Would-be homeowners are facing an extreme seller’s market
The fallout from the COVID-19 pandemic has made 2021 a singular time to become a homeowner. Mortgage rates are still near record lows, and work-from-home policies mean buyers have more flexibility to choose where they’ll live. That’s great for borrowers – it means lower monthly mortgage payments and bigger home buying budgets. However, low rates have also generated more bidding wars and driven up home prices. And since there are fewer homes on the market, house hunting has become more competitive than ever, so you’ll likely have to move fast when you find your home.
Yet, if you’re like most first-time home buyers, you’ll probably still start your home buying journey by searching for property listings online. You’ll find one you really like and book a tour with an agent. You’ll see it in person, decide you love it, and then start figuring out what you need to do to submit an offer. Unfortunately, in a market as competitive as this one, going with the usual process can mean missing out on the very home you’re most excited to see. Home sales are moving incredibly quickly, which means when you sign up for that first showing, you need to be prepared to act.
You’ll want to ask a lot of questions upfront and start searching for homes knowing what you can afford, the type of loan you’ll need to pay for it, and the kinds of concessions you’re willing to make. Be aware of what you can negotiate (agent commissions included) and consider being more flexible in the types of properties you are willing to consider — including homes you may not find in a typical search on Zillow or Homes.com. As a smart homebuyer, you’ll want to be educated about what makes an offer attractive to sellers, what to expect during the option period, and what lenders will need from you during the loan underwriting process. That way, when you find the home you want to move on, you’ll be prepared to submit a winning offer and follow through on the contract. Ideally, your agent will be your best advocate in the homebuying process, helping you to feel more confident and prepared for what comes next. (If you’re not getting that vibe, then it may be time to consider a new agent.)
While considering your next move, here are a few tips from the team at REX, compiled especially for first-time buyers trying to navigate this never-before-seen seller’s market.
Tips for competing in a seller’s market as a first-time buyer
- Show up prepared for the bidding war.
- If you lose out on a home you love, don’t overbid on the next one.
- Know your offer terms going in.
- Sweeten your offer with earnest money.
- Think hard before giving up contingencies.
- Don’t sweat the minor repairs and appliances.
- Do some digging into “non-traditional” listings.
- Take advantage of cash back and buyer rebate programs.
- Budget for more than just the mortgage payment.
- Do your homework to find the right lender.
1. Know what financing scenarios can make you competitive in a bidding war.
Multiple offer situations are all too familiar these days, and it’s not uncommon for a home to go way over asking price. As a buyer working to secure your first home, finding yourself in one bidding war after another can be frustrating–but it doesn’t mean you can’t compete. While you never want to put yourself in the position where you feel overextended, certain lending solutions can make your offer stand out without breaking the bank. With solid credit, you may even qualify for financing that’s as good as cash in the eyes of sellers.
Says Tyler Spitzer, a Senior Strategy & Operations Associate at REX, “Because we’re so light on inventory, these listings that our buyers are going after usually end in multi-offer situations, where a cash offer is going to stand out more than a bridge loan or a first-time buyer putting down anywhere from 5% to 20%. So, we’ve secured lending partners who can front their own cash to purchase the home on the buyer’s behalf, and then transfer the home to the buyer once the mortgage is approved and processed. The fee is on par with a standard mortgage transaction that you would get with any other lender.”
Even in situations where your credit score isn’t the best, or you don’t have a lot of money saved to put down, there may still be solutions out there that can significantly increase your chances of getting a seller’s attention. So, before going on your next home tour, consider talking to a loan advisor to see what solutions they can come up with to fit your financial picture.
2. If you lose out on the first home, don’t overpay for the next one.
When you’ve been outbid on offer after offer, it can be tempting to go all in on the very next home you see, simply out of frustration. This is the biggest financial purchase of your life…you need to keep a cool head. Difficult as it may be, the savviest homebuyers don’t let fear of missing out cloud their judgement. Even when the market is hot, you need to be sure you’re making a sound investment. Says Eric Rothman, a REX agent based in Bakersfield, CA, “being educated on the process and staying diligent is what makes a savvy first-time homebuyer and sets you apart in this new and uncharted market.” Consider what the home is really worth to you, pay for thorough inspections, and be sure it’s something you can live with for a while if the market takes a downturn.
3. When you do find the right home, make sure your offer is ready to go.
The market moves quickly, so if you find a home you want to make an offer on, you need to act fast. If you attend an open house or showing, it’s a good idea to have your offer details written up ahead of time. (Whether you submit that offer on the spot or wait to see what kind of competition you’re up against is part of the strategy you will work out with your agent.) Having your offer in place requires talking to your agent upfront about the price and terms you are comfortable with. To make it strong, you will also want to submit a pre-approval letter from a trusted lender — a step first-time homebuyers often skip due to uncertainty about the process or fear that it will ding your credit. (It won’t!)
