Affordability is at an all-time low for starter homes, and it’s making things tough for prospective first-time homebuyers to cross over from renting to owning.
A recent news story from Bloomberg claimed starter homes are pricier than they were at pre-recession levels and the typical first-time homebuyer now needs nearly 23 percent of their income to afford the typical entry-level home, according to data from the National Association of Realtors.
Even as prices gradually decrease and inventory rebounds, modest cooling in the housing market really only helped high-end markets.
The high barrier of entry, however, has presented real estate agents with a great opportunity to showcase their skills and knowledge of specific markets.
In San Francisco, where prices have soared, Sabrina Gee-Shin, a Realtor with Zephyr Real Estate, takes a three-pronged approach to dealing with first-time buyers. “You have to sit down and talk about what’s really important to the client – assess how bad they want it and their capacity [to buy],” she said.
“A huge part is educating clients about the reality of this current market,” she added. “I’m not into clients spending time going to open houses. That’s not a great use of their time to be in this dreamy dreamy land versus asking, ‘can I do it,’ ‘can I do it a year from now,’ ‘maybe I can if I ask my mom for a gift.’”
Next she sends them to a lender to get a reality check. This is also a good time to talk to them if they have parents that are willing and able to help.
“From there, talk to lenders and a get a real sense of, is it possible?”
From there, once the client understands their reality better, then they strategize. A big part of that, especially in San Francisco, is introducing clients to neighborhoods and areas with which they may not be familiar.
Brandon Doyle, an agent with the Doyle Real Estate Team at Re/Max in Minnesota, also believes it’s important for first-time buyers to understand their lending options prior to starting the house hunt.
“Buyer’s should get pre-approved with a lender prior to going out looking at homes,” Doyle said. “That way they have a better idea of what they can afford with a payment they’re comfortable with.”
Doyle added that agents should help customers look for local down payment assistance – like the deferred payment loan program offered by the Minnesota Housing Finance Agency. “Depending on where they’re buying and income restrictions they may qualify for assistance,” Doyle added.
As for housing hunting, Doyle tells consumers to be prepared to act fast – with limited inventory, oftentimes buyers are competing against multiple parties, he said. Doyle also helps them understand the market, and how it changes depending on the season.
“You may not be able to get everything you want in your first home,” Doyle said. “It is important to have realistic expectations. Certain markets such as Minnesota are very seasonal, purchasing a home in the “off season” when the market has cooled down may give you a better chance to compete.”
Karen Daily Ekofo, a settlement attorney at Ekko Title in Virgina, echoed those sentiments.
“Having a good lender who understands the programs offered to first-time homebuyers is a huge plus,” said Efoko. “They can talk to the first-time homebuyers about all options.”
In Virginia, for example, Efoko said you’re eligible for homebuying assistance from first-time buyer programs if you haven’t owned a home in the prior three years and qualify under income requirements.
Efoko offered another good piece of advice for consumers or the agents they hire: find a person who is really good at helping repair credit scores.
“One of the first things is to get their financing squared away so that if they see a property they want to move on, they are prepared and have a pre-approval on hand,” she said. “The lender the buyer selects often plays as important a role as the type of financing they are getting. I always recommend a local lender.”
In a tight market, agents also need to inform buyers of their financing options, whether it be through a large deposit, a quick close or waived or shortened contingency periods. McFeely said agents should also understand the terms of an escalation clause – a contact where the buyer agrees to raise their offer incrementally depending on competing offers – before an offer is submitted.
“Prep work is so important in this tight market,” McFeely added.