Just what is a seller’s market? How does a home owner maximize the seller’s market to their advantage? Why is it important to know the difference between a seller’s and buyer’s market?
Right out of the gate, understand that a seller’s market is a real estate market characterized by 3 months, or less, inventory of homes to be sold. This means that buyer demand for homes is greater than the current inventory of homes for sale. For buyers, this means that finding the right home is a rough, difficult process. Often, it means battling with other homebuyers for the privilege to purchase a home. For savvy sellers, recognizing that the inventory of homes is low, and that buyers are fighting for the privilege of buying a home, a seller’s market is a great opportunity to quickly sell a home and control much of the sales process along the way.
A rule of thumb to get the inventory levels for a market area is to examine the total number of sales in the last year and divide by 12. This will give you the average number of homes sold per month. Then, for the same market area, divide the total number of currently active homes for sale, by the average number of homes sold per month. This will give you the number of months it will take to sell the currently available inventory. If this number is 3 or less, you are firmly in a seller’s market for the market area you’ve defined.
In most cases, there are three areas of concern that sellers have when it comes to selling their home, no matter the market conditions:
- Money | How much money, after costs, will I take home? What are my net proceeds?
- Time | How long will this transaction take? From listing my home to giving the buyer the keys, how much time will this eat up?
- Convenience | How frequently will the seller be asked to vacate the home or generally inconvenienced by the selling process?
This one is self-explanatory to sellers: when the ink dries, and buyer and seller leave the closing table, how much is the seller receiving from the sale of their home? After the Great Recession, we saw the market of distressed homes (foreclosures and short sales) dwindle. Concurrently, we saw institutional investors and cash purchasers begin to pull back from purchasing as well. The screaming deals for purchasers dried up as the distressed homes were snapped up and inventory not replaced.
Homeowners in the ensuing marketplace, find themselves with actual equity in their homes. Equity is that beautiful number that is the difference between the sales price of a home and the amount the homeowner still owes on their mortgage(s) on the home. As the housing market appreciates, the amount of equity will also appreciate, unless further loans are taken out against the home.
Cost of Sale Rule of Thumb: In addition to the commission that you and your real estate agent have agreed upon for the sale of your home, be sure to add an additional 2% of the sales price to your total cost of sale. This 2% is likely on the high side, if you are selling in the state of Michigan. This percentage includes things like title insurance, transfer taxes, title closing costs, etc.
Home sellers, looking to move up, down-size, or move across town or the country, will always be looking at the bottom line numbers of the sale of their home. In a seller’s market, assuming there is equity in the home to begin with, there is the possibility of increasing the net proceeds for the seller, by maximizing the impact of demand for their home.
Working with a real estate professional that understands the simple concepts and practical application of the economics law of supply and demand, can increase your bottom dollar.
Regardless of the market conditions, time is often a factor in the minds of home sellers. How long will we be on the market? How long will it take for an offer to appear, and then, how long will it take for us to close on the home? In a seller’s market, time on market is dictated by two things, traditionally: price and when the seller wants to move.
Well-priced homes, no matter the market conditions, do not last long on the active market. In a buyer’s market, where there is a lot of inventory for buyers to sift through, it can take some time for the buyer to appear. In a seller’s market, there isn’t much inventory to choose from in the first place, so when a well-priced, quality home hits the market, buyers see it immediately and it will sell rapidly.
Time to Close Rule of Thumb: If the buyers of your home are obtaining a mortgage to purchase your home, you can expect a 30-45 day timeline to get to the closing table, where you exchange keys and checks. This time represents the average number of days necessary for the bank to review the value of your home, in reference to the sales price, and complete their mortgage underwriting process. If your buyer is purchasing with cash, transactions can close as rapidly as a few days.
Agents that place their clients first will identify, counsel, and guide home sellers on what to expect and what to demand from the market, regarding the timing of the sale.
Often overlooked in the rush to get a home on the active market and sold, is the inconvenience factor of the selling process. Many folks are concerned, rightly so, about the net proceeds and time on market. However, convenience is not to be overlooked.
You’ve priced your home well, you anticipate a short time on the active market, but you did not anticipate the literal droves of buyers through your home in a very short period of time. Often times, it feels as though you’ve been evicted from your own home for days at a stretch, assuming you are still living in your home as you are attempting to sell it.
Convenience Rule of Thumb: As the seller, you control a piece of the sought after inventory. You can dictate how and when buyers may see your home. However, if you have the ability, do not be too restrictive in your showing dates and times. There is a limit to the number of “flaming hoops” that buyers will jump through before they simply move along. Here’s a great approach to maximizing the seller’s market to your benefit; in money, time and convenience.
An agent that understands just how tight the inventory is in a seller’s market, can make the market conditions work in your favor, even when it comes to convenience. After all, you are the owner of a home that is in demand. This means that you have the ability to command many aspects of the whole real estate transaction. Don’t want to be inconvenienced? Work with your agent to set clear parameters for the droves of buyers that want to buy your home.
Pulling it All Together
So, you’ve just read a primer on some of the details of a seller’s market, and some points on how to maximize this market to your benefit, as a seller. Why should you know this when you might be a buyer or when we flip back into buyer’s market?
Easy, really. When you sell your home, you will likely be or become a buyer in this seller’s market. Doesn’t sound like much fun, does it? Well, because you now know the fundamentals of a seller’s market, and what is important to sellers, you can tailor your offer to purchase to the seller’s needs and desires.
Remember, Time, Money and Convenience are the three keys that sellers are concerned with. The answer to these concerns is, as much as possible, in as short a time as possible, with as little as possible, respectively. Write your purchase agreement with these answers in mind, and you will begin the buying process, ahead of the competition.