Since the start of the coronavirus pandemic, homebuyers have grown accustomed to overpaying and playing a risky game of bidding wars and waived contingencies.
In a recent survey by Money and Morning Consult, 36% of people who purchased a home in the past two years said they believe they overpaid. The survey also indicated recent buyers were willing to compromise on home size, style, location and features in order to purchase a home.
But with mortgage rates turning sharply upward during the first half of 2022, the housing market is starting to cool. Suddenly, home buying strategies that seemed absolutely necessary as recently as March, may no longer make sense.
So what has changed? Pretty much everything.
Don’t assume you’ll automatically be in a bidding war. Instead, find out how competitive the market really is
Bidding wars may have been the rule of the day since the surge in home buying took off in late spring of 2020 — but the competition may not be as fierce as it once was. In May, nearly 58% of homes under contract with Redfin agents were involved in a bidding war, a 15-month low.
Chris Grimes, team leader of Partners in Grimes at RE/MAX Homes and Estates in Nashville, Tennessee, notes that some well-priced homes in desirable areas of the Greater Nashville area are still fielding multiple offers, but not nearly as many as at the peak. “Instead of getting the typical 10 to 15 offers it’s more like between five and 10 now,” Grimes says.
Many markets are slower. Nicole Rueth, producing branch manager at The Rueth Team in Denver, notes that real estate agents she has spoken to have listings with very few showings and no offers. In less competitive areas you don’t have to be as aggressive.
The key to being successful in a changing housing market is to study and understand it, says Rueth. As the market shifts, buyers need to focus on their local market rather than getting swept up in national trends.
Knowing the individual property is important too. “In every situation, the critical issue is assembling as much information about the property as possible in advance,” says Frederick Warburg Peters, president of Coldwell Banker Warburg in New York. “Then you have a sense of how much flexibility there may be and how best to approach making an offer.”
Don’t settle for the first home you find. Instead, buy a home that fits your needs
During the height of the pandemic buying frenzy, Rueth encountered people who were willing to purchase a house on busy streets with power lines running overhead simply because it was a house and there weren’t any other options available.
But now, more inventory is coming onto the market. Active listings increased by 17% year-over-year during the second week of June, according to Realtor.com. With more listings expected to become available as the year progresses, buyers can be more discerning about the properties they’re willing to bid on.
Don’t automatically pay over asking price. Instead, use an escalation clause
Fewer buyers are going to have to settle for whatever happens to be for sale. Instead, they can focus on how that house fits their lifestyle and their financial needs. Rueth says buyers now need to ask themselves: “Is this home really worth this amount of money?”
This is possible because sellers are also becoming more realistic about the market. At one point during the pandemic, sellers were pricing homes well above the list price recommended by their listing agent, essentially daring buyers to make an offer that would ‘make them move.’
Now, a rising number of sellers are dropping their asking prices. A little over 22% of homes for sale during the four week period ending June 11 had a price drop, the highest share since Redfin started tracking the data in 2015. In some cases, notes Rueth, those price reductions are happening immediately after the first weekend the home has been on the market.
Don’t assume you have to come in hot with a bold offer. If you are worried about competition, one option is an escalation clause. That way, you can let the seller know you want to buy at list price (or below) but are also willing to go up a certain amount if (and only if) there are higher offers on the table. A good real estate agent can help you craft an effective escalation clause.
Don’t waive contingencies outright. Instead, look for alternatives that will protect your investment
Another strategy that became common during pandemic was waiving inspection and appraisal contingencies. This strategy may have been successful, but it was also incredibly risky.
Grimes knows of buyers who waived the inspection contingency — which basically means they purchased the house ‘as is’ and were responsible for any repairs the home needed — only to find the home had defects that wound up costing them thousands of dollars to repair, including a client who is currently involved in a related lawsuit.
Waiving the appraisal contingency can be just as costly. Lenders require appraisals, so if a buyer waives the appraisal contingency and the house is valued for less than they offered the buyer is on the hook for the higher amount. Often this means using money earmarked for a down payment to help cover the gap.
“Instead of looking at a 20% down payment it ends up being more like 10% down,” says Grimes. “They end up having to pay a higher interest rate.”
While mortgage rates remained low, the money buyers saved on mortgage payments might offset the expense of unexpected repairs or a higher down payment money. That’s no longer the case for many buyers today who find they have to spend more of their cash reserves and monthly income on just affording a mortgage to begin with.
If you have to waive the inspection contingency, there are limited ways you can minimize the risk of buying a lemon and incurring extra repair costs. Some sellers may okay an informal inspection before you make an offer.
The appraisal contingency should ideally only be waived if you have enough cash reserves to pay the potential difference in asking price or can afford the higher monthly payments if you need to raid your down payment fund.
“This is the kind of market where strategy wins,” says Rueth. Do your due diligence about the state of the market, ask questions, find out what the competition is really like and then form a plan of attack that will get the best results.