HOW TO NAVIGATE A HOT HOUSING MARKET:
A hot housing market is frustrating to everyone involved. First time home buyers are especially frustrated as they have never been through the process let alone with competition. Realtors are frustrated that they spend a lot of time preparing offers just to lose out on homes and lose the confidence of their clients. Many people think of a hot market as a “bidding war”, but it is actually a buyer “quality war” more than anything. I explain more in this article.
Keys to Navigating a Hot Housing Market
- Have Perseverance and Understand The Market
- Get Pre-Approved by a Lender
- Consider Saving More if Trying for Down Payment Assistance
- Be Prepared and Become Confident
- Tell Your Realtor A Lot About You
- Do not Allow Yourself to Be Discouraged
- Focus on Value of the Home, Not Price
- Understand How to Make a Strong Offer
- Bid Strategy is Important, Think Through It
Have Perseverance and Understand the Market
The market I am speaking from is Denver, CO. Arguments can be made that different areas have different issues, but it is mostly the same. Now as I said above it is a “quality war” among buyers. What this really means is sellers and their agents want the most money for their home, but they also want a buyer that is well qualified and likely to close. Cookie cutter homes are easy to value and thus there is really a ceiling on what you can offer. Too high of offer puts a lot of risk around the appraisal. There are always those occasional cash buyers or buyers willing to pay additional out of pocket if the appraisal falls short, but they are not as common as it seems. We only hear about the wilder deals as they make for fun conversation.
I see people everywhere talking about how “this home went for $30k over” and “there was 7 offers and $55k over”. Once again this is fun water cooler talk, but ultimately it is not reflective of the average deal. There are reasons behind the high flying offers. This year I have only witnessed one property that I would say was a little crazy. It was a home that was worth around $740,000 and went for $800,000. We offered on it and were not successful. Fortunately, the couple I was working with had perseverance. We found a home that was arguably better in every way, valued at $820,000 and we paid $765,000 for it. It was listed on the market at $750,000 and they were willing to go above asking given the value of the home.
You must have perseverance in a hot housing market, the home you just saw online today that you love is likely to be under contract in the next 3 days. While this feels like a panic or a rush, 3 days is quite a bit of time. Once you have looked at 20+ homes you will have a better feel of what you want and when you find it you will be able to act quickly and be excited when you finally close.
I have talked with 4 different people this year that got overly excited at a home they saw, then panicked when it was not for sale anymore, and then just decided to rent. Well, you need to try a little harder than that. The home you will buy is not for sale on the market today, today’s homes that are on the market for 30-60 days are the leftover scraps that nobody wants.
Loan type is particularly important, conventional loans or cash will win the bid every time in multiple offer situations. FHA an VA loans carry higher risk as the buyer is putting less down and presumably is not as financially equipped to carry out the transaction. They also have certain federal underwriting guidelines that make for less wiggle room on inspections and appraisals. At the bottom of the pile are the low-down payment loans where the buyer asks the seller for a credit towards their closing costs. These low-down payment backed offers are typically only accepted after the home has been on the market for a few weeks.
Get Pre-Approved by a Lender
Simply put if you do not have the funds you should not be looking at homes in a hot housing market. If you are confident in your financial position it is okay to do this simultaneous while looking at homes, but this really all comes down to being prepared. You must submit a pre-approval letter or proof of funds with your offer or it will just be rejected. This is a simple step that only takes about an hour to get pre-approved, so just do it. I even have an app I can send you to upload everything to. It is easy, just get it out of the way.
While talking with your lender make sure they work weekends. Also, make sure they are willing to call the listing agent on your behalf when you put in an offer. These are small things, but everything helps in this market. There is a significant difference between pre-qualified and pre-approved. See below for an infographic on the difference.
Difference between Pre-Qualified and Pre-Approval.
Consider Saving More if Trying for Down Payment Assistance
You have probably seen those ads “Buy a Home with Only $1000 Down” or you may have already gotten pre-approved for down payment assistance. The CHFA and Denver Metro DPA programs are terrific and really help extend homeownership. The downside to these loans and grants is that they come with higher interest rates and they are not attractive to a seller as they carry higher risk. This does not help in a hot housing market. Buyers who do not have enough cash could back out of the contract due to a family or other expense emergency. They also cannot put down much earnest money, leaving the seller with little to go after if buyer is in default. The worst part of these programs are the closing costs for the buyer must still be covered. The only way to do this if you do not have the funds is to ask the seller to credit you part of the purchase price at closing.
You might be thinking just offer them more to compensate for the loan type, but there is a bit of risk to this deal. For example, let us say we have a home that has multiple offers at $300,000. You offer them $305,000 and ask for them to credit you back $4,000 towards closing costs. This should net them $301,000, right? The issue is if the home does not appraise for $305,000 the seller knows you do not have any cash to bring to the table. Let us say it appraises for $290,000, now the seller is willing to come down to $290,000, but they still have that $4,000 credit as without it you cannot close. The seller in this instance ends up effectively getting $286,000 and would have been better off to go with an offer without the credit.
