Considerations for Buying a Home in a Buyer’s or Seller’s Market
A Buyer’s Market
A buyer’s market is defined as a situation in which supply exceeds demand, giving purchasers an advantage over sellers in price negotiations. When it comes to the real estate market, a buyer’s market means there are more available homes on the market and fewer active buyers, potentially forcing sellers to lower their asking price to attract buyers who have the pick of the litter.
Because inventory is high, it’s common to see houses stay on the market for a longer period of time. This gives buyers an added advantage in that you can often negotiate down the asking price because the sellers may be more willing to make some concessions to finally sell. This advantage may not go into effect until the home has been on the market for at least 30 days and/or the seller has already reduced the original asking price. Even in a buyer’s market, sellers emotionally believe their home will sell quickly and at or around asking price. It can take the house sitting on the market for a month before they realize they’re going to have to rethink things if they want to sell.
In a buyer’s market, you may also be able to include contingencies, allowances and/or seller-paid closing costs requests that otherwise may soften the deal. Contingencies are common, but as opposed to a seller’s market where certain contingencies can kill a deal, they are less likely to cause a problem in a buyer’s market. Allowances are also fair game, enabling you to get some credit for certain cosmetic imperfections, such as carpeting or paint. Closing costs can add up to 2 percent of the sales price, making them a negotiating point as well.
Home sellers who are anxious to sell are more likely to be willing to consider any reasonable deal than to have no deal at all. This isn’t to say all sellers in a buyer’s market are inclined to sell at rock-bottom prices or be agreeable to particular terms. Selling a home is frequently an emotional decision and most home buyers believe their homes are worth a certain amount. A low-ball offer can offend any home seller and you can’t assume they’re desperate to sell.
Even with the most motivated sellers, if you want to close quicker and ensure your offer is the only one the seller considers, make it an offer they can’t refuse. Remove as many contingencies as possible, get preapproved for a mortgage or better yet, offer all cash to remove any financial barriers. All-cash offers are a great way to incentivize home sellers to lower their asking price even further, because you’re removing risk, stress and hassle for them.
One of the other advantages of a buyer’s market is that you may be able to take a bit more time in finding the just-right house. You aren’t as pressured to make an offer on the spot in fear that another buyer is on the doorstep. Don’t get too comfortable, however. If the house, neighborhood and location are highly desirable, other buyers are sure to be near.
One final note: because there are more houses on the market, a seller’s market can signal it’s a great time to find a diamond in the rough. Even in a buyer’s market, the most attractive, updated homes will still get the most attention and potentially put you in a bidding war. The homes that need more TLC may be left in the dust, giving you the perfect opportunity to make a great investment, particularly if the home is in a desirable neighborhood. Be sure you get a thorough, independent inspection and consider bringing in a contractor and/or interior designer to help you determine the cost of any repairs and updates. You can negotiate with the seller on the repairs, but you may still need to pay for some of them out of pocket.
A Seller’s Market
A seller’s market is defined as a market condition characterized by a shortage of goods available for sale, resulting in pricing power for the seller. In terms of real estate, a seller’s market means there are more active buyers than there are sellers, enabling sellers to price their homes at top dollar because they know their home is in high demand.
In a seller’s market, buyers must be competitive with their offers. The more attractive you can make your offer, the better chance you will have of winning a bidding war. This means the fewer contingencies the better and you may need to forego any allowances or closing cost requests. The goal is to make your offer as effortless and risk-free as possible, especially when compared to other offers.
A piece of advice you will likely hear often is to get your financials in order before you begin the home search. No matter the type of market or how you plan to finance the new home, you will need certain documents and that can take time. In a seller’s market, timing is everything and you don’t want to hold up your offer because you’re gathering financial documents and then waiting on a lender to give you a mortgage pre-approval letter.
You can make an offer with a financing contingency, but most sellers worry about these because you may be unable to get approved for a mortgage. If you have an existing home to sell, you’ll also need to include a home sale contingency in your offer. Most homebuyers need to have an accepted offer on their existing home before getting approved for a mortgage, otherwise, they’ll exceed the debt-to-income requirement. This can get sticky. If your existing home takes a while to sell, your contingency, if accepted by the seller, may expire and you lose the new house. If your existing home sells quickly, you’re in a better position to get pre-approved for financing, but you may also need to move twice if you don’t close on the new house before or at the same time as you close on the sale of your existing home. It’s a stressful timing game that doesn’t typically end where you want it.
All-cash offers, on the other hand, tell the seller you have the money and are ready to move forward. The seller won’t have to worry about you selling your existing home first or getting financing. In essence, they won’t have to wait – and neither will you. Today in most markets it’s a seller’s market and sellers want low-risk offers. Keep in mind that since there are fewer homes on the market in a seller’s market, the nicest homes will go quickly. The sweeter you make your deal, the more likely you are to beat the other bidders.
Check out Homeward to learn more about securing cash to make an all-cash offer on a home. It’s a different way to think about buying real estate, but it’s proving effective for thousands of people who want to avoid the many issues that plague traditional real estate transactions. No matter what type of market you are in, you can reduce the time it takes to purchase a home and do it with significantly less stress if you consider new options like Homeward.
