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With an extreme shortage of housing inventory plaguing most corners of the country, any hope that we might soon see a normal market has vaporized like dew in the noonday sun. With homeowners deciding en masse to keep their homes off the market, we are facing an inventory crisis akin to a tornado sucking prices skyward in a violent vortex.
In contrast, buyers abound. Fueled by record-low interest rates and a desire to own a piece of the American dream, even a global pandemic can’t keep the current pool of buyers on the bench.
In a classic supply-and-demand scenario, the dearth of listings has multiple offers pouring in on almost every available property, and the resultant bidding wars are redefining neighborhood values faster than appraisers can adapt.
Unlike the market advances of 2005-2006, fueled by buyers with junk loans who had no business being in the market, current home shoppers, fueled by a booming economy, have significant amounts of cash and can actually service the enormous loans they are using to purchase properties.
In a classic catch-22 scenario, some buyers are trying to wait until things chill a bit, knowing that with prices escalating so quickly, there is a very good chance that if they wait too long, they will be priced out of the market.
Some who chose to sit out 2020 have discovered that, with price increases, any hope of getting a home that fits their criteria is no longer a reality. So, how can buyers compete in the current frenzy?
The key to succeeding in any market is to learn the current rules and play the game to win. I am not suggesting that buyers be foolhardy or reckless — far from it. However, if buyers really want to succeed in the current maelstrom, I believe they need to be encouraged to forget these eight key things.
1. Forget list price
I frequently encounter buyers who are concerned they may pay too much over “list price.” They say things like, “We will not pay more than 10 percent over asking.” My response? I ask, “What is ‘list price’ anyway?”
I continue by explaining, “To be brutally honest, it is a totally subjective and meaningless number.” With so many ways to set the price at which a home goes on the market, some agents price low, hoping to score tons of offers.
Some, following the whims of the sellers, set the price high anticipating that recent gains will substantiate their price. Others price at what they believe is a representation of the actual market level — at least for this week.
With prices all over the map, “list price” is not the number to focus on — the only value that matters is what any buyer believes they will actually need to pay to have a real shot at getting any given property.
2. Forget the comps
“Comps” is short for comparable market analysis (CMA) — a comprehensive look at the market that lists comparable homes that have recently sold, are still active or have gone pending.
In a normal market, a carefully crafted CMA is critical in helping determine what you should offer for any given property. Unfortunately, in an explosive market such as the one in which we find ourselves, it’s more like trying to drive while only looking in the rearview mirror. Any driver can tell you that what lies ahead is far more important than what is behind.
Consequently, regardless of what the last few homes sold for, the only real price your buyers should focus on is what they will need to pay to get the home they currently want.
Comps only provide a starting point and buyers need to understand that it goes up from there. In some cases, way up. Some appraisers, realizing this dilemma, are starting to weigh pending sales more heavily than before. Buyer’s agents should also be calling listing agents with pending sales to try to gauge current pending prices.
3. Forget what you believe the house is worth
Think you know what any given home is worth? Another irrelevant number. At the end of the day, anything is worth what someone is willing to pay for it. Consequently, the only number that matters when putting an offer on a home is what you believe another highly motivated buyer will pay.
While that almost seems insane, the truth is buyers need to get over it or get out of the market. That may be tough talk, but it is real. I have encountered many buyers who will not write offers at competitive prices because they believe the house is not worth it.
News flash: If someone else out there is willing to pay the price, the house is worth it regardless of what you think. And once a home sells at the new high price, the bar is reset for the entire neighborhood.
If you want the home, you need to figure out the other buyer’s price … and beat it. If you miss or flinch, the next one will be higher. Until, of course, the market turns. Since the patent has not yet come in for my crystal ball, I have no real idea when that will actually be.
4. Forget the appraiser
With properties selling far above previous sales, appraisers are finding it extremely difficult to bring in appraisals at the contract price. With sellers determined to close at the price written in the purchase agreement, negotiations attempted by buyers to reduce prices after the appraisal comes in are moot.
Consequently, determined buyers, alerting sellers that they will not renegotiate, are removing appraisal contingencies. This means the buyers need to come up with extra cash to fund any shortfall should a home appraise lower than contract price. This is dangerous turf, and buyers need to be counseled affectively.
No ability to come up with extra cash? Buyers may need to get creative. We purchased our first home with a second “loan” from the First Bank of Mom and Dad. If you qualify, you can also reduce the loan-to-cash ratio and go with a higher loan. The difference in available cash may offset a lower appraisal price.
5. Forget searching at your maximum price
If buyers want to secure a home, they need to be looking at properties 10 to 15 percent under their limit so they have some room to maneuver. If buyers are preapproved for $500,000, they should not be looking at homes priced any higher than $450,000.
Even then, if any given home is particularly desirable, multiple offers could easily push the price significantly higher.
6. Forget searching for your dream home
Every time I meet with prospective buyers for the first time, they pull out their dream home list and elaborate on things they will not accept. Many have spent hours carefully constructing these tomes and firmly believe there is a house out there that meets their dreams.
A second factor weighs in here as well: The fact that the emerging generation of buyers is far less acquainted with tools and home improvement techniques than previous groups — coupled with hours of watching HGTV, the end result are very “picky” buyers.
My recommendation? As hard as it may be, toss the list. Homes can be improved over time. The goal currently is to get a house at all, let alone one that meets every criteria.
When I suggest this to some buyers, their blank looks indicate they cannot possibly consider this last piece of advice. In our area, with good schools at the top of everyone’s list, any suggestion that they look in lower-priced areas with lower-scoring schools is tantamount to treason.
One person, looking at a property, stated, “This is not as nice as our current rental.” To which I replied, “True. But your rental belongs to someone else — this could be yours. You may initially need to move down before you can afford to move up.”
7. Forget the status quo
With the classic “buyer love letter” falling into disrepute, wannabe homeowners need to find other ways to separate themselves from the pack. While some sellers are only interested in the maximum purchase price, others are looking for more.
Consider options such as providing free rentback, offering to pay normal seller closing costs and more. Although frowned upon in some areas, offers with escalation clauses may also be effective.
Take a long, hard look at homes that are remaining on the market longer than normal. While these may not be as pretty as the others, they can provide an open door to ownership and can be improved over time.
Most buyers operate in packs: they swarm to new listings, one gets lucky, and then off they all go to the next shiny object. Teach your buyers to operate counter-clockwise to the rest of the herd.
8. Forget giving up
It is frustrating, agonizing and totally scary, but the buyers who are landing a home are the ones who do not give up. It is hard to keep going. Disappointment, frustration and anger can easily set in, derailing a buyer from sticking to the plan.
The good news is that the ones who understand the rules listed above, who are persistent and keep adapting to meet the current demand are the ones who eventually get a home of their own.
While this is grim advice, and in some ways defies common sense, those who have been trying with their clients to secure a home amidst the current madness will recognize a ring of truth. While these ideas may fly in the face of reason, unless your buyers follow the advice, there is one last thing they can forget as well — owning a home any time soon.
(Writer’s note: This is a revised version of a 2017 article published on Inman.)
Carl Medford is the CEO of The Medford Team.