The more money you can put down and the more competitive your offer will be, the interest rate will be lower, and your payment will be less. These loan programs are perfect for someone who is not wanting to spend all their savings, but rather keep that as a safety cushion. If you honestly cannot put together $5,000 or more, you should reconsider whether home ownership is right for you. There are a lot of things that can go wrong with a home that can cost at least $5,000 let alone a deductible on an insurance policy after a big hailstorm. An exception to this $5,000 would be if you have VA benefits. The benefits of the VA loan outweigh the downside. VA loan benefits include no private mortgage insurance (PMI), 100% loan to value, and great interest rates. If you are a VA borrower you should still be honest with yourself about whether you can save up for a big repair or expense in the future.
Interest Rate Table From Denver Metro Down Payment Assistance
Be Prepared and Become Confident
Being prepared is everything in a hot housing market. Most homes hit the market on Thursday, showings start Friday or Saturday and offers are due on Sunday or Monday. This does not mean that the home will sell, but it is to help the seller get the most offers on the home and try to build competition. A well-prepared buyer is watching and waiting and looking at the auto-emails from the MLS. If you are not setup on this you need to be, it will save a lot of time having properties automatically emailed to you the moment they hit the market. Do not look at Zillow every day, the listings can take a couple of days to appear there and you are wasting time by surfing every time. When the right one hits the market, go look at it within the first day or two and make an attractive offer if it is the right home.
Confidence is important as you will not be confident without knowing what you are doing. I personally like to go over the contract to buy and sell before we get to the offer stage that way you are prepared. I also like to talk about what you are responsible for and minimize the number of surprises. Real estate is fairly simple, and the confidence will come from knowing what you are getting into. As you look at enough homes you will gain a good feel on the price or value of a home as well. As Realtors we somewhat get a natural feel of price from the repetition of constantly looking at and valuing homes. This is not some sort of super-power. You will get this same feeling as you focus in on an area. All of this leads to confidence and the ability to make an attractive offer and close. Just remember that all of this does not happen overnight, but you must start somewhere, so start getting prepared.
Tell Your Realtor A Lot About You
This might sound a little silly, but in the world of “quality wars” what I say about you to the listing agent matters a lot. Now, I do not need to know your childhood crush or your favorite ice cream flavor, but I do need to know a bit about your job and maybe a few hobbies. One of the biggest causes of a deal falling apart is someone losing their job. COVID-19 has wreaked havoc on everything and the more comfortable I can make them about your job security the better.
I recently had a buyer that won out in a 4-way tie on a very nice townhome. The main reason we won is we were a conventional borrower, and the buyer had a steady job. This buyer worked for FedEx and it is obviously a very safe job to have in the world of COVID-19 and the increased demand for online ordering. We had a longer than usual closing timeline, but they were okay with this as we had a very solid buyer.
As a Realtor it is our job to portray you in the best light. The more I know about you the more comfortable the seller will be. I want you to picture two different buyers. The first the agent sends a few texts and then emails over an offer. The second the agent calls and has an extended conversation about their buyer, how great they are, and why this is the house for them! Which one would you choose all things being equal? Just like anything in life comfort comes with time and the more time an agent puts into talking with the other agent the more competitive you will be.
Do not Allow Yourself to Be Discouraged
You just found the perfect house after looking for 3 months and touring about 30 homes and your offer is not accepted. You will feel very defeated, discouraged, deflated, a lot of “d” words. Have expectations that this will happen. There are a lot of homes in Denver, just do not get discouraged and don’t fall victim to the water cooler talk of a hot housing market. Just keep your head up and go look at the next one that pops up on the market. Learn from the experience and brainstorm what you could have done better and do it next time.
Focus on Value of the Home, Not Price
In the first paragraph I mention an example where “there was 7 offers and $55k over” which scream hot housing market if there ever was one. This example was a home that I showed to a couple and they really liked it. It was priced around $550,000 and when we walked through, I explained to them that it would be under contract quickly at around $600,000. The reason was simple; great home, great area, and it was worth around $600,000. The reality is this home only went for $5,000 over what it was worth, but that does not sound as sexy now does it?
There is a lot of subjectivity in pricing a home especially with unique homes. Many agents just simply do not take the time or they intentionally price homes low so they can bring in a lot of offers. The price it low strategy to me doesn’t benefit anyone except the real estate agent. The agent gets to brag about how much over asking they got for the home and how many offers they had, and it helps them win more business. The homeowner sees really no difference and, it is much more difficult to pick the right buyer out of 10 offers than it is out of 3.
