A new study from the Rochester Institute of Technology, published in Fortune, analyzed 14 million home sales over 20 years across 30 states, and reached a resounding, but obvious conclusion: There are no winners in a bidding war (except for the seller, of course).
Homebuyers who secured a property by coming out on top in a “highest offer wins” battle consistently overpaid by an average of 8.2%, and consequently experienced weaker returns over time. For flippers and landlords working on thin profit margins and refinancing, the loss of equity can have long-lasting ramifications.
The Cost of “Winning”
One of the earliest lessons fledgling investors should learn is to “never fall in love with a house.” However, real estate agents orchestrating bidding wars are counting on potential buyers doing just that—to earn their clients the most money possible for their home and themselves a higher commission.
What looks like a victory at closing often ends up translating into years of subpar performance, according to Soon Hyeok Choi, assistant professor of real estate finance at Rochester Institute of Technology, who worked on the report. She discovered that winners of bidding wars had annual returns 1.3% lower than comparable investors who stayed out of the fray. Equally, buyers who paid above asking price also had higher default rates—1.9% above average.
Don’t Be Fooled by Affordable Markets
The study’s home base of Rochester, New York, was found to be particularly susceptible to bidding wars due to its affordability, which attracted investors and spurred multiple offers. The danger of such markets is clear: Just because…