Buying or selling a house is one of the biggest transactions you’ll make in your lifetime, so it will naturally be an emotional experience. A multiple offer scenario can heighten the emotions even further. Whether you’re in the market as a buyer or seller, being involved in a bidding war can take a psychological toll.
Buyer Psychology in Bidding Wars
Buyers who get caught in a bidding war can find themselves in a tough position mentally and emotionally. If you’re in the market to buy a house, it’s important to be aware of the psychological pitfalls of a multiple offer situation.
The listing price is the anchor
The anchoring effect is a very real phenomenon in real estate. People fixate on the first piece of information they receive and have a hard time moving away from it.
In real estate, this means that most buyers can’t shake off the listing price of a home. They don’t want to offer much more or less than the listing price because they’re convinced that the listing price is the property’s true value.
When the listing price is accurate to the home’s market value, the anchoring effect doesn’t create much of an issue for home buyers. However, if a seller underprices a home in an attempt to spark a bidding war, buyers might resist offering above the asking price. Even if you’re desperate to win a bidding war, overcoming the anchoring bias can be difficult.
Buyers are afraid of missing out
The fear of missing out is one of the biggest emotional triggers for buyers, especially in hot real estate markets. When you see your perfect home, you feel like you can’t pass up the opportunity to make an offer. You start imagining your life in this new house, and you get attached to the property before your offer has even been considered.
Then, when you find out you’re in a bidding war, you’ll do anything possible to avoid missing out on your dream home. You’ll waive contingencies, overlook big maintenance problems, or increase your offer price.
Even though new homes and opportunities appear on the market all the time, you feel like this is your one and only chance to get your dream home. When you make decisions based on the fear of missing out, you act recklessly, increasing your risk of getting into a bad deal.
The sunk cost fallacy influences decisions
The sunk cost fallacy is one of the most dangerous pitfalls for real estate buyers. This is the tendency for people to continue chasing something that they’ve invested time, money, or energy into just because they don’t want to waste what they’ve already given up.
In a multiple offer scenario, the sunk cost fallacy can come into play in a few ways. If you’ve invested a lot of your time and mental energy into bidding on a house, you might feel like it’s too late to quit. However, walking away as soon as you realize the deal isn’t worth it is always better than getting yourself further stuck in a bad situation.
Buyers also find themselves struggling with the sunk cost fallacy when their offer has been accepted and they’ve paid their earnest money. If you realize at this point that the property isn’t right for you, it can be tempting to stay committed so that you don’t lose your deposit. Losing your earnest money from backing out of a bad deal is better than getting stuck in a house you hate or can’t afford, though.
Escalation clauses can reveal too much
Escalation clauses are a popular strategy for buyers in hot markets. When you include an escalation clause in your offer, you agree to automatically increase your bid to exceed another buyer’s offer up to a certain amount.
An escalation clause may seem like the easiest way to navigate a bidding war because it allows you to outbid your competition without offering more than necessary. Although this strategy has its place in negotiations, it’s not always the easy win buyers think it is.
By including an escalation clause in your offer, you reveal how much you’re willing to pay for the home. For example, your escalation clause could state that you’ll exceed another buyer’s offer by $5,000 up to a maximum of $500,000. Now the seller knows how much you can pay, and they could simply make a counter-offer of $500,000.
Seller Psychology in Bidding Wars
A multiple offer situation is a home seller’s dream, but sellers can fall into psychological traps, too. If your home has sparked a bidding war, you need to act carefully to avoid choosing the wrong offer.
Bidding wars spark confidence.
A bidding war can be a huge confidence boost for a home seller. When you know that multiple people are interested in your house, you may feel like you can leverage the offers against each other and ask for more.
While receiving multiple offers does set you up to make strong counter-offers, it doesn’t mean that you can ask for anything you want. Sometimes, sellers make overly ambitious counter-offers because they’ve overestimated the buyers’ interest. This could turn the buyers away, leaving you with no offers at all.
Sellers may hold out for the “best” offer
Multiple offers doesn’t mean limitless offers. When you receive several offers on your house, you might convince yourself that the bids will keep coming in for as long as the property is on the market. As a result, you hold out for the “perfect” offer that may never come.
The real estate market moves quickly, and most buyers will move on to the next opportunity in a short time frame. If you wait too long in the hopes of receiving a better offer, you may lose out on a great opportunity that was right in front of you.
Choosing an offer is an emotional decision
You might think that choosing from multiple offers is a simple mathematical decision. For most homeowners, though, selling the property can be highly emotional.
This house has been your home, so you probably have strong feelings about what it’s worth. Reading the potential buyers’ opinions about the value of your home can be difficult, and it’s easy to take offense.
Remember that a prospective buyer doesn’t yet have the emotional attachment to your house that you do, and they’re trying to get the best possible deal. When reviewing multiple offers, it’s important to consider the whole picture, including the offer price, contingencies, and closing timeline. Try to think about which offer will set you up for success with the sale overall, not just which one gives you the most money.
Reading buyer letters is risky
Buyer letters are a controversial subject in real estate. In a bidding war, buyers sometimes write a letter describing who they are and why they want to buy the home. If they can’t outbid the competition, they may be able to appeal to the seller’s emotional side.
As a home seller, you might find the buyer letters to be compelling. If you’re emotionally attached to your home, it can be comforting to know who will be taking care of the property moving forward.
However, these letters could put you in legal jeopardy if a prospective buyer claims that you rejected their offer based on a protected status. For instance, a buyer’s letter might mention that they attend the church down the road from your house. If you deny their offer, they could accuse you of religious discrimination. Before reading any buyer letters, talk through the pros and cons with your agent.
Understanding the Psychology of Multiple Offers
Multiple offer situations can be mentally exhausting both for buyers and sellers. Buyers can make impulsive decisions based on fear of losing an opportunity, and sellers can get too confident. Buying and selling are both emotional experiences, so preparing yourself for the common psychological traps is key.
