The real estate market is highly competitive, especially in areas that have an abundance of potential buyers with a limited number of houses for sale. Many times you will find yourself in the middle of a bidding war with multiple offers on the table in a competitive real estate market. Trying to win a bidding war for a home can significantly raise the asking price and force you to go over budget if you aren't prepared. Luckily, following a few simple tips can help you win any bidding war for a home without worrying about breaking the bank.

Here are five effective ways to win a bidding war for your next dream home.

#1 Increase Your Down Payment

One of the best ways to improve the likelihood of winning a bidding war is to increase the down payment. A higher down payment reduces the amount of money needed from a bank and gives you an advantage over other buyers that do not have the extra money for a larger down payment. Ultimately, a higher down payment will save you money in the long-term and help you stand out from the crowd of other potential buyers with similar bids.

#2 Acquire a Mortgage Pre-Approval Letter from Lender

Another way to improve the chances of buying a home is to obtain a pre-approval letter from a financial lender. A mortgage pre-approval is simply a letter from a lender stating that you have the necessary amount of income, a high enough credit score, proof of assets, and other credentials to be approved for a loan. A seller is much more likely to choose someone with a mortgage pre-approval letter due to them already being pre-approved for a loan.

#3 Minimize Contingencies

Limiting the number of contingencies is another excellent way to win the bid for your new home. A simple offer is much more likely to gain consideration compared to another offer with a long list of contingencies. These additional demands can include things such as requesting the seller to repair specific items, pay closing costs, or purchase a home warranty. Limiting these demands can play a crucial role in gaining an advantage over other bidders.

#4 Offer Appraisal Gap Coverage

An appraisal gap occurs when the agreed upon purchase price of a property is higher than the appraised value set by the buyers lenders appraisal. It signifies that the buyer is aware that their offer may be inflated, but they are willing to take the risk to secure the property. Here is an example:

“Buyer will accept an appraisal that is up to $20,000 lower than the contract price.”

This way the buyer is putting a limit on their appraisal risk. When you waive an appraisal contingency completely you are risking 100% of the difference between the possible low appraisal and the contract price.

Let’s assume you offer $500,000 for a home and it only appraises for $470,000. You’d have to make up the $30,000 difference in cash if you waived the appraisal contingency.

But assume you have an appraisal gap clause capping the low appraisal to $20,000 below the contract price. If the appraisal is $30,000 below the contract price, then you only have to pay $20,000 in extra cash. Then you’d have another $10,000 gap that you did not agree to that you can attempt to renegotiate with the seller.

#5 Remain Flexible on the Closing Date

Sometimes the difference between a winning and a losing bid is to simply remain flexible on the closing date. The home seller may need additional time to move, and staying flexible is an excellent way to accommodate their needs. Always being upfront about your willingness to be adaptable on the closing date may be the key difference in separating yourself from the rest of the bidders.

Buying a house is always a lengthy process that requires a lot of energy and effort, especially if you are a first time home buyer. Competing against others in a bidding war for a home is a challenge that can quickly get expensive. However, an experienced realtor can guide you throughout each stage of the process to help you follow these tips to win the bidding war for your new home.