Buying a House in a Tough Market: Tips and Tricks to Give You an Advantage
We get it—2024 is not a great time to buy a house. With soaring prices and limited inventory, it can seem impossible. However, buying a home is a wise investment and a significant financial step; not to mention the pride and security that comes from owning your own home. While the market may be challenging, understanding the forces that shape it can help homebuyers. There are many tactics that can make an offer on a home more attractive to sellers. First, we recommend you check out our article on the basics of homebuying, to give yourself an overview on getting a mortgage, buying a home and keeping your finances in shape.
So, what’s the housing market like now?
There are several key factors defining the current housing market. Housing prices have shot up, interest rates overall are high and housing inventory is low. High interest rates mean higher monthly payments on mortgages. Current homebuyers are not motivated to sell, as they likely have lower interest rates and therefore lower monthly mortgage payments. There are not as many homes on the market, so there is steep competition for the houses that are for sale. Second, housing prices are high due to economic forces like inflation and the job market. The median sales price of a house in the U.S. is $412,300, but that doesn’t mean there aren’t quality less expensive housing options available.
Learning to walk the walk
You’ve decided to want to buy a house and are ready. You understand the basics of the homebuying process.Maybe you’ve even put in a few offers on houses, only to have them rejected. Given the tough market, how can you give yourself a competitive edge?
Seller motivations: Sellers want as little hassle as possible when it comes to securing a buyer for their property. Recognize that sellers are likely buyers themselves, moving somewhere else. While you may expect them to hold out for top-dollar, they may very likely have a contingent offer on another house and want to sell their house quickly—with as few issues as possible. Here’s how to make that happen.
Pre-inspections vs. inspections: After an offer on a house has been accepted, a home inspection typically occurs. A certified professional conducts a thorough examination of the house to ensure the property is safe and to alert the buyers of any potential expensive maintenance or repairs, such as the house needing a new roof. If any issues do arise, this can delay or jeopardize the transaction as buyers must decide whether or not to proceed or negotiate a new offer. Remember, sellers want as uncomplicated a transaction as possible. Sellers find offers with a waived inspection attractive, because it removes a potential obstacle in closing the deal. However, it is always a good idea to have an inspection done; not doing so can lead to incredibly expensive work in the future. Without an inspection, you may unknowingly be walking into major problems. So, what should you do? A pre-inspection is a basic home inspection conducted before putting in an offer on a house. This means you can put in an offer with a waived home inspection, plus the peace of mind knowing that all major elements of the house are safe and working. And waiving the home inspection can make even a modest offer seem all that more attractive to sellers, as it removes a complication from the closing process. Though, as both home inspections and pre-inspections cost money, understand that this tactic may not always be financially practical.
Appraisal gap: An appraisal is conducted to assess the home’s value after your offer is accepted and indicates your available financing options. If the house appraises for less than your offer, your mortgage will cover the home’s appraised value. While you can try to negotiate a lower deal with the sellers, they can also decide to look for another buyer. Here’s where an appraisal gap comes in—the buyer offers to cover all or some of the difference between the home’s value and the accepted price themselves. An appraisal gap can be any number that you are comfortable paying yourself and is submitted with the initial offer. This again can help give sellers peace of mind that fewer obstacles will come up during closing.
Escalation clause: One difficult aspect of homebuying is that you don’t know what other offers are for a home you want to purchase. While you want to put in a competitive offer, you also don’t want to put all your cards on the table if you can get the house for less. An escalation clause can give you an edge, by specifying that you are willing to beat out competing offers up to a certain amount. For instance, if you are comfortable paying $330,000 for a home that is listed at only $300,000, you may put an offer in for $300,000 with an escalation clause that you will beat the highest offer by $1,000 up to $330,000. That way, if other offers come in lower than your maximum offer ($330,000), you are able to beat out other offers without having to pay more. Remember, the appraisal will determine your mortgage; if the home appraises for less than your offer, you will need to either make up the difference yourself or negotiate a new deal with the sellers.
A word of caution with using pre-inspections, appraisal gaps and escalation clauses; they cost money. While these tactics can give yourself a competitive edge in the current housing market, the priority should always be staying within your budget and not overextending yourself financially. Understand, too, that home inspections can also reveal costly repairs or issues. There are always extra expenses associated with closing, so make sure you factor these in when going over your finances. Having a trusted team of lending experts can help guide you through the process and ensure that you are comfortable with these major financial decisions.
For sale by owner: Not all sellers go through a realtor. Some sell their homes without the help of a realtor, to maximize profits for themselves. Many homes being sold directly by their owners don’t show up online or may require some digging to find; some feature less-than-ideal photos that don’t represent the property well. But these homes can be hidden gems with motivated sellers willing to negotiate, with the added benefit of less competitors vying for the home. If there is a particular area you’d like to live, periodically drive or walk around it and see if you spot any “for sale by owner” signs.
Refinancing: High interest rates have turned many people off from entering the real estate market. There are indications that interest rates will begin to lower within the next year, and it is impossible to exactly determine the outward effect this will have on the housing market. Refinancing your mortgage when interest rates are lower is always an option to consider. Refinancing with a lower rate can mean lower monthly mortgage payments.
It’s all about your team.
Buying a home is stressful, especially now. Our biggest piece of advice is to work with a team of qualified professionals. It can make a huge impact on the quality of your experience if you have a comfortable relationship with your lender and realtor. Homebuying is a process; from applying to be pre-approved to getting the keys, a loan officer will prepare you each step of the way. At Earthmover Credit Union, our experienced team will work with you to understand your financial goals and make sure you stay within your budget.
There is a lot you can do now to prepare, however the market changes. Building up savings takes time, but anything you can set aside now will help you later. Borrowers should seek to keep their credit score high to take advantage of a lower interest rate on their mortgage. Once pre-approved, do not take out any new loans or credit cards. Aim to keep your finances as simple and streamlined as possible, to avoid any delays in closing.
While the market may be competitive now, it is always changing. Buyers should stick to their budget and not overextend themselves on a mortgage payment. There are additional expenses associated with buying a house to consider. Having a strong relationship with your lender can help make sure you make wise financial decisions.
To sum up
There’s no hiding it, it’s a difficult time to purchase a house. Now more than ever, it’s important to have a trusted team of professional to guide you through the process. Manage expectations by focusing on what options are available. Tactics like pre-inspections, appraisal gaps and escalation clauses can help give your offer an edge over the competition. Homes come on the market every day; the more you know about the world of real estate and lending, the better positioned you are to navigate it. If you’d like to take the first step towards buying a home, give us a call today.
