If you haven’t purchased a home in the last few years, you may be surprised to find that buying a house isn’t as easy as it used to be. Home inventory is at an all-time low in most places around the country. According to realtor.com®, the April 2021 inventory of active U.S. home listings declined by 53% over last year.
When housing stock is low, families stay put in their homes, rather than looking for a new place to live. Owners don’t need to sell to take advantage of record-low mortgage rates, as they can just refinance their current home. As a result, demand for homes is high. And home prices tend to go up.
It’s clearly a tight market for buyers. Attempting to purchase a house in this type of market can make the already complex process of buying a home even more overwhelming.
To help buyers successfully get through the buying process, we asked Jeremy Walsh, a Mid-Atlantic-based real estate agent, to give some insight in what buyers can do to boost their real estate transaction success.
Walsh recommends these steps to consider in a competitive home buying season.
1. MINIMIZE CONTINGENCIES
For buyers, the rapid pace of the market and quick-rising prices means that you must be more prepared than ever to make a decision and to negotiate and finance your home purchase.
Bid competitively and keep contingencies (contract ‘add-ons’) to a minimum. Remove purchase agreement restrictions such as needing to sell your home before you move or wanting to delay the closing until a certain date. These can make your offer unappealing. Because of the tight market environment, you’ll probably be able to sell your house rapidly.
Other contingency considerations:
a. Buying “As Is”
When a home is listed “As Is,” it means that you’re buying it in whatever condition it currently is—without any repairs or staging. The seller won’t bend on the price and declines to negotiate on repairs or upgrades. (It’s important to note that complete seller disclosure is still required.)
Keep in mind that “As Is” doesn’t always mean the home is damaged beyond repair. It’s often used when a seller cannot afford the amount needed to fix a home, or expend the time to wait for contractors to finish a job. There are many other non-repair reasons a seller might list a home “As Is.”
Buying a home “As Is” can be a great choice for some buyers, especially those looking for a deal who are willing to put in some work.
Should you decide to pursue an “As Is” property, it’s best to seek professional guidance. Contact and discuss the situation in advance with your lender. Some properties, specifically those with major structural or safety concerns, may not qualify for certain financing programs, so it’s best to have a mortgage expert on your team.
b. Closing cost assistance
Both buyers and sellers pay closing costs. However, in today’s environment, where homes regularly receive multiple offers, sellers have less incentive to negotiate with buyers. Therefore, the wise move is to limit any request for closing assistance.
“If you have a buyer who needs help with closing costs, who wants to have a home inspection, those can be the items that are seen as not as strong,” Walsh says.
c. The stakes of appraisal
If the home appraisal—performed after your offer is accepted—comes in lower than your home bid, you may be put in a tough spot. Low appraisals can happen in a bidding-war environment where buyers make offers based largely on emotion and excitement, as opposed to comparable home prices. But if the appraisal comes in lower than your offer you risk having to rescind your offer or needing to come up with a bigger down payment to cover the gap.
To avoid this surprise, Walsh says “Consider putting an appraisal gap contingency in place, where you will agree to pay the difference of the appraisal value and sales price up to a certain amount.”
d. The rent-back option
A large concern of homeowners is that they don’t know if they’ll be able to secure their next home before selling. To gain leverage over other buyers, you may offer to lease the house back to the seller for a pre-determined length of time while the seller finds a new home or has one built.
Typically, rent-back agreements are limited at 60 days for the seller to remain in the house after closing. It’s a real benefit to a seller, giving that extra time for them to secure financing for their move to a new home.
e. Purchase price sticker shock
The New York Times says consumer confidence is on the rise, putting the country in a “buying mood.” However, buyers are experiencing sticker shock in today’s overheated housing market, where the competition has hiked up prices.
If you’re having a hard time finding a house in your price range, or have made offers only to be outbid, bear in mind that your struggle is typical in this market. Right now, buyers routinely may be competing against 10 to 12 offers.
Walsh says, “Arrange with your agent how much you can afford. Factor in enough to cover closing costs, or what you pay beyond the down payment. Consider searching for 5-10% below your pre-approval amount so that you can compete when the pricing is driven up. For instance, if your preapproval is $350,000, consider looking at homes that are listed at $320,000-$325,000 to be able to compete when the pricing gets escalated above the asking price. You do not want to look at homes at your max pre-approval amount because as soon as there are multiple offers and the price is driven up, you will get priced out of the market.”
2. BE READY TO GO ABOVE LIST PRICE
Everyone loves a bargain, but this may not be the time to hold out for one. You will need to bid competitively. You may not want to start out offering the absolutely highest price you can afford, but don’t try to go too low and get a deal. In a tight market, you’ll lose out.
3. DON’T SEARCH FOR A DEAL. THE DEAL IS GETTING UNDER CONTRACT.
In a seller’s market, it’s highly unlikely any buyer will find a home that checks all of their boxes. It’s a good approach to take stock and summarize what trade-offs you’re willing to make ahead of time to broaden your search. To get ahead of the game, make a list of your top criteria when beginning your home search and find an agent you trust to help find the perfect fit. According to Walsh, “Getting under contract is winning, and is the deal in this market.”
4. LISTEN TO YOUR AGENT’S PERSONAL SUGGESTIONS
These are unprecedented times, and not the time to go it alone. The help of a real estate agent is more essential than ever to find properties as soon as they’re listed for sale and to understand local market dynamics. You’ll want an agent who can advocate for you if a bidding war begins.
Your real estate professional may even help you find out about homes for sale before they go on the market, helping to get a jump on competition. Their advice will help you achieve your real estate goals.
The bottom line
It may seem unfair that the market favors sellers right now instead of buyers—particularly if you’re a first-time home buyer. But the housing supply outlook is looking up. As vaccinations roll out and people feel safer to show their home, more homes should come on the market.
According to Walsh, “As more homes continue to come on the market, we hope to see a market that was similar to pre-Covid conditions, where there was high demand and limited supply, but enough to choose from for the active buyers to keep the market moving forward. Since Covid, we have the lowest amount of inventory available we have ever seen. We are experiencing more listings becoming available now than we have, which is encouraging for the buyers that continue to have the patience. We do, however, suggest to buy as soon as you can, because we do believe that pricing will continue to rise and the inventory will remain low for a while to come. With interest rates low, it is still a great opportunity to lock in to a low rate and hedge against inflation. As inflation continues to rise, so will rental rates, so why not lock into a fixed low interest rate payment and get your money working for you?”
If you’ve made the decision to buy a home, Tower’s Real Estate Center can help you find and finance your perfect home. We have many loan options and great, low rates that’ll fit your needs—whether you’re a first time buyer, upgrading to a larger home to fit a growing family, or looking for a place to retire. We have the solutions to make your dreams of home ownership a reality.
Resources: Jeremy Walsh of Coldwell Banker Realty, The Home Buying Institute, The American Genius, LLC, Lansing State Journal