Since the start of the coronavirus pandemic, homebuyers have become accustomed to overpaying and playing a risky game of bid wars and waived contingencies.
In a recent survey by Money and Morning Consult, 36% of people who bought a home in the last two years said they believed they had paid too much. The survey also indicated that recent homebuyers were willing to compromise on home size, style, location, and features to buy a home.
But with mortgage rates rising sharply during the first half of 2022, the housing market is starting to cool off. Suddenly, home-buying strategies that seemed absolutely necessary in March may no longer make sense.
So what changed? Practically everything.
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Don’t assume that you will automatically be in a bidding war. Instead, find out how competitive the market really is.
Bidding wars may have been the rule of the day since the surge in home buying took off in late spring 2020 – but the competition may not be as fierce as it once was. In May, nearly 58% of homes under contract to Redfin agents were involved in a bidding war, a 15-month low.
Chris Grimes, Team Lead for Partners in Grimes at RE/MAX Homes and Estates in Nashville, Tennessee, notes that some good-priced homes in desirable areas of the Greater Nashville area are still featuring multiple offers, but not as many as peak. “Instead of getting the typical 10 to 15 offers, it’s more like five to 10 now,” says Grimes.
Many markets are slower. Nicole Rueth, production manager for The Rueth Team in Denver, notes that the real estate agents she spoke to have ads with very few presentations and no offers. In less competitive areas, you don’t have to be so 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 rather than getting carried away by national trends.
Knowing individual ownership is also important. “In all situations, the critical issue is to gather as much information about the property in advance as possible,” says Frederick Warburg Peters, president of Coldwell Banker Warburg in New York. “So you get a sense of how much flexibility there can be and how best to approach an offer.”
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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 found people willing to buy a house on busy streets with electrical power lines simply because it was a house and there were no other options available.
But now, more stock is hitting the market. Active listings increased 17% year-over-year during the second week of June, according to Realtor.com. With the expectation that more listings will be available as the year progresses, buyers can be more discerning about the properties they are willing to bid on.
Do not automatically pay over the asking price. Instead use an escalation clause
Fewer buyers will have to settle for whatever is on sale. Instead, they can focus on how that house fits their lifestyle and financial needs. Rueth says buyers now need to ask themselves, “Is this house really worth that amount of money?”
This is possible because sellers are also becoming more realistic about the market. At one point during the pandemic, sellers were pricing homes well above the list price recommended by their listing agent, essentially challenging buyers to make an offer that would make them move.
Now a growing number of sellers are lowering their asking prices. Just over 22% of homes for sale during the four-week period ending June 11 saw a price drop, the biggest share since Redfin began tracking data in 2015. In some cases, notes Rueth, these reductions prices are occurring 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, one option is an escalation clause. That way, you can tell the seller that you want to buy at list price (or below), but you’re also willing to raise a certain amount if (and only if) there are higher offers on the table. A good real estate agent can help you craft an effective escalation clause.
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Don’t give up contingencies. Instead, look for alternatives that protect your investment.
Another strategy that became common during the pandemic was the waiver of inspection and evaluation contingencies. This strategy may have been successful, but it was also incredibly risky.
Grimes knows buyers who waived the inspection contingency – which basically means they bought the house ‘as is’ and were responsible for whatever repairs the house needed – only to find the house had defects that ended up costing thousands of dollars. to repair, including a customer who is currently involved in a related lawsuit.
Waiving the assessment contingency can be just as expensive. Lenders require appraisals, so if a buyer waives the appraisal contingency and the home is appraised for less than what they offered, the buyer will be on the hook for the higher value. Often this means using money earmarked for an advance to help cover the gap.
“Instead of looking at a 20% down payment, it ends up being more than a 10% down payment,” says Grimes. “They end up having to pay a higher interest rate.”
While mortgage rates have remained low, the money buyers saved on mortgage payments can offset unexpected repair expenses 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 just to pay off a mortgage to get started.
If you have to forgo the inspection contingency, there are limited ways to minimize the risk of buying a lemon and incurring extra repair costs. Some sellers may approve an informal inspection before you make an offer.
Ideally, the valuation contingency should only be waived if you have sufficient cash reserves to pay the potential difference in asking price or can afford the higher monthly payments if you need to encroach on your advance 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 really is, and then form a plan of attack that will get the best results.
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Every Saturday, Money’s real estate editor, Sam Sharf, delves deep into the real estate world, offering a fresh look at the latest real estate news for homeowners, buyers, and dreamers.
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