Since the start of the coronavirus pandemic, homebuyers have become accustomed to overpaying and playing a risky game of bidding wars and forgoing contingencies.
In a recent survey by Money and Morning Consult, 36% of people who bought a home in the last two years said they felt they paid too much. The survey also showed that recent buyers were willing to compromise on size, style, location and home features in order to buy a home.
However, with mortgage rates trending sharply higher in the first half of 2022, the real estate market is starting to cool off. Suddenly, home buying strategies that seemed absolutely necessary in March no longer make sense.
So what has changed? Pretty much everything.
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Don’t assume that you will automatically get into a bidding war. Instead, find out how competitive the market really is
Bidding wars may be the rule of the day since the surge in home buying began in late spring 2020 — but competition may not be as fierce as it used to be. In May, nearly 58% of homes under contract with Redfin agents were involved in a bidding war, a 15-month low.
Chris Grimes, Partners in Grimes team leader at RE/MAX Homes and Estates in Nashville, Tennessee, notes that some affordable homes in desirable areas of the greater Nashville area still have multiple listings, but not nearly as many as at the peak. “Instead of getting the typical 10 to 15 offers, it’s more like 5 to 10 now,” says Grimes.
Many markets are slower. Nicole Rueth, Producing Branch Manager at The Rueth Team in Denver, notes that real estate agents she’s spoken to have listings with very few showings and no bids. In less competitive areas, you don’t have to be as aggressive.
The key to succeeding in a changing housing market is studying and understanding it, says Rueth. As the market changes, buyers need to focus on their local market instead of getting carried away by national trends.
It is also important to know the individual characteristic. “In any situation, it’s critical to gather as much information about the property as possible beforehand,” said Frederick Warburg Peters, president of Coldwell Banker Warburg in New York. “Then you have a sense of how much flexibility there can be and how best to approach an offer.”
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Getting started
Don’t settle for the first home you find. Instead, buy a home that suits your needs
During the height of the pandemic buying frenzy, Rueth encountered people willing to buy a house on busy streets with power lines running overhead simply because it was a house and no other options were available.
But now more inventory is coming to the market. According to Realtor.com, active listings increased 17% year over year in the second week of June. With more listings expected to become available throughout the year, buyers may be more discerning about which properties they are willing to bid on.
Do not automatically pay more than the asking price. Use an escalation clause instead
Fewer buyers have to settle for what happens to be for sale. Instead, they can focus on how this home fits their lifestyle and financial needs. Rueth says buyers should now ask themselves, “Is this house really worth that much money?”
This is possible because the sellers also assess the market more realistically. At one point during the pandemic, sellers have offered homes well above their agent’s recommended listing price, essentially daring buyers to make an offer that would “come them to move.”
Now more and more sellers are lowering their asking price. Just over 22% of homes for sale in the four weeks ended June 11 saw their prices fall, the highest percentage since Redfin began collecting data in 2015. In some cases, Rueth says, these price reductions occur immediately after the first weekend the home has been on the market.
Don’t assume you have to come in hot with a bold offer. If you’re concerned about competition, a price escalation clause is an option. This allows you to let the seller know you want to buy at (or below) list price, but also be willing to bid up a certain amount if (and only if) higher offers are on the table. A good real estate agent can help you create an effective escalation clause.
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GETTING STARTED
Don’t just forego contingencies. Instead, look for alternatives that protect your investment
Another strategy that became common during the pandemic was to forgo inspection and assessment incidents. This strategy, while successful, was also incredibly risky.
Grimes knows of buyers who have waived the inspection quotas — which basically means they bought the house “as is” and were responsible for any necessary repairs to the house — only to find the house had defects that required repairs ended up costing them thousands of dollars, including a client who is currently involved in a related litigation.
Forgoing rating contingency can be just as costly. Lenders require estimates. So if a buyer waives the appraisal contingency and the home is valued for a lower value than what is being offered, the buyer is on the hook for the higher amount. Often this means that money set aside for a down payment is used to fill the gap.
“Instead of a 20% deposit, it’s more like 10% in the end,” says Grimes. “They end up paying a higher interest rate.”
While mortgage rates stayed low, the monies saved from mortgage payments could offset the cost of unexpected repairs or a higher down payment. That’s no longer the case for many buyers today, who find they have to spend more of their cash reserves and monthly income to just afford a mortgage to begin with.
If you have to forgo the inspection contingency, there are limited ways to minimize the risk of buying a lemon and additional repair costs. Some sellers may authorize an informal inspection before submitting an offer.
The valuation proviso should ideally only be waived if you have sufficient cash reserves to pay the potential difference to the asking price or can afford the higher monthly payments if you need to raid your down payment fund.
“This is the kind of market where strategy wins,” says Rueth. Do your due diligence on the state of the market, ask questions, find out what the competition is really like, and then create a plan of attack that will yield the best results.
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Every Saturday, Money’s Property Editor, Sam Sharf, delves deep into the world of real estate, offering homeowners, buyers and daydreamers alike a fresh take on the latest real estate news.
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More of money:
Why home sellers prefer cash offers – even when they’re lower than competing bids
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Stressed out and alone, homebuyers turn to therapy to cope with a wild housing market
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