Make sure you and your agent use a home valuation approach that is like what an appraiser would use as ultimately you want the home to appraise. If you are having to stretch a lot and still cannot get there it is overpriced. Do not be afraid to offer less than asking if this is the case, although if it is the first weekend you are probably better off waiting a week or two. We were able to negotiate almost 10% off the asking price recently on a condo that had been on the market for about a month. The reality is they were asking too much for it and after I thoroughly explained that to the other agent they ultimately agreed.
Understand How to Make a Strong Offer
A strong offer is more than just price as I mentioned above. Having a reasonable closing timeframe (about 30 days), putting a healthy amount down (ideally 20%), and using a conventional loan are all part of a good foundation to a competitive offer. Not every buyer has these so if you do you already stand above the rest. If you lack the ability of a large down conventional offer that is okay, just have your agent put their focus into how financially sound you are and how it is the right home for you. Ultimately you are trying to make the seller feel comfortable, so just get there another way.
Other components to a strong offer in multiple offer situations may include minimizing inspection concerns, stop-gap appraisal provisions, hard earnest money, or waiving certain rights in the contract. Be careful as these can be dangerous to your earnest money. I firmly believe that credibility of the buyer and buyer’s agent carries more weight than some of these crazier contract terms.
Minimizing Inspection Provisions:
Rather than putting language around minimizing inspection concerns I like to have a discussion with you about what is acceptable and what is not for inspection. This way I can convey this verbally to the other agent. We want to keep these things out of the contract to give you the best contract terms. The standard contract to buy and sell states “in buyer’s sole discretion” around inspection issues. What this means is you can come up with almost anything to get out of it. By focusing on verbalizing the inspection methodology we give you legal flexibility.
I always think it is fair to ask for things to be fixed or replaced that are broke, but not obsolescence or cosmetic issues. This sounds simple, but ultimately you have the opportunity before making an offer to see the obvious issues. Cosmetic issues such as broken tile, cracked counters, bad paint, etc. can all be spotted by the eye before making an offer. If these are of concern and you want them fixed by the seller, then we will convey that up front. A 15-year-old hot water heater could fail at any moment, but is working now. I do not think it is fair for a seller to have to fix or replace something that is not broke or failing.
Issues that are of health or safety concerns should be addressed. Improper repairs of gas/sewer/water lines should be fixed. Sometimes homeowners do renovations themselves and do a poor job of wiring. This is an issue that isn’t “broke”, but if it isn’t up to code for when the work was done it is fair to ask for it to be repaired.
Appraisal stop-gap provisions give the seller comfort that your high priced offer will be backstopped with extra cash if need be. Basically, you are agreeing to cover the difference between the appraisal and your offer up to a certain amount. As an example, if you are purchasing a $400,000 home with $100,000 down, but you are willing to put up to $120,000 down if needed you can write that into the contract. This way if the home only appraises for $380,000, the bank is only loaning on $380,000 and you are putting an extra $20,000 down.
Earnest Money Provisions:
Hard earnest money should only be used when you are very confident and very likely to close with cash even with inspection issues. The best examples of when this might be okay to use is if a builder is buying a home for the land and doesn’t care about the condition of the home or possibly new construction where you are confident about the condition.
Don’t focus too much on wild contract terms, but know there are options if things get really competitive and you are willing to take some risks.
Bid Strategy is Important, Think Through It
Okay, so let’s pretend you followed my advice, and you are well prepared and ready to make that offer. You want to just make the offer and wait and see? No, you want all the data at your fingertips to make a good offer and time it right. This is where the agent and their negotiating skills are going to win you the deal. Negotiation in this hot housing market as you know does not mean getting 10% off the asking price, it means getting your offer accepted. Before I make any offer, I always try to connect with the listing agent to give them my speech about you and how amazing you are as well as get information about their expectations. Sometimes the agents will give us all kinds of details, other times you are lucky to get a text back. We want every tidbit of information we can have to make an educated decision.
When submitting an offer, we want to be cautious about response time, meaning how much time the seller has to respond. If you have a great offer and it is competitive, we probably want response time to be short, but not unreasonable. We also do not want to just jump out there and be the first offer through the door. The agent on the other end is going to let everyone else know that they got an offer and will try to start a bidding war. In multiple offer situations I like to offer around the deadline to help keep the bidding war to a minimum.
Hot Housing Market Conclusion
After reading this I want you to feel a sense of calm and have a “I can do this” kind of feeling. This is not hard, but you must be organized and ready. If you are curious how buying a home can affect you financially in the long term, I encourage you to watch the YouTube video I made about “Buying Versus Renting”.
Happy House Hunting!
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Not responsible for accuracy or for updating this content, readers should perform their own due diligence and seek proper legal and tax counsel prior to making any decisions. This is intended as an informational opinion piece only. Original content is created by Greg Taft.
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