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Bidding wars: How to stay cool in a hot housing market

Knowing what to do when you find yourself in a bidding war can help you avoid endangering your long-term fiscal health.

Looking to buy a home this year? Right now, it's a seller's market, which means there's more demand for homes than supply. For most sellers, there's no shortage of buyers interested in their properties. As a buyer, this means there's a higher chance of finding yourself in a house bidding war.

How a bidding war unfolds

When you want to buy a home, you need to make an offer to the seller. The seller can then accept, reject or counter it.

In a seller's market, this process sometimes gets tricky because you might not be the only potential buyer who puts in an offer. If the seller gets multiple offers from different buyers, a house bidding war can begin.

The seller can simply accept the highest offer, or if a lower offer seems favorable in other ways, he or she could make a counteroffer and choose to negotiate with that buyer instead. But sellers don't have to accept any offer—they can counter all offers and have the potential buyers submit new ones.

What to do if you get in a house bidding war

When it comes to knowing how to bid on a house with multiple offers, the answer might be simply to make the best offer you can afford—which could mean paying more than the asking price.

Even if a seller says that he or she accepts your offer, it isn't legally binding until the documents are signed. Sellers have the right to verbally communicate that they'll accept your offer, but they can still consider (and even accept) other offers that come in before they sign yours.

To help avoid that situation, you can include something called an escalation clause in your original offer. It's a stipulation that assures the seller that you’ll automatically increase your offer by set increments (up to a limit you set) if the seller receives offers higher than your original one.

Stay calm when emotions run high

Dealing with multiple rounds of offers can be stressful, and facing the prospect of being outbid on a home you badly want can cause you to react emotionally. Those reactions can lead to irrational financial decisions—like offering more on a house than you can afford.

It's not always easy to keep your perspective, but remember that this house is not the only house on the market. Be patient and think about the big picture so you don't jeopardize your long-term financial security just to win a short-term bidding war.

Keep it up. You're getting smarter about home buying.

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