Historically low real estate inventory levels can be a daunting prospect for buyers and sellers alike. Nationally, 2014 saw a thin inventory of homes for sale and good buyer demand for those homes. There are three different markets, according to inventory levels, in the real estate market:
- Buyer’s Market: Over 6 months of inventory for buyers to choose from;
- Neutral Market: Between 3 and 6 months of inventory for buyers to choose from;
- Seller’s Market: Under 3 months of inventory for buyers to choose from.
For buyers, low inventory levels can be an extremely frustrating experience. While there is simply not much inventory to choose from, what homes there are to consider, sell rapidly. Remember, there are a few other buyers looking in the same marketplace as you, attempting to find a home amongst the few homes available. Should you find yourself as a buyer in a market where inventory conditions are tight, here are a few things to keep in mind to ensure success:
Be prepared! Like the Boy Scout motto, be sure to have all of your ducks in a row before you become serious about purchasing a home. This means talking with your lender to ensure you are firm on your purchasing capabilities. Having the lender’s pre-approval in hand is a must, before looking at homes. Being prepared also means having a firm idea about what it is that you are looking for in your next home. Working with your real estate agent, and not being solid on the home you want, will lead to a very frustrating experience.
Communicate. Clearly. Often. With all of your real estate service providers, communicate clearly and often, to ensure a smooth transaction. Your lender and real estate agent should know exactly what it is that you are looking for, and have helped lay out a road map to achieve your goals. One surefire way to make this happen is to communicate.
Be Patient. In the depths of a seller’s market, it may seem as though there is nothing for you to purchase, or you may get outbid on a couple homes. Trust me, your home is out there. The sellers of your future home are probably going through the same thought process as you, “Is there a home for us in that town? I don’t see anything I want to purchase now. I don’t want to move twice.”
Working with an agent that also lists homes for sale, they will be able to give you excellent suggestions for getting your offer to grab the attention of the seller. Typically, the seller is concerned with three things, in considering any purchase agreement: sales price, closing date, and inconvenience level. Obviously, if you are competing with multiple buyers for one home, you need to do all that you can to make your offer as attractive as possible. Here are a few things to consider, under advisement of your agent, of course:
- Over List Price Offer: it may not make sense, initially, but offering over the list price is one way to grab the seller’s attention. In essence, you are grabbing them by the collar and screaming, “Here! That publicly stated price you said you would accept? I’ll pay more than that!”
- Cash Offer: Let’s face it, cash is king. If you can swing the purchase of a home with cash, sellers will respond favorably. After all, cash doesn’t come with the bank requesting an opinion on the value of the home (appraisal).
- No/Few Contingencies: In the last couple years, I have witnessed offers submitted to my sellers where contingencies were all removed. In essence, the offer was a sales price to be closed on a specific day
Finally, a word of advice about the homes that you are searching through. When your lender gave you a pre-approval letter, there was a ceiling on the pre-approval; a top dollar amount in a purchase price that your lender says you can afford. Many buyers will search up to, and a little over, that price ceiling. The thought is that if a buyer can afford up to that price point, why not look at homes a little over that ceiling in hopes of bargaining the price down?
First of all, this is a seller’s market. Sellers have very few reasons to come down from their list price, if they are priced at the market value for their home. Second, as other buyers will be competing for the same homes you are considering, chances are very good that the end sales price for a home you are considering will be at least list price, if not higher. So, if your price ceiling is $250,000, and you find a sweet house at $250,000, but are competing with 5 other offers for that home, you could get out bid very quickly.
My suggestion when it comes to searching for a home is to search for homes that are no more than about 90% of your pre-approval limit. So, if you are approved up to $250,000, set your search limit at $225,000, for example. So, when the inevitable bidding war ensues, you will be holding a very big stick in your hand to outbid many of the other purchasers. Because your pre-approval is $250,000 and many buyers search for homes up to their pre-approval limit, you could outbid most other financed buyers for the home of your dreams. Using this tactic in bidding wars, you will likely beat out the other financed offers on the home. You will still need to walk through the appraisal process of the home, and may need to renegotiate the sales price or pay more for the home.