Navigating a Seller's Market as a First Time Home Buyer
by Ed Machart
on Friday, January 22nd, 2021 at 9:30am.
Purchasing a home, especially as a first time home buyer, is a big decision and there are a lot of scenarios to consider. Now add in buying in a seller’s market, and it’s easy to feel overwhelmed. This guide will help take the guesswork out of the scenario for you and give you some tools and understanding of the process.
A Brief Explanation of the Real Estate Market
Real estate and the housing market is cyclical, and these cycles are influenced by a number of factors, including interest rates, economic conditions, and consumer confidence. Together, all of these can create a shortage or surplus in housing, which is when we will see either a seller’s or buyer’s market.
A seller’s market happens when there’s a shortage in housing or more buyers than homes available for sale. A buyer’s market happens when there is an excess number of homes for sale in relation to the number of buyers. A balanced market occurs when there is the same—or relatively similar—number of homes for sale as there are buyers.
Key Factors in a Seller’s Market:
More buyers than homes for sale
Demand increases home prices
Homes sell quickly
Multiple offers on a home, giving the seller negotiating power
An Overview of the Home-Buying Process
Let’s take a look at the home buying process without worrying about the market for the moment. This will be important so you can understand the process as a whole before looking into how the market affects the buying process.
1. Decide if you are ready for home ownership.
Are you financially stable?
Do you have the financial management skills and discipline to handle this large of a purchase?
Are you aware of all the costs and responsibilities that come with being a homeowner?\
Are you ready to devote the time to regular home maintenance?
2. Get your finances in order.
Analyze your monthly income.
Decide how much extra income you can use toward monthly home expenses (i.e. mortgage, insurance, taxes, maintenance, etc.).
Research upfront costs for a home purchase (i.e. down payment, home inspections, legal fees, etc.).
3. Meet with a lender to discuss your financing options and confirm that you are financially ready to buy a house. It’s a good idea to get pre-approved for a mortgage before you start looking for a home.
4. Build your home buying team.
Real Estate Agent
Builder or Contractor
5. Make the offer and close the deal. At this point you will work with your local REALTOR®, who will advise you on a purchase price, deposit amount and any conditions you should include in the offer. If there is a counteroffer, your agent will negotiate on your behalf to get you the best deal. Once the purchase agreement is signed, your agent will facilitate the terms of the agreement, working to remove each condition.
Some conditions you may include are:
Subject to Financing
Subject to Home Inspection & Approval
Subject to legal review
Subject to Permit Inspection
Subject to Appraisal
Subject to Survey
Subject to Underground Utility Check
6. Close the deal. Once you remove the conditions from the purchase contract the offer becomes firm
7. Closing Day. This is an exciting time—it’s when you finally get to take legal possession of your new home!\
Tips for Buying in a Seller’s Market
A seller’s market can make it very difficult, if not almost impossible, to buy the first home you want to buy. When the market favors sellers, time is of the essence. A stunning home that is priced appropriately can attract more than one offer. Don’t lose heart, though, you can get what you want, but you need to bring your “A” game and be decisive.
Here are some tips to make the process easier, quicker and help secure the right home for you.
Work with an experienced real estate agent. In a seller’s market, buyers should take all the help they can get. With a seasoned REALTOR® on your side, you’ll have a much better chance of getting the home you want.
Get pre-approved for a mortgage first. Sellers often prefer an offer from someone who is pre-approved to minimize their risk of the deal crashing.
Put forward a strong offer with a healthy deposit. Low-balling an offer in a seller's market will just waste your time.
If you like a home, move quickly. Be aggressive about your interest, but don't annoy the seller.
Make your offer attractive and uncomplicated. If your offer is fraught with conditions (i.e. a home inspection, long possession date, etc.), the seller could see these as possible roadblocks to selling. Another buyer with fewer or none of those conditions and a similar price offer, may look more attractive to the seller, since they are offering the least amount of hassle. Instead, carefully review your clauses and remove the ones you can live without.
Be agreeable and responsive. If the seller counters your offer, do whatever you can to meet their desires (ie. higher deposit, shorter possession date, etc.).
Appeal to the seller with a personal letter. At face value, all offers look the same. They all typically include the same information about the price, the buyer, and the conditions being offered. And when a seller is considering multiple offers, all of those bits and pieces can start to blur together. A personal note written to the seller explaining why you believe that you’re the perfect buyer for their home could just be the thing to set your offer apart.
Make an all-cash offer. Cash offers close faster and eliminate the risk of the mortgage not getting funded, making them far more attractive to sellers. Cash offers often give buyers more negotiating power, and can help them to save on the transaction. And a full cash offer may look more attractive to a seller than a slightly higher bid that’s dependent on mortgage financing.
Be prepared for a bidding war. In seller’s markets, bidding wars are familiar territory. No buyer wants to find themselves in such a conflict for fear of going over budget, so start your search well below your budgeted maximum to give yourself negotiating room should bidding war break out.
Do not request favors. This is not the time to ask the seller to give you the refrigerator or paint the front door.
It can be overwhelming to shop for a home in a competitive market, but don’t get discouraged. With the right amount of preparation and the help of an experienced local REALTOR®, you’ll be able to lock down the home of your dreams, no matter the market!