Buying and Selling Your Home in Today’s Overheated Market [Part 1]
This strong seller’s market may continue for a while.
Buyers should always get pre-approved before officially entering the frenzied housing market.
If planning minor renovations to your home before selling, make sure you know which upgrade will help you get your money back.
There’s no question real estate is hot. If you or someone close to you is thinking about buying a home in this highly competitive market, you need to act fast. Homes in desirable neighborhoods with good schools are receiving multiple offers and routinely selling in less than a week--for above asking price. While speed is essential to winning a bidding war, don’t rush into such an important life decision without doing your homework first.
To help guide you through the often-stressful home buying process, we reached out to Princeton-based real estate expert, Tyler Howe, Mortgage Advisor, Finance of America Mortgage and Ryan A. Dunn, CFP, Associate Wealth Manager at Novi Wealth.
Q: What is causing the spike in housing prices and how much longer do you expect the “seller’s market” to continue?
RYAN DUNN: There are multiple issues that have led to the sharp recent increase in housing prices. For one, there are simply too many buyers and not enough properties available for purchase. Add to that low interest rates, zoning issues and increased building costs, and you really have a perfect storm for a spike in home prices. Until we see some of the aforementioned issues rectified, we’ll most likely see the seller’s market continue.
Q: If speed is so critical to buying a home today, what can potential buyers do to get themselves ready to pull the trigger?
TYLER HOWE: Before you even start looking at houses, make sure you get pre-approved by a reputable mortgage lender. The pre-approval process will help you set reasonable boundaries for your search. A reputable lender will help you find your “sweet spot” in terms of price range, the size of the down payment you can afford to make, and subsequent housing payments. Q: What else can buyers do to expedite the pre-approval process?
TH: The pre-approval process will also identify any red flags that could impact your ability to qualify for a loan. It’s important to discover those potholes right away so that you can the necessary steps to clear those challenges. There’s nothing sadder than seeing someone fall in love with a house and then learning they don’t qualify for a pre-approval letter. Also be wary of getting pre-approval letters from lenders who have shady reputations. No matter how solid your finances are, listing agents may shy away from an offer presented with a pre-approval letter that’s issued by lender who has a poor reputation.
Q: If you’re a buyer who needs a mortgage, can you compete with someone else making an all-cash for the home you want? TH: It’s hard to beat a cash offer, but there are various ways to even the playing field. The appeal of a cash buyer (for the most part) is speed to closing and lack of contingencies. The way we try and compete is to offer a seller the same benefits of a cash offer—speed and lack of risk (i.e., contingencies). A high-quality lender can approve a loan in less than two weeks (sometimes within 24 hours), and close on a loan in 30 days or less. Sometimes we will call a listing agent to smooth over the offer and provide assurances about the buyer’s strengths and our collective ability to move quickly.
RAD: Before making an all-cash offer, make sure you understand the trade-offs. You will likely have tax consequences if selling appreciated assets to raise all the cash you need. In some cases, a modest conventional mortgage is the better move in the long run. However, if you find the perfect home and want to make the most competitive offer, we can discuss how best to structure this. If a mortgage still makes sense for you, we could look at raising cash for an all-cash offer and then apply for a mortgage after the property is purchased.
TH: When there are multiple offers but only one lender calling the listing agent, this can go a long way to making your offer stand out. When all the offers start looking the same to the seller (especially if at the same price), little things like a phone can tip the odds in your favor. A buyer can also remove other contingencies from their offer, such as the appraisal contingency, the inspection contingency or the home sale contingency But, removing each of these contingencies comes with added risk to the buyer. If your realtor or lender is encouraging you to remove these contingencies on every offer you make without any thoughtful discussion, you should think twice about working with that person.
Q: Potential buyers are often required to have their “best offer” in by a certain date. What is the benefit to doing things this way?
TH: This “best offer” requirement is a byproduct of the feverish demand in the marketplace. Listing agents are very cognizant about harnessing that demand in sellers’ favor. Often homes will be listed on a Thursday with bidding closing on the following Monday. Prospective buyers may travel for a weekend and miss out on a potential home altogether. This makes it extremely hard for buyers to be confident about their offers, as they barely have time to process their decisions. It’s like having to decide if you will marry someone within five minutes of meeting them.
Q: Is this bidding fever a natural result of supply and demand or is there something going on behind the scenes? TH: Yes, listing agents are often inducing a bidding war by intentionally pricing the property under market value. They hope to churn up demand, as perceived competition among buyers causes “over-asking” price offers and escalation clauses. Enforcing a “highest and best” deadline further encourages this behavior, because buyers know they only get one shot at an accepted offer.
Q: How important is it to make your house sale-ready in this market?
TH: What’s fascinating is that people selling homes in serious disrepair now have an amazing opportunity to sell as-is.
RAD: I’ll have to disagree slightly with Tyler here. Making minor repairs—filling holes, painting walls, etc.--still makes sense today and will increase your home’s marketability. With larger upgrades, however, you’re unlikely to recoup your entire investment. New buyers often want to put their personal touches on their homes and that bathroom you renovated may get gutted immediately by the new owners. Depending on which type of renovations you do, you typically get back no more than 50% to 90% of the money you put into it. Since we’re in a seller’s market, you may not have to invest in as many upgrades as would have under normal circumstances.
Q: So, what’s allowing sellers to be so lax today?
TH: It’s simply the lack of inventory. Many buyers are willing to take on some repairs themselves if it means winning a bid—especially if they’ve lost out a few times before. And investors in the housing market are seeing the upside in sales prices right now and they’re trying to ride the wave.
Q: What can buyers do if they find the perfect home, but still haven’t sold their existing home?
RAD: The most challenging issue is raising capital for a new home purchase before selling your current home. Without the cash from selling your home available, you may need draw on money you’ve saved in a savings account, a retirement account or investable assets. But drawing on those kinds of assets can put a crimp in your retirement (or college) savings and you’ll often have to pay tax on the money you’ve withdrawn. A short-term “bridge” loan—which provides funds you need to buy a new home before you’ve sold your original home—has been a good solution for many of our clients, provided they qualify.
TH: If a buyer is unable to make an offer on a new home contingent on the sale of their current home, a common solution is to put down as little as possible on the new home, provided the buyer is qualified to carry both housing payments simultaneously. Once your original home sells after closing on the new one, you can always pay down the principal of the new loan. If you are making a significant principal reduction (typically $10,000 or more) the servicer will recast the loan and reduce your payments.
Conclusion In Part 2 of this post, we’ll explore more options for buyers carrying two homes, the advantages of renting and how early retirees with limited income can still be competitive home buyers. If you or someone close to you has concerns about buying or selling a home in today’s competitive market, please don’t hesitate to reach out. We’re happy to help.