Buying a home in a competitive market
So, you’re buying a home? That is awesome! Unfortunately, you’ve heard that the market is really competitive now. What does that actually mean to you? A lot. When you’re buying a home in a competitive market, you will likely need to develop a strategy.
A competitive market isn’t like a buyer’s market where you can throw any offer at a seller and he accepts it. No, in a competitive market (also called a seller’s market), you are likely to get into a bidding war with multiple buyers. The mechanics change, the price isn’t as important and other factors come into play that influence the seller’s choice in offers.
When buying a home in a competitive market you’ve got to forget about the norms.
An average real estate sale starts with a seller and a buyer. The seller sets the price, and the buyer makes an offer. A few minor negotiations may go back and forth, but in the end, it’s just two parties working out the details.
When buying a home in a competitive market, you’ve got to forget about the norms. There may be many buyers vying for the same house. The list price may just be a starting point and the negotiations may become stressful and lengthy. Other buyers may bump their offer up $5000, $10,000, and I even had one where the winning bidder bumped his offer up $50,000. The list price means nothing at that point.
How can you win when buying a home in a competitive market?
There are no guarantees when you get into that kind of competitive market, but there are things you can do to up the odds in your favor. For instance, Keep the contract as clean as possible. What does that mean? Every contingency is a mark against you in a contract.
A home inspection, a financing contingency, a radon test, a home sale contingency, an appraisal contingency, the loan type, or a request for closing cost assistance are all issues that can sway a seller one way or the other.
In a competitive buying situation, cash is often King (though not always). If you’re bidding against a buyer with cash, you’re already at a disadvantage. That doesn’t mean she’ll get the property. You can offer more than the list price with an early close date, and the seller may be willing to wait a few weeks for the extra cash.
Home inspections are desirable, but they can be the difference between winning and losing.
A home inspection gives the seller a reason to worry if he hasn’t maintained his property. That item alone (and I recommend them) can bounce your contract to the trash pile. A seller who knows he is about to be hit with a laundry list of repairs is likely going to skip over that offer for the offer with no home inspection.
Financing and loan types can be a killer.
A financing contingency tells the seller that you may be pre-qualified, but you are not approved for a loan. While he waits for your lender to give you the thumbs up, he loses all the other bidders who were trying to get the house. Get your pre-approval early and then look for a home. You will cut weeks off of your closing time, and that is an advantage for you in a bidding war.
Loan type can also nix your chances in a multi-offer environment. A USDA loan, VA or FHA loan all have stricter guidelines on their appraisals. If seller hasn’t maintained his home, the appraisers will report that and the lender will need those items to be repaired before a loan will be given.
Some loans naturally take longer, such as a USDA loan. A seller in a hurry will not look as favorably on that type of loan because it’s a waiting game that could be avoided with a cash deal or a conventional loan.
Put your highest and best out early when buying a home in a competitive market.
I recently had a wonderful couple lose out on their dream home because they wanted to get it at a price that was more in line with their desired payment than in the home’s real value. They got into a bidding war and the other buyer made a full price off with fewer contingencies. Done. They were out of the running before the race started.
This is one of those times where you really need to trust your Realtor. If you can’t trust your Realtor, you have the wrong Realtor. In the case just mentioned, I told the couple there was no way the seller was going to accept their first offer. He was already selling a wonderful home below the local government assessed value.
The seller had to move, and he had to move quickly. The buyers hesitated just long enough (a week) to allow another buyer to surface who recognized the value of the discounted property. They had a less desirable loan, they had a financing contingency (the other bidder did too), they had a home inspection and they had an appraisal contingency. The other bidder had 50% of those contract contingencies on his offer.
My buyers looked at the list price and then did the math. They wanted to come up with what the house should sell for based on a payment they wanted. It doesn’t work that way. The price is typically set by market data and a seller’s need or wish to sell and then it is negotiated with a contract. The winning bidder offered 5% more with fewer contingencies and won hands down.
If my buyers had listened to their experienced Realtor/Investor, they would have had a better chance. When buyers violate the rules of negotiating, they lose. I believe if they had acted when they first saw the home, they would be living there today. They would have been able to offer less, have their contingencies in the contract and still get a ratified contract.
The second mouse gets the cheese.
They hesitated too long. Remember, the second mouse gets the cheese. They ignored their Realtor’s advice. They loaded their offer with contingencies and then tried to low-ball the seller when they were competing against a highly motivated buyer. Put your best offer forward in the beginning. If you lose out, move on. You should never fall in love with anything that can’t love you back. Buyers need to realize that not all sellers are desperate to sell. In this case, the seller was desperate, but my buyers waited to long to get into the game.
Call a pro when you’re buying a home in a competitive market