How to handle a bidding war in a hot housing market

Over the last few years, if you were trying to buy a home in the United States, you were typically up against one other bidder for sales that closed.

In April? Try four, according to data from the National Association of Realtors. Welcome to the era of the real estate bidding war.

You do not have to tell John Colantoni. The law firm partner from Jersey City, N.J., was recently looking for a property in golf course-rich Pinehurst, N.C. Unfortunately, so were a lot of other people – which is why he and his investment partners got outbid three times, usually by around $50,000. Finally, when they spotted an attractive four-bedroom for $300,000, they had enough of losing – and had to go $40,000 over the asking price to win the bid.

"It's a gold rush," Colantoni says.

Bidding wars are the natural outcome of a red-hot housing market. With economic growth and wages rebounding smartly from our pandemic year, COVID-19 pushing many families towards more spacious homes in the suburbs, huge investors getting into residential real estate and interest rates still relatively low, housing has found itself as a very attractive asset class.

In fact, the S&P CoreLogic Case-Shiller Index saw national home prices advance at a 13.2% annual clip in March, up from 12% the previous month.

"The share of homes that sell above their list price, which usually indicates a bidding war, is more than twice what we were seeing a year earlier," says Dan Handy, economic data analyst for real estate site Zillow.

It might also require adjusting your bid if need be, or revising your expectations. And, as with any negotiations, it might require walking away.

Here are a few tips from experts:

Do not fall in love. If homes are getting five bidders apiece, it is very likely you are going to get outbid, perhaps multiple times. But you cannot lose focus. "Don't get emotionally attached to any home and start imagining your lives there," says Ryan Serhant, head of brokerage Serhant, and star of Bravo's "Million Dollar Listing New York." "It's hard to do, but if you don't get a particular home, try not to be devastated about it."

Run the numbers. The obvious temptation in any bidding war is to offer the moon. But if that locks you into long-term debt that you cannot truly afford, then that's no solution. Instead, revise expectations about what your budget will get you: "Look for homes with list prices below your max budget, to provide some breathing room to make an above-list offer," advises Zillow's Handy.

Be realistic. In a more typical housing market, there are any number of terms where you can haggle with the seller – from the timing of the closing date, to contingencies, to needed repairs. But in the current market, sellers hold most of the leverage. That's the situation Colantoni faced, when the sellers wanted to rent their place back for a while until their new home was ready. "Anything we pushed back on, they had all the power," he says.

Says Serhant: "Work with a strong agent and don't go into battle buck naked all by yourself."

The good news is that buyers can still come out on top in the long run — like Colantoni, who looks to make a tidy sum from golf fanatics for years to come with his new Pinehurst purchase.