The residential real estate market is in a frenzy. A historically low supply of homes for sale combined with buyers anxious to flee cities for more space and safety in the suburbs and also take advantage of low mortgage rates produced a 12.8% surge in home values in 2020, a climb that has continued in 2021. Many would-be buyers have been forced to make rushed decisions and enter bidding wars, leading to above-asking-price offers—in March 2021, the average sale price was 100.6% of asking price, versus 98.6% for March 2020 and 98.1% in 2019.
What should buyers do in this sellers’ market? One option—wait it out. Buyers now are manic with FOMO (fear of missing out), but that won’t last. The supply of homes for sale is likely to increase by the fourth quarter. Waiting will give buyers more options and greater bargaining power. But waiting won’t work if you need a new home now…fear that home prices will continue to climb in 2021, as many analysts predict…and/or don’t want to risk missing today’s low interest rates, which recently averaged about 3.3% for a 30-year fixed-rate loan. Seven homebuyer strategies for extreme seller’s markets…
Get preapproved by a leading lender. Some buyers don’t realize that “prequalified” isn’t the same as “preapproved.” Preapproved means that a lender examined your tax returns and other financial documents and concluded that you can obtain a mortgage. Prequalified means only that a lender checked your credit score, took your word about your income and estimated your borrowing power. When sellers have multiple offers, as most do these days, they inevitably lean toward those from preapproved buyers, whose financing is unlikely to fall though. Sellers are especially likely to trust preapproval from one of the area’s leading mortgage lenders. Helpful: There is no rule that you must obtain your mortgage from the same lender that provides preapproval—you could be preapproved by a well-known lender, then obtain your mortgage from an obscure online or local lender that offers better terms. Warning: I have never seen a fee for preapproval as lenders want your business. If a lender charges a fee, pick another bank.
Target homes that need some TLC. Most buyers prefer homes that are 100% move-in ready. The current supply/demand imbalance won’t be as strongly against you if you shop for houses that need work. Unfortunately, fixing up a fixer-upper is challenging these days—contractors are in great demand in 2021, and there are shortages of some construction components.
Potential solutions: Find a fixer-upper that needs only cosmetic work or modernization that can be delayed…and/or ask your real estate agent/broker to call on relationships he/she has with local contractors to get the work done quickly.
Broaden your home-search parameters. Expand the price range you’re searching by 10% to 20% in each direction. It’s worth searching below your intended price because you might have to offer above asking price to buy a house these days. It’s worth searching above the amount you intend to spend, too, because an overpriced property might fail to attract multiple offers even in this hot market, so your well-below-asking offer could be accepted. Expand other search criteria as well. Example: If you need three bedrooms, also search for two bedrooms. Some homes will have rooms that could be converted or divided to provide the extra bedroom, and these two-bedroom homes likely will be overlooked by other three-bedroom buyers.
Offer your “no regrets” number. A tricky question is, How much should I offer? In normal times, buyers might base offers on what comparable properties sold for and/or what a real estate website estimates the property is worth—but in this fast-changing market, those figures could be out of date. Instead, ask your agent to give you three figures before you make your offer—the amount he believes would constitute a good deal for you in this market…the amount that would be reasonable for you and the seller…and the amount that almost certainly would get your offer accepted, but that would represent a win for the seller.
Reflect on these figures, and settle on an amount that won’t leave you thinking, I should have bid more if you lose…but also won’t leave you thinking, Why did I pay so much? if you win. You should never have your heart set on a particular house—that thinking can lead to overpaying. It is better to make an offer that you can live with and be willing to accept however things turn out. Think of the first offers you put out that get rejected as being just for practice to reduce feelings of failure and lessen the impulse to make frustration-fueled excessive offers on subsequent listings.
Helpful: Consider adding a small amount to the round number you decide to offer—$502,000 rather than $500,000, for example. If multiple buyers decide to offer the same round number, that extra amount could mean your offer is the first one considered.
Be flexible with closing dates. In a market like this, where homes often sell very quickly, it’s not uncommon for sellers to want to spend a few more weeks or months in their homes. Giving sellers the option of delaying closing gives them an additional reason to choose your offer.
Waive mortgage and home-sale contingencies if you can—but not the home-inspection contingency. In normal times, buyers make their offers contingent on several things, including their ability to obtain a mortgage and sell their current home…and the seller’s home passing an inspection. Lately, some buyers have been waiving these contingencies to encourage sellers to choose them. It is smart to waive the mortgage and home-sale contingencies if you could afford to buy the property in cash and/or own two homes temporarily. But do not waive the home-inspection contingency—the risk of missing out on a desirable home is trivial compared to the risk of buying an undesirable one because you didn’t get it inspected. You could accidently buy a home that requires hundreds of thousands of dollars in foundation repairs or that has mold growing in its walls.
Write a “letter of introduction” to sellers. Creating a personal connection with a seller can help you stand out from other buyers. The best way to accomplish this is to include a letter with your offer. Focus on your fondness for a feature or two of the property that the seller clearly prioritized…and/or on family if there’s reason to believe the seller raised a family in the house. Examples: If the home has a well-tended garden, write how much you look forward to working in the garden. If extensive updates and renovations were done to the kitchen, write how much you look forward to cooking there. If the home has children’s bedrooms, write how much you would like to raise your kids or host your grandkids there.