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Table of Contents
What is a Bidding War?What causes a Bidding War?Bidding Wars and Escalation ClausesAcademic Research on Bidding WarWhat is a Bidding War?
A bidding war occurs when there are too many buyers competing for the ownership of a single property to the extent of increasing the price of the property through increased bids. When the seller of a property receives several offers over a property, a bidding war can erupt. A bidding war occurs in competitive bidding when there are two or more buyers interested in a particular item and they engage in increasingly higher offers in order to have possession of the item.
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What causes a Bidding War?
In competitive bidding, a bidding war occurs within the shortest period of time, to the extent that competitive buyers do not have the time to think through the offers they make but sporadically increase prices just to gain ownership of the property. Dealing in multiple bid offers is not an ideal practice for a buyer, but is played out in the real market. Although bidding wars do not happen as frequently as they used to, a buyer can still find himself in competitive bidding creating a bidding war. Oftentimes, a bidding war causes the final price of a property to exceed the original highest price the seller wants to yield the property for. For instance, if the original intention is to give a property away for $400,000 maximum price, the increasingly high bids placed by buyers can cause the property to be sold for a price higher than $400,000. Not all properties experience bidding wars, it is often common with properties located in desirable locations or has a high net worth.
Bidding Wars and Escalation Clauses
Bidding wars happen at a fast pace, leaving buyers to make decisions influenced by emotions rather than logic. In the real estate market, escalation clauses go hand in hand with bidding wars. When sellers of properties perceive a bidding war, they implement escalation clauses which allow them automatically increase the bid by a specific amount if they receive a bid higher than the original sale price. While an escalation clause gives a seller the ability to increase the price of a property, it also stipulates the highest price buyers are willing to pay for a specific property. It is vital that a seller is aware of the maximum price contained in an escalation clause before implementing the clause.
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