Buying a House in a Seller’s Market

Buying in a Seller’s Market:  If you are active in the real estate market, either as a buyer or as a seller, you have probably noticed that there is a lot of activity.  Houses that are appropriately priced are receiving multiple offers, are selling quickly and they are often selling for more than the asking price; a seller’s market.

Supply and Demand:  As a result of the continued low interest rate environment and the general belief that market prices have stabilized, demand for the limited supply of available houses continues to be high.  Economics 101:  When demand is high and supply is limited, prices generally increase.

My Market Forecast:  We are currently in a “Seller’s Market”.  I believe that as we get closer to the so called “summer selling season” more houses will come on the market and the market will gain some balance.

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For Sellers:  If you are in a position of having to sell your house, a seller’s market would be a very good time to list your house for sale.  A lack of inventory means that there are an increased number of potential buyers who will want to see YOUR house.

For Buyer’s:  Don’t panic!  If you are a buyer in this seller’s market, you may feel pressure to make a move.  The article below discusses “panic buying” and gives a good prospective about buying in a seller’s market.    Read on. . .

Five Mistakes Buyers Make in a Seller’s Market
Tara-Nicholle Nelson, Trulia.com Aug 8, 2012

Given this rapid turn of the market, what’s a buyer to do? Maybe take a new approach to prepping for the hot market house hunt.  To that effect, I submit that savvy buyers will find more pitfall-preventing power in learning what not to do.  Inspired by the last time we had a market heated up by short times on market, low inventory and multiple offers, here are five hot market mistakes home buyers should avoid making in a seller’s market:

1.  Acting out of desperation.  Deep inhale – aaaaaand exhale.  It’s extremely easy to get caught up in the lightning-fast pace at which the great homes come on and off your local market, growing panicked and even desperate – especially when you see ‘just-right’ homes go from ‘New’ to ‘Pending’ status before you can even get an appointment to see them!  (In this fast paced seller’s market, it is really important that you make arrangements to see a new listing that may be right for you as soon as possible.  – TB)

But know this:  desperation has no place in a home buying transaction.  Panic does nothing but cause people to make impulsive and otherwise unwise decisions, ranging from talking themselves into a home that isn’t quite what they really want, to paying way more than they can truly afford to spend (see #s 4 and 5, below).

If you’re in the market for a home, and your local market is so hot it’s causing you to feel freaked-out, panicked or overwhelmed, remind yourself that:

• There are probably hundreds of homes in your neck of the woods that will meet your needs.  When one goes off the market, another is on it’s way on.
• There is no ‘perfect’ home.  If you didn’t get that one that seems like “the one”, then, by definition, it’s not “the one.”
• Every home you see or make an offer on, and don’t get, equips you with a better understanding of the market, putting you in a better position to get the home that will eventually be yours. In life generally, I believe every experience is either a stunning success, or a successful education. Look at the homes you miss out on as an opportunity to get a successful education about the market.

(These three bullet points are so true.  You WILL get the house that you are supposed to get.  I see it time and time again!  – TB)

Desperate is bad.  Urgent, however, is good.  If you know, for example, that single family, 3+ bedroom homes, near downtown under $400,000 move very, very quickly, then act on that knowledge:

• Ask your agent to notify you as soon as they hear of homes coming on the market that meet your needs – even before they are on the MLS, if possible.
• As soon as you see a new listing that seems like it might work for you, go see it – don’t wait for the weekend.  And if you see a home and really like it, make an offer without further ado.

2.  Hesitating.  What’s worse than seeing great properties come and go before you can get out to see them?  Seeing them go into contract after you view them, but before you make your own offer.  When the market is hot, often buyers who have been sitting on the fence or simply window-shopping for ages will stumble into a great house and decide that it’s time to make an offer, only to realize that their loan approval has expired and it will take a day or two to get a new one.  At the other end of the spectrum, buyers who have just started house hunting can come across a home they love, but drag their feet in making an offer because (a) they’re used to a slower-paced market, so don’t recognize the urgency and (b) they aren’t 100 percent sure something better won’t be coming right along.

In a hot real estate market, hesitation can be costly.  You can end up in a multiple offer situation where you would have been the only offer a few days prior, or can even end up losing out on a property entirely because another, more decisive buyer swoops the place right out from under your nose.

Morals of the story:  Make sure you maintain a current loan approval in place at all times – in fact, I say you shouldn’t be out house hunting if you don’t have a current loan approval.  Once you’ve seen a good number of homes, you’ll have more material against which to compare every other home you see, making you less likely to dither before making an offer when you do find a good one.

