How Home Buyers Can Compete in a Hot Market

It’s been a few years since the 2007-2008 financial crisis and many markets across the United States have bounced back stronger than ever. All over the country we’re seeing local real estate markets with appreciating home values, low inventory, and buyers facing stiff competition. In an article published by Realtor.com in August of 2015, San Diego was listed as #6 on the “20 Hottest U.S. Real Estate Markets”, with 11 out of the 20 cities being found in California. Even if you’re not located in San Diego or California, you may have noticed your own local market heating up. A hot real estate market can be great as a homeowner. Homes are taking less time to sell and many sellers are getting close to, or even above, asking price. As a homebuyer, though, it can be quite challenging, especially as a first time homebuyer. So what can you do as a buyer to compete in these hot markets?

Get Pre-Approved

The first and most critical step to being a competitive buyer in a hot market is getting pre-approved. As a homebuyer, you may find yourself wandering into open houses or wanting to look at properties and locate a home before worrying about the financials. After all, looking at homes is the exciting part and no one likes dealing with paperwork. However, this approach can be a huge mistake and you may risk missing opportunities.

Browsing homes before you’ve spoken with a lender can be a great way to start getting an idea for neighborhoods and what you can get for your money in different areas, but if you are in this stage, you are not what is considered a “ready buyer”. When you’ve found a home you’re interested in and it comes time for offers, things move very quickly. This is especially true in a hot market and it is important to have all your ducks in a row before submitting an offer. Having a pre-approval letter means that you have already been approved up to a certain amount for a loan, contingent on an accepted offer. This not only gives you as a buyer a number to keep in mind when searching, it also helps your real estate agent, as it is important that you only see homes that are within your approved price range that you are able to make an offer on.

The pre-approval letter shows the seller that you are already qualified for a loan which means it is one less thing for the seller to worry about throughout the transaction. Put yourself in the seller’s shoes to really understand how important this step is. Would you, if you were selling your home, want to take your home off the market for a buyer who may not even have the ability to qualify for a loan and close? Probably not.

Offer Terms

Another way to position yourself as a strong competitive buyer, is to be flexible with your offer’s terms. Every real estate transaction and seller is different, and their ideal terms may vary from others. If you are able to be flexible with your terms, this can be an advantage. For example, let’s say that the sellers of a home you are interested in need to relocate to a different part of the country and need as much time as they can before that happens. If you are in a position where you can offer them a longer escrow period, say 60 days or more, your offer may be more attractive than another buyer’s offer that closes in 30 days. It can work both ways though; if someone needs to be out as soon as possible, being able to close quickly can be an advantage if the other competing offers all take longer to close.

Other than being flexible with the timeline as far as closing, you can show that you are a serious buyer by making a larger deposit. An earnest money deposit shows the seller that you are interested and have skin in the game. Coming in with a larger deposit may show the seller that you are more interested than others and are more likely to close, making your offer more attractive.

You can also consider making a non-contingent offer or reducing your contingency window. With a standard offer, a buyer is given a certain period of time to perform their due diligence and conduct inspections. This is the period of time that you, as a buyer, want to make sure that you are happy with the property and are getting what you expect. Submitting a non-contingent offer means that you are giving up this right, which, from a seller’s perspective, means that you are ok with the current condition of the property and will not be asking for any repairs or reductions. While this does make your offer stronger in a seller’s eyes, it is VERY risky as a buyer. I would only suggest submitting non-contingent offers if you are a seasoned home buyer or investor. To make your offer stronger while still retaining your inspection contingency, consider reducing the timeframe. With a standard California Residential Purchase Agreement (RPA) you are given 17 days to perform inspections. If you wanted to show a seller that you are more serious and are willing to speed up the process, you could consider reducing this to 10 days or less.

Competing with Cash Offers

These above suggestions are all great ways to help make your offer look stronger to a seller, but what if you are competing with investors who are submitting cash offers? With real estate markets heating up, we see more and more investors coming into the market, trying to get a piece of the action. This can make it very difficult for traditional home buyers, as cash offers are typically much stronger than traditional. With a cash offer, there is no need for the seller to worry about a buyer’s loan not funding and cash offers can typically close on a much shorter timeline than those who need to qualify for a loan. This is a very real issue that many homebuyers are facing, as they are getting outbid by cash investors. So what can you do to combat this?

