It’s a seller’s market out there — between historically low interest rates and low inventory, prospective home buyers are facing stiff competition. In our local market, homes are getting dozens of offers within just a few days of listing. Our partners at GreenPath Financial Wellness recently presented a webinar with insight into buying a home in this competitive market. In case you missed it, here are 5 tips for buying in a seller’s market:
1. Have a Budget… And Know Your Limits
Before you start house shopping it’s important to understand the true costs of buying a home so you know what to expect. You’ll need to set a realistic housing budget for your situation and determine what your maximum limit is.
2. Build a Good Team
Buying a home may seem daunting, but you’ll assemble a team of experts to help you. Choosing a lender is the first step to building your buying team. Your lender will work with you one-on-one throughout your home buying journey and will help you find the right loan for your unique circumstances. Meeting with a lender first is important because it allows you to narrow your search according to what you can afford. In addition to your lender, you’ll select a real estate agent who will work with you to find homes that suit your needs and schedule showings. Experienced agents with market and neighborhood knowledge are an asset to your team. They will help you craft your offer and work through negotiations. Choose an agent who is familiar with your prospective neighborhoods and that you’ll enjoy working with. You will also need to choose a home inspector and homeowners insurance agent.
3. Get Pre-Approved
When considering offers, sellers want to be confident that the deal will close. That’s why pre-approvals are so important — it proves to the seller that you have financing ready to back up your offer. Plus, in a competitive market, a pre-approval may even be required just to view a home. To get pre-approved, you’ll submit the mortgage application and your lender will do an extensive check of your credit and financial background to approve you for a loan amount.
4. Think Like a Seller
Think like a seller and appeal to their best interests to make your offer stand out. Sellers are typically most interested in the likelihood a deal will close and their overall net proceeds from the sale. One strategy may be to put down a larger earnest money deposit. Earnest money is a deposit made to an escrow account when an offer is made to show a buyer’s good faith to buy the home. It’s typically 1-2% of the purchase price. A contract is written up that outlines the conditions for refunding. If you walk away from the deal for reasons not stipulated in the offer contract (such as the home failing inspection), the seller may keep the deposit. If the sale proceeds, this deposit is applied toward the down payment and closing costs.
Another option, if you have flexibility, is to consider a Use and Occupancy Agreement, which allows the seller to stay as an occupant for a period of time. If they’re waiting to move into a new home, this agreement could be a deciding factor when accepting an offer. The agreement is a legal document in which you establish rental terms and a daily rate, and your real estate agent should be able to provide guidance.
5. Boost Your Offer
When crafting your offer, there are some strategies you can consider to make your offer stand out. Your real estate agent can provide guidance. An escalation clause, or elevator clause, states that you’re willing to increase your offer, up to a certain limit, if another competing offer is higher than yours.
Another strategy is to include an appraisal guarantee, or appraisal gap clause. This states you are willing to provide a certain amount of additional funds on top of your downpayment to cover the difference if the appraisal value comes in lower than your offer. Please note that your mortgage loan is based on the appraisal value, so this strategy requires cash on hand.