As a homebuyer, you’ll face one of three types of real estate markets as you embark on home ownership: buyers’, sellers’ and balanced. The type of offer you’ll want to submit is highly dependent on the current market. In a market where there are lots of homes for sale and few buyers competing for them, a buyer has a different set of objectives than when the market is searing, with few homes for sale and lots of buyer competition.
Let’s break these markets down and figure out what type of offer is appropriate to each.
A buyer’s market is high in housing inventory and low in other buyers. This is the ideal time to shop for a home because homeowners are actually competing for your interest. With the buyer in the driver’s seat, sellers are willing to make concessions that they wouldn’t otherwise consider, just to get the home sold. A strong offer in this market — as long as the house is priced appropriately — meets the seller’s asking price but loads up on concessions. Hate the carpet? Ask for a carpet allowance. If you’re low on cash, ask the seller to assist with closing costs.
The seller considers it a strong offer because you’ve met the price. It is strong for you, the buyer, because you are receiving credit for items you want repaired or replaced or a financial concession. In this situation, it’s a win-win for both parties. Be aware that some government-backed loan programs specify which items the seller must pay at closing.
“Highest and best” is a term you’ll often hear during an overheated seller’s market, when there are few homes available to lots of buyers. It s the strongest offer one can submit on a home for sale. In this market, prices typically tend to escalate quickly (the old supply-and-demand economic model at work) and bidding on homes sometimes becomes frenzied.
Before a seller’s market becomes overheated you’ll typically be faced with competition from investors – those guys and gals that come in waving lots of cash and proffering enticing promises to close quickly. Because prices are still low, this stage of the market is also generally full of first-time homebuyers who get locked out of the process by the cash-laden investors. Although it’s not impossible to win against these buyers, it is challenging. The most important thing to remember is that the seller is in charge. Because of this, don’t plan on receiving any concessions from the seller. In fact, don’t ask for them. If you do, and there is a clean cash offer, you will lose.
To beef up your offer, consider doing the following:
Go through the offer with your agent and look for ways to shorten time limits – offer to have the home inspection complete within one week, for instance. Skip asking for seller concessions.
If you have the money, offer to pay your real estate agent’s commission. This gives the seller an extra three percent of the sales price at the closing table. Consider shopping for homes priced under your maximum loan limit to give yourself more money to use as seller incentives – such as the aforementioned credit for your agent’s commission.
The Balanced Market
Any time a local real estate market has five to six month inventory of available homes, it is considered balanced. In a balanced market, buyers and sellers have equal control and leisurely negotiations are common. Your number one tool in any market will be your real estate agent, so choose wisely.