3.  Ignoring the market entirely.  I’m not an advocate of making your decisions about whether and when to buy or sell based on what’s happening in the market.  Rather, I recommend making your real estate decisions based on what’s happening (and what you forecast and envision will be happening in the next 5-10 years) in your family, your career and your life.  (An excellent point.  –TB)

That said, when it comes time to execute your decision to buy, it’s foolhardy not to take market dynamics into account.  I’ve seen many a buyer over the years decide to stick their heads in the sand and their ears in their fingers, tuning out all of the market ‘noise’ as though it doesn’t apply to them.  Unfortunately, in a hot seller’s market, this usually results in them getting beat out for 5 or 10 different houses, then having the emotional kneejerk reaction of throwing every single dollar they have at the next house they fall in love with – whether it’s the right house or not, and whether they can truly afford it or not.

You don’t want to fall under the panic-inducing spell of the seller’s market, but neither do you want to ignore it.  Rather, ask your local agent to help you pay attention to neighborhood-specific information, like:

• which types of properties move quickly,
• how many days they generally stay on the market,
• whether multiple offers are a reality you need to face, and
• how much over-asking homes like the one you want are selling for.

Then, use this information to make strategic decisions about your home buying process, covering everything from which properties and areas you’ll focus on, how quickly you’ll need to get out to see listings and – most importantly – what price range you should focus your search on.  If you know homes are selling for over-asking, engineer your search price range to be low enough that you can be successful, rather than exclusively looking at properties priced at the top of the range you can afford.  (It is kind of silly to even discuss “how much over asking” houses are selling for.  The only important considerations are the overall market environment and the comparable sales figures.  –TB)

4.  Financial fogginess.  Don’t run the numbers in your head.  Don’t ballpark your income, the big bills and such on a notepad, stick your finger in the wind, and decide you can afford X number of thousands of dollars a month for a home.  Home buying is the big leagues, financially speaking, so you need to be sparkling, crystal clear on precisely what you can afford.  This universal truth of home buying is especially critical in a hot market, where you may be faced with the need to make decisions about whether to increase your price range or your offer price on relatively short notice.

Either keep an income/expense journal, use an online money app like Mint or Manilla or sit down and do a deep dive into your last few months’ checking and other account statements to get a complete picture of what you can afford and to get conscious about what sacrifices might want or need to make.  It is not overkill to bring your tax adviser or financial planner into this conversation.  These professionals can help you understand how your tax situation as a home owner may change.  Also, make sure you include line items for your savings, retirement investing, gifts, school tuition, travel and recreation – the sorts of things that lenders will not account for when they tell you what their guidelines say you can afford.

5.  Overpaying.  There are several ways to overpaying for a home.  You could pay more than the place is worth, which is difficult to do if you are buying the place with a mortgage loan which requires an appraisal.  You could pay more than you need to in order to get the property, which sometimes happens to buyers in multiple offer situations, and buyers who have experienced the trauma of losing out on home after home, and who just decide to make a high offer to get closure and secure a place they like.  Whether any price meets this second definition of ‘overpaying’ is difficult to ascertain, as it would require us to know what would have happened in the hypothetical world in which they didn’t offer such a high price and so, might not actually have been the successful buyer.  (Your real estate agent should prepare a Comparative Market Analysis (CMA) so that you will understand the relative value of the house you are looking at and feel comfortable with your offer.  –TB)

The antidote to both these forms of overpaying is simple:  pulling the comparables before you decide what to offer.  It only takes a minute, your agent will help you, and it’s just not prudent to decide on an offer price without a fresh pull of the sales data on the similar, nearby homes that have recently sold.  If your agent includes active and pending sales in their pull of the comparable data set, you may also find out useful information like whether several other competitive properties have just hit the market, or that all of the competition is now pending – things that might also inform your motivation levels or price strategy.

And there is a third, more insidious form of overpaying that haunts seller’s market buyers as well:  paying more than you can truly afford for a home.  It’s fine, even expected, that if you thought you were buying into a depressed market and instead end up buying in a hot one, you might have experienced some upward ‘creep’ in what you’re willing to spend for a home.  But that doesn’t excuse letting that creep go beyond what you can truly afford, overextending yourself.  (This new house will be your home.  You should not have to worry about whether or not you will be able to pay your bills in your home where you should feel at peace.  Buy ONLY what you can afford comfortably and at a price where you will be able to relax and enjoy your new house!  –TB)

The only cure for this form of overspending is for you to both know (see #4, above) and to set in stone what your actual, top-line maximum home purchase price is – even if you are the only one who knows this number, in your own head.  Your mortgage professional can help you work backwards from the amount of cash you have to invest in the transaction and the maximum amount you can devote to your housing costs on a monthly basis, to arrive at your maximum home purchase price.

Long story short – if you’ve been pondering the prospect of buying a home for long, you might feel like you’ve been sitting in the economy section of an emotional rollercoaster.  Prices fell so fast you might have doubted whether buying makes sense at all.  Now, with barely a plateau, they’re on the upswing – and every other buyer in town seems to be dropping offers on the choice homes before you can even get out to see them.  Use these tools to avoid repeating the mistakes of the last generation of homeowners.