Navigating the Home Buying Process in a Seller’s Market
What is a “Seller’s Market?”
Even before the COVID-19 crisis hit, our local real estate industry had been in a seller’s market. The Greater Charlotte area has been experiencing rapid growth for several years now, with dozens of people moving in and around the Queen City every day! Low levels of inventory (few homes for sale) combined with historically low interest rates and a lot more people looking for homes has led to increased buyer demand. As a result, the relatively few sellers putting their homes on the market are at an advantage, being able to price their home according to high demand – hence, a seller’s market.
In North Carolina, real estate activity was deemed an essential service in late April. Realtors were encouraged to follow the appropriate federal, state, and local health and safety guidelines, but it was far from business as usual. Most firm offices were closed, open houses and showings of occupied properties were strongly discouraged, and face-to-face meetings with clients and vendors were restricted. Despite these limitations, year-over-year sales for the week ending May 9 were up 14% compared to the same 7-day period last year.
Note: The most recent real estate market data can be found at the end of the post or here.
What’s more, the average number of days that a home was on the market decreased by 19.1% in April 2020 compared to a year ago, while the median sales price increased by 7.5% for the same time period.
As our local economy moves forward this summer,* we are expecting an even greater “surge” in real estate activity, with more and more buyers getting back out to look for homes.
I’ve been fortunate to represent buyers during the Seller’s Market craze, and even a few during the COVID-19 restrictions. If you’re ready to buy and are feeling overwhelmed by the thought of stiff competition, bidding wars, and overpaying, don’t fret. While the ball is usually in the seller’s court in this type of market, with a little preparation – and ahem, a great Realtor – you can still secure the home of your dreams at a fair price.
Read on for a few of my tips, then give me a call!
1. Get Pre-Qualified – Better Yet – Pre-Approved for a Loan
There’s no doubt about it, cash reigns supreme in a seller’s market, with cash offers having the advantage over loans and contingencies (Having to sell one property in order to purchase another) in multiple offer scenarios.
The “cash” offer is not a viable option for many homebuyers. If you will be obtaining a mortgage, it’s best to start your financing homework as early as possible. (I’m happy to recommend several qualified lenders who’ve earned my trust and with whom I’ve worked in the past.)
Once you’ve selected a lender, they will review your financial position to determine the price most suited to your ability to pay and your comfort level, then provide a mortgage pre-qualification. A pre-qualification is a quick estimate of how much money you might be able to borrow based on basic information you provide about your finances. At this step, you’ll have the opportunity to learn about different mortgage options and clearly assess your budget and monthly payment goals, however, your financial information is not verified nor will you be approved for a specific loan amount.
Pre-approval takes pre-qualification a step further by actually getting approved for a specific loan amount. This is achieved by submitting your financial information (pay stubs, tax returns, retirement statements, credit reports, etc.) to be reviewed and verified by the lender.
The pre-approval process will help you in the following ways:
I highly recommend my buyer clients get pre-approved, especially in our current seller’s market where it’s vital to stand out against the competition.
Pre-approval tells sellers you are a serious homebuyer who can confidently obtain a mortgage to purchase their home. In our current market, I’ve even seen sellers require a pre-qualification or pre-approval letter be submitted to purchase prior to showings.
2. Work with a Knowledgeable and Flexible Realtor
With many new listings going under contract within hours or days of hitting the market, there is literally no time to wait when your ideal home pops up. You want a Realtor that understands this urgency and will work quickly to schedule showings, research comparable properties, and be prepared to submit a fair and competitive offer ASAP.
As your Realtor, our first step is setting up a buyer interview to discuss the features you desire in a home, pinpoint the area you wish to live and identify the price range you are most comfortable spending. Once we’ve established the type of home and preferred location, it’s time to start searching. I am proud to offer one of the most innovative real estate search tools in the industry, ensuring that we never miss out on a new listing. Clicking the link below, you’ll be hooked up to enhanced home searches, real-time updates, property alerts, and the ability to DM back-and-forth with me on desired homes.
What is a “fair and competitive” offer in a seller’s market?
As your buyer representative and advocate, my overall goal is to ensure you get the home you want at a decent price. So how do you place a competitive bid without feeling like you’re overpaying? First, be firm with your max budget (This is why pre-approvals are so important!). Then limit your home searches to those properties below your max budget. In a multiple offer situation, you want some wiggle room to go a little higher if needed.
