Strategies for Buying in the Current Market
It is important to know the current state of the real estate market when you are buying or selling a property. Buyers and sellers that were looking to buy or sell only six months ago will experience quite a different environment today as the market has shifted dramatically. There are several important factors to consider when making the decision to purchase a home: 1) know the number of homes available for sale or the “supply;” 2) know the current demand for homes in the market, i.e., many homes are under contract compared to the total number of homes on the market – the higher the percentage, the greater the demand; and 3) the “comparables” – how much are similar homes in the same area selling for in the current market.
Today, the inventory of homes on the market is declining while the demand continues to grow. Good homes that are priced right are selling quickly for full price or even more. Sellers are receiving multiple offers and buyers are often bidding the price of the home above the asking price. Buyers that are not educated on current market conditions sometimes think the market is still one that favors the buyer, thus are writing low offers and asking the sellers to contribute towards their closing costs. The sellers are the ones in control of the inventory of homes that large pools of buyers (many of whom are investors) desperately want. Sellers are now calling the shots and to be a successful buyer in today’s market you must be prepared to take the following steps.
The best homes are selling quickly. Once they are listed an on the Multiple Listing Service (MLS), they get distributed to several websites and are visible to the large pool of buyers that are waiting to find the perfect home. When a new property is listed on the MSL in today’s market, the traffic generated is great due to the low supply of good properties and the large demand of buyers, including many out-of-state investors. Be prepared to write an offer immediately, it is not a market to sleep on it. As one Realtor friend of mine says, “if you sleep on it, you will not sleep in it.”
Talk to a lender and get pre-qualified. Have the lender fill out a pre-qualification form indicating the amount of a loan you can qualify for and sign it at the bottom. Include a copy of a bank statement showing you have the necessary funds to close escrow or pay cash, if making a cash offer. In this market a seller will not even look at your offer without this.
Make a strong offer and consider an escalation clause
When writing an offer, start with your highest and best offer, this is not the time to try to see if you can get a lower price or ask for the seller to pay for closing costs and/or down payment assistance. The quicker you get a home in escrow, the less chance you have of competing bids. Write a clean and strong offer. Consider writing an escalation clause if there are multiple offers. An escalation clause is when a buyer offers to beat the highest offer received by the seller by a specified amount. For example, a buyer is willing to pay $1,000 over the highest and best offer received. The buyer’s offer would need to include an escalation clause stating the $1,000 maximum cap above the highest and best offer received by the seller.
Especially in the situation where the house is a short sale or bank-owned, follow the instructions of the listing agent. Sign all additional documents and addendums and use the title company that the bank or listing agent request. Be prepared to be pre-qualified and possible use the lender that is requested by the bank or the listing agent. If the instructions are not followed, the offer will most likely go nowhere.
Write back-up offers
I hear may agents say that showing homes that are under contract is a waste of time. In our current market, there are many homes that are bank-owned and short sales. The bank-owned properties are sold in “as-is” condition and, in many cases, the buyer cancels their offer after the inspection period. For short sales, the process tends to be quite long so there are numerous instances when the original buyer is no longer interested after the bank comes back with an approval three, four or five months later. Appraisers are coming in very conservative and it is common in our current market for appraisals to come in lower that the bank-approved price. When this happens, the buyer has the option to cancel or re-submit the lower price to the bank to see if the bank will accept an offer at the appraised lower value. In these cases, it will add another 30-60 days to the process and increase the odds that the buyer may not be interested in waiting an additional 30-60 days on top of the time that they have already spent waiting to move into the home.
When we recently took a number of buyers out to look at homes, we found 10 great short-sale listings that were under contract awaiting bank approval. While making appointments to show these 10 homes, with the intention of writing back-up offers, three of them became available. This is a great strategy and not a waste of time.
Do not worry about paying too much
A purchase that is being financed will require an appraisal to assure the lending institution that the property is worth at least the agreed upon price in the contract. In this shifting market, appraisals are coming in at the low end. When assigning value on a home, appraisers are tending to use nearby homes that have sold for the least amount as comparables, which means that many appraisals are coming in lower than the price a buyer and seller agree to. This is especially true when a property has been bid up with competitive offers.
The appraisal will protect a buyer from paying too much for a property. If the appraisal comes in lower than the contract price, three things can happen: 1) the buyer and seller can cancel the contract; 2) the seller can drop the price from the market value to the appraiser’s value and the buyer would then have to come up with the cash to make up the difference between the market value and the appraiser’s value; or 3) the buyer and seller can negotiate to meet somewhere in the middle to make the sale happen. If a buyer is making a cash offer to purchase, they may write in an offer contingent on the appraisal coming in for at least the contract price or a price acceptable to the buyer.
In summary, it is a great time to be a seller. If your home shows well and is priced right, it will sell fast. If a buyer is prepared to be strategic in their approach, they can enjoy the benefits of owning a home or investment property. Never before have interest rates been so low. The market has yet to respond to the low supply and high demand with a price increase so now is the time for buyers to get serious and secure a property at today’s low prices and historically low interest rates.