You’ve done all your homework and found the perfect home. It’s everything you want, and the price is great. Just to be sure, you’re prepared to offer a bit more than asking.

Then the selling agent breaks the news: The owners are accepting multiple offers on the same day, and everyone will be allowed to re-submit their bid if they want.

It’s a bidding war, and one thing is for sure: That listing price is never going to happen.

Put Some Perspective On Your Bidding War

If you’ve ever participated in an auction of any kind you know exactly how you can throw caution to the wind in the heat of the moment and end up bidding way above what you originally intended. Real estate is no exception, and in many cases is a lot more serious because there’s so much emotion involved. After all, you won’t find an identical house, and after convincing yourself this one is perfect, it’s going to be hard to believe there’s an even better one out there.

Keep A Level Head And Focus On The Numbers

As soon as you start calculating how much your love of the house is worth, you’re probably about to make a very bad decision. Buying a house is a combination of investment and lifestyle. If you’re planning on living in the home for the next 30 years and don’t really care about the market value, then sure, you can justify spending more (assuming you can afford it).

If your time horizon is shorter or you’re planning on making a profit when you sell this one in order to upgrade, emotion has no place in the discussion.

Know What You Can Afford

Affordability is a bit unclear. If you’ve been pre-approved by your bank, that amount is generally more than you should borrow. If you’re trying to figure out how to use all of that amount plus a line of credit and some money from your in-laws, you’re almost certainly over-extending yourself.

Here are a few ways to run the numbers to put your purchase in perspective.

  • Total Cost – Use our online mortgage calculators to calculate how much your home will cost by the time you pay it off entirely. A difference of $30,000 might not sound like much, but combined with the interest you’ll pay on it it could mean YEARS of additional payments and many thousands of dollars. For example, a $300,000 mortgage will cost a total of $429,624 over a 25 year period (assuming monthly payments at 3.08% interest). At $330,000 you’ll end up paying $472,587, almost $13,000 extra ON TOP of the additional $30,000.
  • Monthly Payments – Cash-flow is usually tight when you first buy a home, so don’t forget that the higher the purchase price the higher your monthly payments. Repairs and maintenance are always up in the air when you buy a new home, and having extra cash around is always advisable. In our previous example your payment would be $1,575.29 per month vs. $1,432.08, an almost $150 per month difference.
  • Other Properties – If you were shopping around with a budget of $300,000 in mind, you probably missed out on some in the $320,000 – $330,000 range. If you truly can afford this price, maybe there are better properties that you never got a chance to see.

Preparing For The Bidding War

You should now feel better prepared in terms of how much you can afford, so the question is how to handle the bidding war. Based on your calculations, you need to have an absolute maximum price in mind. Whatever you do, don’t go over this.

There are other factors other than price when putting an offer on a home. Find out what you can about the sellers and try to appeal to them. Most people want someone who will look after their home well. If you’re a young family, make sure the selling agent passes that info on. If they have a dog and you do as well, let them know. On top of this kind of personal connection, you also want to put down an offer with as few conditions as possible. Get a home inspection done ahead of time so the offer isn’t conditional on having one, and make sure your financing is all in order. Having a flexible closing date can also help.

There are houses on every street – don’t let your excitement cost you thousands of dollars or put you in a shaky financial situation.