Another smart tactic is presenting your highest and best offer right out of the gate.
I’ve seen several buyers lose out on homes because their initial offer was lower too conservative, expecting the sellers to negotiate. In these multiple offer scenarios, the sellers don’t need to negotiate, they just move on to a stronger offer.
Offer more in due diligence to the seller than an earnest money deposit.
When buying a home in North Carolina, you will hear the terms “due diligence fee,” “due diligence period,” and “earnest money deposit. ” When a seller takes their home off the market by accepting an offer, they are also accepting a certain amount of money from the buyer, called a due diligence fee. In exchange for that money, and for an agreed-upon time frame established in the contract, the buyer has the opportunity to conduct their due diligence of the property (conduct home inspections, surveys, appraisals, title searches, repair negotiations, etc.) making sure it is a good investment based on their offer. During the due diligence period, the buyer can walk away from the contract for any reason or no reason at all. The due diligence fee is nonrefundable to the buyer if they terminate the contract; if they move forward, the amount is credited toward the purchase at closing.
The earnest money deposit is a “good faith” deposit that the buyers intend to buy the home. Earnest money is refundable to the buyers if the contract is terminated before 5 PM of the last day of the due diligence period; it is also credited to the purchase if the sale goes through.
In general, there is no “set” amount of money for the due diligence fee and earnest money deposit, rather they are negotiated amounts usually dependent on the home’s price point, but also the amount of competition from other buyers.
Before the seller’s market craze, it was typical for the earnest money deposit to be a higher amount than due diligence (Say an earnest money deposit of ~1% of the offer price and a due diligence fee ~10-20% of the earnest money deposit (For example, on a $300,000 offer, offering $3,000 in earnest money and $500 due diligence is fair).
As a buyer, you want to offer the smallest due diligence fee possible because this is less money to lose if you back out of the contract. However, in competitive offer situations, higher due diligence shows the seller you are serious about purchasing their home by risking cash upfront.
In our current market, it is not uncommon to see higher or equal amounts of earnest money and due diligence offered in contracts.
3. Understand the Seller’s “Pains & Pleasures.”
Hopefully, you are working with a Realtor who is a great communicator – and an even better listener! When communicating with listing agents in the pre-offer, offer, and negotiating stages, I take the time to try and understand as much about the seller’s needs and desires as possible.
Is the seller downsizing and overwhelmed about moving out extra furniture (Pain!)? Suggest to your buyers they buy it from them in a Bill of Sale. Even if they don’t keep it in the long run, your buyers may gladly organize donating it or dumping it if it gets them into their dream home.
Are the sellers needing a quick close because they are relocating due to work? Maybe they need more time waiting on their new construction home? (Pleasures!) Be flexible with the due diligence period and closing/settlement date to accommodate the seller’s schedule.
Taking time to find out these little details up front and present them in the offer may make the difference against your competition.
4. Fully Understand Your Needs and Where You Can Compromise
Even in a saturated market, that “perfect” home is really hard to find. Low inventory may make it especially challenging to find a home that checks off all the boxes. Before heading out to showings, do some serious thinking about what matters most to you in a new home. Is it the location? Floorplan or style? Square footage? Once you know what you can’t live without consider making compromises on less important features. When I’m out on showings with my buyer clients, I always suggest the “85% rule.” It’s rare a new home purchase – even a custom-built new construction – will ever be 100% perfect.
If we find a home that fits your needs and you can envision living there happily but is not perfect – maybe only 85% perfect – seriously consider it.
With your priorities, compromises, and the 85% rule at top of mind, it will be easier to practice patience and stay focused when you are faced with competition. If you do lose out to other offers, instead of getting frustrated, learn from the last transaction so you can make better decisions on the next offer.
Ready to start the search for your new home and want a Realtor who will work on your behalf in this seller’s market? Contact me today
* The most recent data from Canopy Realtor Association continues to show the Charlotte region in a seller’s market. Buyers are busy this Autumn season, but market-wide, inventory levels were down a whopping 51.3% (Sept 2019 vs. Sept 2020), thus driving the median sales price for the same period up 16%.