7 tips for home buying in a seller’s market
Kevin Shirley, Associate Broker (DC), GRI, ASP, e-PRO
Any real estate market is simply a matter of economics. A market where inventory is low and demand is high will inevitably lead to some (or even most) homes selling quickly and with competitive bidding. Right now, housing inventory is historically low, as are mortgage interest rates, creating the perfect conditions for a strong seller’s market.
With the right strategies and support, it’s still possible to buy a home in a seller’s market, though it’s obviously more challenging than it is in a buyer’s market. Here are seven tips for buying a home in a seller’s market:
Determine your market’s current conditions
This first step can help you confirm that you’re in a seller’s market so you can update your home-buying strategy. Your real estate agent can help with a few calculations. One is called the “absorption rate,” which details how many months it would take to sell all the currently-available homes for sale in a given area in the current market conditions. A low number — under, say, 4 months — means you’re in a seller’s market. (Basically, the calculation uses the number of homes sold in the last 12 months and divides that number by 12, and then divides the rate into the number of current listings.)
Another calculation is the sales-price to list-price ratio. A good rule of thumb is that, say, a 102 percent ratio indicates a fast seller’s market with competitive bidding; a 98 percent ratio is a seller’s market; and 85-90 percent is considered a buyer’s market.
Make your best offer first
In strong seller’s markets, consider making a list-price offer preemptively to prevent competitive interest. Some sellers, though, are reluctant to consider an offer the first day or so on the market, even if it’s a strong one, for fear of missing out on a so-called “bidding war.” You may even consider making an offer above the asking price; it won’t end up costing you much more over the long run. Your down payment and your monthly payment will only change significantly if you offer an amount far above the asking price. Keeping your offer aligned to other recent comparable sales will help you secure the home you’re interested even if it’s slightly above the asking price.
Be ready to compete
If a quick offer at the listing price doesn’t work, the next step is to make your best offer and be prepared for a counteroffer. You can add what’s known as an “escalation clause” to your bid. An escalation clause is a preemptive offer to pay a certain amount of money more than any other competing offer. This strategy telegraphs a strong desire for the property and a willingness to pay the most. Sometimes this works, and sometimes it doesn’t. But it’s useful to know you have the option.
Another strategy is to look only at properties up to, say, 89 percent of your maximum budget to give you extra funds in case of a bidding situation.
Don’t expect a counteroffer
The conventional wisdom is that there are no counteroffers in a seller’s market. Consider putting your best offer on the table upfront. An owner may receive three, five, or even 20 offers all at once. In such a scenario, a seller doesn’t need to make a counteroffer to any buyer; he or she can simply pick and choose the strongest offer.
Show them the money
Demonstrate your seriousness by offering more cash than expected in your earnest money — a deposit made to the seller to show your commitment to the transaction. If a robust earnest-money deposit in your area is 10% of the offering price, consider doubling or even tripling it.
Offer non-price intangibles
Some sellers will accept your offering price if you include some non-price considerations that can speed up the transaction, also called contingencies. With the help of your agent, you can decide to strategically waive the financing or appraisal contingencies, write a larger-than-average earnest money deposit check as mentioned above, and/or limit inspection to three or four days (or even asking to perform an inspection before writing your offer).
In some very fast-paced markets, the property might not appraise for the highest offer, and the loan won’t be approved. A lower bid with decisive non-price factors can win out. The more contingencies a buyer includes in their request, the greater risk to the seller and the less likely a seller is to consider their offer.
Buyers can also stand out by being flexible with the dates and contingency deadlines in the offer. Giving the seller extra time to move out — or even allowing the seller to remain in the home for a certain period after settlement (through a post-settlement occupancy agreement) — can make a buyer’s offer more appealing.
Have money in reserve for a low appraisal
In a swiftly appreciating market, high home prices can lead to home appraisals that don’t keep pace, leaving lenders reluctant to fund the loan. Homebuyers might consider having money set aside to pay the difference between an agreed-to purchase price a low appraisal. Smart home sellers are looking for purchasers willing to make up the difference between the negotiated sales price and the appraisal.
The bottom line
While they may seem small, these things can go a long way to making your offer stand out and get you the home of your dreams. Establishing that you’re a serious buyer with the financial capabilities to meet all obligations is the way to a seller’s heart. Be willing to go the extra mile, both in your intention and in your financial offerings. If you do so, the seller of your dream home will notice your effort and give your offer a second glance.