4. Show you mean business with your earnest money.
Earnest money is essentially a refundable deposit you put down to show a seller you’re serious about buying a home. Buyers can offer anything, but obviously the more skin you are willing to put into the game, the more solid your offer appears to a seller. The earnest money is one area that really gets a seller’s attention when you are trying to offset a concession somewhere else in your offer. In particularly hot markets, buyers may even choose to take their deposit to the next level by making high earnest money deposits or even ones that are nonrefundable.
5. Remember that appraisals and other contingencies are there to protect you.
Contingencies are where savviness can hurt you or help you. Most first-time homebuyers are trying to stand out from the crowd, especially in this market. Some real estate agents may advise their buyers to present an offer with no contingencies in order to appeal to sellers. But, you need to be savvy for your own benefit when you hear advice like that. Will waiving your right to contingencies make your offer stand out? Definitely. But, at what cost? Let’s take an inspection contingency for example – do you really want to enter into a purchase agreement where you won’t be able to back out if something alarming and expensive comes up on the inspection report? Probably not. Remember, contingencies are there for YOUR protection. Be wary of giving them up simply to strengthen your offer.
6. Don’t let smaller repairs and appliances ruin the deal.
Your offer has been accepted and an inspection has been completed. You can ask your agent to make any repair requests, but that doesn’t mean you should ask the seller to cover small cosmetic fixes before you close. Repair requests are meant to cover large-scale issues within a home, like a broken HVAC or leak in the roof, not chipped paint or missing light bulbs. If you are competing with other offers, it’s also not the best time to ask the seller to include personal property in the sale. Especially if the refrigerator, washer and dryer are specifically excluded in the listing information. Why risk losing your dream house over an appliance or some kitchen curtains? These types of upgrades are things you can easily budget for on your own timeline.
7. Dare to dip your toes in “non-traditional” listings.
Ever notice the “Other listings” tab on Zillow? Here’s where you’ll find a collection of homes being offered without the help of a traditional listing agent. They might be bank-owned properties or homes for sale by owner (FSBO). Because most buyers skip over these types of listings, they tend to sit on the market longer and sell for less than homes with more exposure and competition. When looking for a potential deal, a savvy buyer will look at everything available and call in reinforcements in the form of a real estate professional who knows what to look out for.
As REX Agent Viktor Kruse puts it, buying a property without professional representation is a bit “like buying a used car with a for sale sign that you found on the street. It is unlikely that it will come with an inspection report from your local Mercedes-Benz dealership, and the buyer should know what they are doing. If they do, there might be a better deal to be had.” If you’re willing to do some digging, you might come across an owner who is simply familiar with the selling process, confident in doing their own negotiations, and prefers not to pay the traditional 5-6% in agent commissions. Before pursuing this kind of transaction, just be sure that they are willing to work with you on the appraisals, inspections, and escrow paperwork that would accompany a traditional sale. If not, it’s best to steer clear.
8. Use buyer rebate and cash back incentives to your advantage.
Buyer rebate programs are designed to help your bottom line by giving you money back to put towards closing costs, which are usually 1-2% of the purchase price. The rebate comes from splitting the commission your agent receives from an outside broker for representing you as a buyer in purchasing the home they are selling. Paying less at closing means you can potentially afford to put more money down and improve your offer. You could also use it to purchase furniture, cover moving expenses, or make desired updates to your home.
9. Budget for more than just the mortgage payment.
Your mortgage payment is only one expense of owning a home. You have utility costs, insurance, property taxes, school taxes, HOA fees, etc…Be sure to count those in because they can be significant! There may even be special taxes that homeowners are responsible for that you didn’t even know existed. For example, in California, many newer neighborhoods require an additional property tax called Mello Roos, which can significantly raise your monthly payment. Be sure to check out the property taxes and other expenses early. Your real estate agent should be able to point you in the right direction of where to find this information, including asking sellers for tax assessments and related documents directly.
10. Do the work to find the right lender (or get a straightforward broker to do it for you).
When it comes to buying your first home, there may not be anything more important than getting the right mortgage. Rates change daily, and half point higher or lower on your interest rate can mean the difference between paying or saving tens of thousands of dollars over the life of your loan. A truly savvy buyer does their research when it comes to their mortgage. Having a good loan advisor on your side can offer your peace of mind about the process. Even so, it’s important to know what questions to ask as there can be lots of hidden fees involved in processing a loan. Some mortgage brokers may even take a higher commission from a lender in exchange for offering you a more expensive mortgage rate. A broker with your best interests in mind will compile options from a variety of different lenders and advise you when to pounce on a competitive rate.
Final Word on Competing in a Seller’s Market
New to the process or not, first-time home buyers need to be on top of the market. With inventory low and the demand steadily increasing, you want to be prepared to move on when the right opportunity strikes. That means going into your home search with a solid offer strategy already in place and avoiding common mistakes that can result in missing out on the home you love. There isn’t a one size fits all approach to buying your first home. Every market is different and it’s difficult to predict what will catch a seller’s attention. But be savvy out there, work with an agent you can trust to be helpful, honest, and responsive — and you will be well ahead of the game.