8 Tips for Home Buying in a Seller’s Market
A home seller’s market is simply a matter of economics. Inventory is low and demand is high, leading to some homes being on the market for only hours with competitive bidding.
Home prices have been going up for 50 consecutive months across the country, according to data from the National Association of Realtors. The median existing-home price in April was $232,500, up 6.3 percent from April 2015.
Housing inventory is 3.6 percent lower than it was a year ago, when it was at 2.22 million homes
It’s still possible to buy a home in a seller’s market, though it’s obviously more difficult than it is in a buyer’s market or otherwise. Here are eight tips for buying a home in a seller’s market:
1 - Determine you’re in a seller’s market
This first step can help you know for sure if you’re in a seller’s market so you can adapt your home buying strategy to it. A real estate agent can help with a few easy calculations.
One is to use a market absorption rate calculator, which tells you how many months it would take to sell all the remaining homes, or inventory, for sale in a given area. A low number means you’re in a seller’s market.
The calculator first asks for how many homes were sold in the last 12 months. It divides that number by 12 months, and then divides the rate into the number of current listings.
Unsold inventory in the United States was at a 4.7-month supply at the end of April, up from 4.4 months in March, according to the National Association of Realtors. Most of the shortages of homes for sale are in the West, with the Midwest having the most inventory. A six-month supply is considered a balanced market.
Another measurement is the sales price to list price ratio, says Bruce Ailion, a real estate agent at RE/MAX Town and Country in Atlanta. A 103 percent ratio tells you it’s a hot market with multiple offers, a 98 percent ratio is a seller’s market, and 84-88 percent is a distressed buyer’s market, Ailion says.
“Like the temperature outside determines your clothes, so the temperature of the market determines your strategy,” he says.
2 - Make your best offer first
In strong seller’s markets Ailion recommends making a list price offer quickly to prevent competitive interest.
“Many agents are happy to get the seller their price and do not want to do the extra work of multiple offers to get $10,000 more when their compensation is only $300,” he says. “A buyer can take advantage of the lazy seller’s agent.”
3 - Be ready to bid
If a quick offer of the listing price doesn’t work, the next step is to still make your best offer, but be prepared for it not to be your final offer.
Ailion says he often adds an escalation clause of 2-3 percent more than the highest bid received. “This expresses a strong desire for the property and a willingness to pay the most,” he says. “Sometimes this works and sometimes it doesn’t.”
He says he’s also used this method in a slow market where a buyer wanted the property but not at the seller’s price. The buyer’s lower offer includes a 2 percent escalation if another buyer comes in.
Bob Gordon, a real estate agent at Berkshire Hathaway HomeServices in Boulder, Colo., recommends preparing for bidding wars on their favorite properties by only looking at houses up to 89 percent of their maximum budget. This will give them extra funds in a bidding war, Gordon says.
4 - Don’t counter
There are no counter offers in a seller’s market, Gordon says.
“Buyers really need to put their best offer on the table,” he says. “Owners are going to see three, five, 12 offers all at once. They don’t need to write a counter, they can pick and choose the very best offer. So buyers better be amazing on the first go.”
5 - Show cash
Show a seller how serious you are by offering more cash than normal in earnest money — a deposit made to the seller to show a buyer’s good faith in a transaction. If a high earnest money deposit in your area is $20,000, then increase it by $10,000.
6 - Offer non-price factors
Some sellers will accept your price if you provide some non-price considerations that can speed up the transaction, also called contingencies.
“In a strong market a buyer needs to consider waiving the financing contingency, limiting inspection to three to five days, and placing larger earnest money deposits to provide non-price consideration,” Ailion says.
In some very hot markets, the property might not appraise for the highest offer, and the loan won’t be approved. A lower offer with strong non-price factors may win out, says Ailion, who had a recent buyer compete with 13 offers and be successful with non-price considerations even though they were several bids below the top. The more contingencies a buyer has in their offer, the greater risk for a seller and the more likely a seller is to reject them in a seller’s market.
One of these is a home inspection contingency. A home inspection is important for a buyer, but some buyers will waive it to help improve their offer.
Buyers can also help themselves by being flexible with dates and deadlines in a contract. Giving a seller extra time to move out, for example, can make a seller’s offer more appealing.
7 - Have money for a low appraisal
High home prices can lead to home appraisals that don’t climb as fast, leaving lenders to not fund the loan. Gordon, the Colorado real estate agent, recommends that home buyers have money set aside the pay the difference between a contracted purchase price and the appraisal.
“Savvy home sellers are looking for purchasers that can make up the difference between the negotiated sales price and the appraisal,” he says.
8 - Use videos and letters
Not everything in a home sale is about money. A seller’s nostalgia for their home can be strong, and a short, personal letter from a buyer that shares how they’d enjoy living there might sway them.
Promising to maintain the architectural heritage of a historic home, for example, or showing how much you look forward to taking care of the rose garden on the property can show that you’ll also have a sentimental attachment to the home.
Gordon says his clients shoot videos and write letters. One client noticed photos of international travel at a condominium he wanted to buy, so “he wrote about recently visiting Italy and how the condo made him think of his visit overseas,” Gordon says.
Another client beat out a higher-priced offer with a video shot on her patio with her prized rose in the background. At the closing, the seller told them “Well, when my daughter saw that video, she said ‘Mom, these are the buyers for your home!’” Gordon says.
Appealing to the heart may not be your first strategy in a seller’s market, but it could be a smart way to complete a deal before it has even started.