After you have located your dream home and is planning to submit a contract to buy, you should consider which bidding strategy you are going to use to compete with other potential buyers. In my mind, there are generally three strategies to determine how you should put in your initial price regarding the home you plan to buy. They are (1) regular strategy; (2) low balling strategy and (3) over bidding strategy.
Before we talk about the details of the these strategies, let's cover some very basic knowledge on how the listing price is generally determined. The listing price for most homes is determined based on the foundation of Competitive Market Analysis (or CMA). Let's assume the seller has a home for sale.The CMA analysis basically shows the seller how much other homes in the same neighborhood were sold in the past (such as past 1 year). Then it lists out the difference between the seller's home vs other homes that were sold, such as square footage, number of bedrooms, bath rooms, number of parking space or car garages, kitchen upgrades, size of the lot, etc. Since every home is unique in its own way, chances are good that the seller's home is better in some of those parameters but not as good in others. If you are in a seller's market (home price is generally going up since supply of homes is limited) or the seller's home is better that most homes sold before, the seller might want to price higher than most of the homes sold in the past year. Otherwise, if you are in a buyer's market (home price is generally going down since a lot of supply) or the seller's home is not as good, the seller might want to price lower.
Now let's talk about what each of the strategy means and in what situations you should use each:
(1) Regular strategy: this is the strategy where the bidding price is in reasonable range of list price where 'reasonable' is determined by the CMA analysis. Most people use this strategy to determine the initial price and is probably is most commonly recommended strategy by most realtors.
(2) low balling strategy: this is the strategy where the bidding price is significantly below the listing price. The longer the property has been on the market, the better your chances of success are. You should only use this strategy when the property has been on the market for at least 3 weeks.
(3) over bidding strategy: this is the strategy where the bidding price is even higher than the listing price or at least very close to it. You should use this strategy only when you want to close the deal with the seller before other potential buyers come in and bid up the price ever higher.
Why you should never use low balling strategy for property that has been on the market for less than 3 weeks? Why you should even consider over bidding strategy to potentially 'over pay' for the property? Check out my other post 'Game Theory and Home Bidding Strategy'.
