Buying a House in a Hot Market
Buying a home in a seller’s market can be challenging. While housing market conditions may be less than ideal, there are still benefits to buying a property versus renting. Use these tips to stay ahead of the competition and land the house you’ve always wanted.
What’s Causing Colorado’s Competitive Housing Market?
If you’re in the market to buy a home right now, you’ve probably noticed that competition is high and houses are closing for above asking prices. Currently, we’re in the midst of what’s known as a seller’s market, meaning there are more buyers than there are sellers. Inventory of active listings for the State of Colorado is down 15% from this time last year. Meanwhile, the Colorado State Demography Office is expecting the rate of net in-migration for the Denver Metro Area and other counties in Colorado to increase in the next 30 years.
Increased demand for homes, limited supply and historically low mortgage rates all drove the expansion of the current seller’s market. What that means for you as a homebuyer is that people selling their homes will have more negotiating leverage. You’ll have to be prepared to make a buying decision quickly to land a home and you can expect to pay more than the asking price. It’s been reported that this year in May, buyers paid an average of 104% of the listing price, which is up 1.6% from the same time last year.
You may be wondering, “why should I buy a home in such a competitive market?” While some may be inclined to wait until the next market crash or to rent while they wait for inventory to catch up with demand, this could delay your plans for quite a while. This seller’s market is not likely to change in the near future. Forecasts predict home prices will continue to rise over the next decade and rising interest rates will increase your monthly mortgage payment as well as the total amount you’ll pay over the life of the loan. All the factors that contribute to the seller’s market also contribute to increasing rental costs. If you plan to stay in your area for more than five years, it may still be more cost-effective to own a home and build equity than it is to rent.
If you want to be a competitive buyer in today’s seller’s market, use these tips to help you purchase the home of your dreams.
Have a Trusted Buyer’s Agent
Having an excellent real estate agent can make the difference between getting the house you want or not. A buyer’s agent (buyer’s agents help the buyers, while listing agents represent the sellers) can not only negotiate deals on your behalf but can also use their connections and resources to find deals in a timelier manner than you could by looking at listing websites. Speed is key here as the average house is only on market for 26 days.
When looking for a buyer’s agent, be sure to check their reviews and see if they have any references that would be willing to speak with you. Some other questions you should ask include:
- How many properties did they sell in the last year?
- How well do they know the neighborhood you’re interested in?
- What access do they have to unlisted properties?
- What can they do to make your offer more competitive against other buyers?
Get Pre-Approved for a Mortgage
In a competitive seller’s market, ensuring you are qualified for a mortgage is essential. This shows your seriousness as a buyer. Sellers will know that your finances have been verified and that you’re ready to make an offer. Some lenders may also offer programs to lock in your interest rates after you go through their pre-approval process. To prevent any delays from going under contract, be sure to get pre-approved before you start looking.
Part of the process will be working with your mortgage company to determine how much of a loan you can afford. Knowing that homes are usually selling for above asking price, it may be worthwhile to look for homes that are under your mortgage loan amount, so you have some room to bid up.
Working with local mortgage lending companies can also give you an edge in a competitive market. Not only do they often have lower fees and interest rates, but also offer personalized service that you may not get when working with a national or online lender. In some cases, realtors won’t even accept pre-approvals from non-local mortgage lenders. When choosing a mortgage lending company, make sure you’re doing your homework to find a provider that has the product you need, competitive rates, a quick turnaround time and excellent customer service.
Submit Your Best Offer First
In a market like this, submitting an offer that’s below the asking price may quickly rule you out of consideration by the seller. Knowing that most homes are selling for above asking and that the bidding process is highly competitive, you should make your first offer as attractive as you’re comfortable with. This would be a good time to consult with your buyer’s agent to see what pricing strategy they’d recommend.
Add a Personal Touch
While buying a house can seem like a very transactional process, at the end of the day it’s another person on the seller side. Exploring what non-price contingencies a seller may have can also make your offer more compelling. They may have other motivations to sell their home that aren’t price or money related, so work with your agent to find out what other things you can include in your offer. Maybe a seller would prefer to not move out for a couple of months or wants to know that the tree they planted in the backyard when they first moved in will be taken care of. Whatever it is, connecting with the seller and having a personal approach may improve your chances.
Be Ready With Extra Cash
If the appraisal comes back lower than the purchase price of the home you want to buy, you may need cash to make up the appraisal difference.
Having some extra cash on hand is useful, and prudent, for several different reasons. First, bidding on a property may go above the amount you’re approved for on your mortgage loan. Having extra cash, above your down payment amount, could allow you to continue bidding on a home that you really want.
Another possible use for extra cash is making a larger earnest money deposit (EMD). If you’re serious about buying a home, a larger EMD may show that you’re a serious buyer and won’t back out of the deal for other opportunities. However, use caution with this method. If you don’t end up buying the home and back out of the contract, the seller may be able to keep your EMD for wasting their time.
Finally, having cash is a prudent step to take as home prices start to rise. The median sale price of a single-family home in Colorado is up 20% from last year. While home prices may be rising quickly, home values may lag. If the home’s appraisal comes back lower than the purchase price of the home you want to buy, you may need cash to make up the appraisal difference. It’s important to plan for this possibility so you’re not caught off guard.
Establish Your Boundaries
While it may seem like the sellers hold all the cards, it’s still important to set your negotiating boundaries to mitigate your long-term financial risk. Establish your maximum offer price and stick to it even if it means you’re not able to win a bid. It’s better to let a listing go, rather than jeopardize your ability to make future payments or dipping too heavily into retirement savings.
If you don’t have a lot of extra cash, consider looking for homes that have lower asking prices, so you still have room to bid.
Also, be cautious of different contingencies that may come up during negotiation. For example, if a seller asks you to waive the home inspection contingency, beware. While it may make your offer more competitive, it may also expose you to unforeseen repairs, issues and headaches down the road.
Fulfilling your dream of buying a home is still possible, even in tough market conditions. These strategies can help you stay competitive and make the buying process less stressful. Be patient in your search, prepare diligently and know what you’re looking for so you can take advantage of opportunities as they arise!