How to be a buyer in a seller's market
Being a buyer in a seller’s market may feel overwhelming to some potential homeowners. Whether you are a first-time homebuyer or have owned property before, understanding what a seller’s market is and how to navigate in a seller’s market could relieve that feeling.
Being prepared for a seller’s market is one of the best thing buyers looking to enter the housing market and get a home loan can do.
What defines a seller’s market in real estate?
A seller's market is defined by a shortage of properties for sale while home demand increases. In short, a seller’s market is when supply is low and demand is high. If you’re looking to buy a home in a seller’s market, you will need to prepare to move quickly when looking for and closing on your dream home.
Low inventory and high demand explained
Low inventory and high demand are key characteristics of a seller’s market. This is when there are more potential buyers than housing options available. This makes the competition greater when trying to purchase a home.
The essential preparation phase
With the increased competition that a seller’s market brings, you could quickly lose out on any home you find. However, if it looks like you are trying to buy a home in a seller’s market, there are a few things that you could do to prepare you for entering a seller’s market.
Why a mortgage pre-approval is your strongest tool
One of your strongest tools among the first things you should look into before entering a seller’s market is a mortgage pre-approval.
Mortgage pre-approvals can serve two major purposes during the homebuying process. One, it shows potential buyers the loan amount they could receive, allowing them to focus their time on homes within their budget. And two, it shows sellers that you are a serious buyer.
You can present sellers your pre-approval to show you have been approved for the funds needed to purchase their home. This can save time by removing the need to go through the mortgage process after finding a home when someone else with the available funds or a pre-approval could swoop in on the property you found.
Find a real estate agent who specializes in fast-moving markets
A real estate agent who specializes in fast-moving markets could help you navigate the seller’s market. They could assist you by focusing on properties within your budget and needs, point out things you should look for in a home and give you advice on making an offer for the home.
Have ‘earnest money’ ready to move
Earnest money refers to deposits potential buyers offer as a sign of good faith and to show sellers they are serious about purchasing a property. Having your earnest money ready before you start shopping for a home lets you be prepared for moving your funds when the time is right.
Tactics for making a competitive offer
One way to stand out in a seller’s market is to make sure your offer is competitive. These are some tips for making a competitive offer if you shop for a home in a seller’s market.
The power of a clean offer with fewer contingencies
If a home has many buyers looking at it, offering to purchase the property without any or at least fewer contingencies can be risky but may help you stand out. Contingencies could include home inspections or appraisals.
Some contingencies could add time to the closing on a home, so offering to purchase without them could speed up the time that the seller will have to wait to get the money for the sale. This could make an offer without contingencies stand out from others, though purchasing a home without an inspection or appraisal could be risky for buyers.
Using an escalation clause to stay ahead of other bids
An escalation clause allows buyers the chance to change their offer if a higher bid comes in. If you have some wiggle room in what you are willing to pay for a home, an escalation cause could help you stay ahead of any potential buyers trying to outbid you.
Why offer a flexible closing date appeals to sellers
A flexible closing date will state a timeframe for closing instead of having a locked-in fixed date for closing. This would allow sellers who may be hoping for a little more time to find a home or pack to move on their own time instead of feeling rushed.
Financial strategies for a high-competition market
Let’s take a look at a few financial strategies to help prepare you for navigating a high-competition market.
How a larger down payment changes the seller’s perspective
A larger down payment could make an offer seem less risky and more favorable to sellers. Larger down payments tend to mean you will need to borrow a lower amount, which reduces the risk of the deal falling through or not being approved for your home loan.
Preparing for an ‘appraisal gap’ and how to cover it
An appraisal gap happens when the home appraisal amount is lower than the listed or purchase price of the home. When this happens, you can renegotiate with the seller to lower the purchasing price slightly or to the appraisal amount.
Since mortgage lenders will only cover the appraised amount, if you decide to stick with the original listed price, you will have to cover the difference out of pocket.
The pros and cons of waiving inspections
If you are considering waiving home inspections, these are some pros and cons you may want to look at.
Pros
- Your offer could be more competitive
- It could speed up the closing process
- New construction homes may come with warranty protection that could already cover some defects
Cons
- You will need to purchase the property regardless of any defects you find
- Don’t know if there are any hidden problems with the home
- Some hidden defects or problems could end up being costly
How to stay resilient during a bidding war
While not every homebuyer ends up experiencing a bidding war, it is a real possibility, especially in a seller’s market when more buyers are looking for homes. Preparing for a bidding war is one way to help stay resilient in a seller’s market and not let your hopes fall.
Setting a firm maximum price before you bid
Before you make an offer on your home, make sure you have an absolute maximum price you are willing to spend without spreading yourself too thin financially. It is best to make sure your initial offer isn’t at your maximum, as this will give you a little wiggle room if you end up in a bidding war.
Avoiding emotional overspending in the heat of the moment
While it is not a guaranteed experience, understand it is possible to be outbid on a property you could see as your forever home. While this hopefully never will happen to you, knowing that it is a possibility can help deter you from spending more than your planned budget if someone else outbids you.
Buying a house: Where to get started
When you are ready to start the process of buying a home, whether you are in a seller’s market or not, you can begin with an online mortgage application through a trusted lender.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
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