Most of the time when investors are coming in with cash, they are coming in below list price in the hopes that they can get a discount or deal, using their ability to buy with cash as their leverage. To counter this, considering making your offer at a higher price. It is important to still be comfortable with the price you are offering, and you don’t want to feel as if you are overpaying, but coming in above ask is a strong indication to the seller that you are serious and it means more money for them. Using this approach could be enough to tip the scales in your favor. If you have been getting outbid by cash buyers on homes and are considering making offers above ask, consider looking at homes that are in a slightly lower price range so that you have some wiggle room to allow for a higher and stronger offer.

One last suggestion to compete with cash is to make your offer personal. Consider writing a note and even including a picture of your family with your offer. Some sellers are very sentimental and have an idea in their head of how they’d like the property to be used in the future. For example, let’s say you have an elderly seller who has lived in the home for years and has raised their family there. If you are a homebuyer with a family looking for a long term place to raise your kids, having a letter stating this along with a picture may sway the sellers in your favor when comparing it to an investor who is going to come into the property, gut it, and completely redo it.

Counter Offers and Multiple Counter Offers

If you find yourself in a situation where you have submitted an offer and are competing with others, it can go a few different ways. The first option a seller has is to accept or counter what they consider the strongest offer, therefore rejecting all other offers. If you are one of the rejected offers, there is not much you can do at this point except hope that the offer doesn’t get accepted and the seller will consider your offer as a back up. The second option they have is to counter a select few of the stronger offers. What happens in this case is all other offers are rejected and the select few receive a multiple-counter offer, meaning the seller is countering the submitted offers and they go back to the buyers. Typically, in this situation, the seller will ask the buyers for their “highest and best”, or their strongest offer. In this scenario, the buyers are all competing against each other. The last option a seller has when receiving multiple offers is to multiple counter all the submitted offers. Again, in this scenario, the seller will typically be asking all buyers for their “highest and best”. To be competitive in hot markets, you may want to consider coming in with your “highest and best” offer in the beginning. Leading with a strong offer may be enough for the seller to not bother countering any other offers and give you the opportunity to negotiate between you and the seller. The important thing here is that you want to have a “highest and best” in mind, and you do not want to find yourself in a situation where you are stretched beyond your means as other buyers bid the property up.

Strong Team and Communication

Once you reach the point where you have an accepted offer and have opened escrow, continue to show that you are a strong buyer. Make sure that there is open communication between you, your agent, your lender, and anyone else that may be involved in the transaction. Having strong communication between everyone on your team will help to ensure that everything goes smoothly and that no balls are dropped. Also, be aware of all the timelines. Once an offer has been accepted, there are many moving pieces that all need to fall into place before the transaction can close. Minimize headaches and delays by completing necessary paperwork in a timely manner and taking care of things such as home inspections and appraisals early on.

Dealing with Low Inventory

So these tips are great once you’ve found a property and are submitting offers, but what if you are just not finding any homes that fit what you’re looking for? Low inventory of available homes is becoming a bigger issue in many markets across the country, and is something that we are seeing first hand in San Diego.

The most obvious response to this is that you may need to adjust your search criteria, however, this may not be a realistic option for all. Some buyers need to be in a certain neighborhood or area, or need specific features that are non-negotiable. In that case, you can’t adjust your criteria, and are at the mercy of the market and the new properties that are being listed.

If you want to take a more proactive approach to combat this, you have a few options. Consider working with a local agent who is willing to prospect different neighborhoods for you. This approach could include door-knocking different neighborhoods to see if anyone is interested in selling, or doing direct mailers. Consider writing a letter for your agent explaining your family’s situation and why you are trying to move to the area; and have your agent hand them out or direct mail them.

Another approach that can be very effective, is finding an investor friendly agent. There are many agents that strictly work with retail clients, agents that strictly work with investors, and those that work with both. If you are finding it frustrating with the low inventory available in your market, consider working with an agent who has a large investor network. These agents will likely know about properties that are currently under construction and will be coming to market in the next few weeks to months. Working with these agents will give you access to the off-market inventory and, depending on the circumstances, could give you an advantage of previewing and/or submitting offers before the properties hit the market. This can be a major benefit because it can cut out a lot, if not all, of the competition. Since we work with traditional retail clients along with investors, we have been able to do client walk-throughs of coming-soon properties, and if our clients are interested in making an offer, have been able to do so prior to the newly rehabbed home hitting the market!

While it can be tough as home buyers competing in today’s hot markets, don’t be discouraged! There are still many buyers across the country that are finding success in their local markets. It may take a few offers, but there is always opportunity out there. You also don’t have to go it alone. We’re here to help every step of the way, so feel free to reach out to us with any questions or concerns!