulling out of that bidding war? Absolutely.

Don't get in over your head

When you fall in love with a home (and my friend really did), it can be tempting to fight for it. But you have to know your financial limit.

My friend knew he really shouldn't spend more than $550,000 on a home. And so he pulled out of that bidding war at just the right time.

In fact, looking back on it, my friend said he probably should've just pulled out of the process the moment a second bid came in, because in reality, the $520,000 he had offered initially was a fair price for the home at hand. But he was willing to go a bit above due to really liking the home and the lack of inventory in his area.

In today's market, you might still land in a bidding war, because housing inventory still hasn't picked back up to pre-pandemic levels. But if you're going to engage in one, set a limit and don't stray from it.

It's hard to give up on a home you can see yourself being happy living in. But if you get in over your head by paying too much for it, the enjoyment you get from that home could be replaced by ongoing financial stress.