Whether you’re searching for your first home, upgrading from a starter house, or downsizing for retirement, you’re preparing to jump into the real estate market. While buying a home is often a stressful process, house hunting during a seller’s market is not for the faint of heart.
In a hot real estate market, multiple offers may flood in on homes only listed for a few hours. It can be overwhelming to compete with buyers putting in cash offers above the list price without even stepping foot in a property that’s for sale.
While it might be a good idea to wait until the market cools off in some circumstances, there are essential moves you can make to boost your chances of landing the home you want when sellers have the advantage. Let’s take a look at different types of real estate markets, how you prepare to put in an offer during a seller’s market, actions to take when you find a home, and how to handle purchase offer rejections.
What is a Seller’s Market?
Various factors influence a real estate market, including the economy, employment rates and opportunities, interest rates, market cycles, the local inventory of homes, and more.
When the supply of houses available for purchase equals the demand from buyers over a period, a real estate market is considered balanced. Housing prices are stable, and homes sell in a reasonable time.
A buyer’s market exists when there are more houses for sale than people actively looking to purchase one. In these conditions, buyers typically have the advantage. Home shoppers can often negotiate lower prices and dictate specific terms of a sale, including requesting seller concessions such as paying for a portion of closing costs, including furniture or appliances, or extending a closing date.
The opposite is true in a “hot” or seller’s market. Buyers outnumber the limited inventory of homes available, resulting in fast sales and high prices. When demand outweighs supply, sellers may receive several offers on their home, allowing them to ask competing buyers for their “best and final” offer. Bidding wars then drive up property prices, buyers may drop contingencies, and sellers get to choose the purchase offer best meeting their needs.
You have your work cut out for you if you want to buy a home in a seller’s market. But that doesn’t mean you won’t be able to purchase the house you want. Instead, you’ll need to start early, take action when you’re interested in a home, and be willing to stick with the home buying process.
Unless money is not a concern, you need to think about buying a home in a hot real estate market as you would any other competition.
If you want to “win” and get your purchase offer noticed, be organized and proactive. Here are key items to take care of if you want your bid to stand out in an aggressive market.
1. Clarify your housing needs vs. wants.
It’s time to get serious about the “must haves” in your home search. This doesn’t mean you should compromise on what’s most important to you. But the longer your list of requirements, the more it will restrict your search and the chances of buying a house in a limited market.
Pro tip? Once you figure out your needs, rank your list from most to least important. It might be difficult, but ranking your needs will help you make a faster decision when it comes time to put in an offer or bid higher when you’re facing stiff competition. If a house meets most of your needs - but not the most crucial need(s) - you might regret buying it.
2. Get your finances in order.
There are plenty of financial tasks to check off your list before you start shopping for a new home. Some of these will take time. So, the earlier you start preparing, the better.
- Check your credit score regularly and review your credit report for accuracy.
- Save money for a down payment - preferably 20% when possible - to avoid paying for private mortgage insurance (PMI).
- Save even more money. You may need extra savings to cover an appraisal gap on a property you want to purchase. There’s also a chance you may have to pay two mortgages for a few months if you find a house to buy, and don’t use a contingency on selling your own home before purchasing the new one.
- Get preapproved for a mortgage. Being pre-qualified isn’t enough in a seller’s market. Pre-approval is a more thorough financial review that helps seller’s gain confidence that your financing won’t be an issue if they accept your offer.
- Consider a local lender or mortgage broker. You might be tempted to go with an online mortgage lender. But you may benefit by using a network of local lenders and agents who work together frequently to make deals happen.
- Research and predict future expenses. Be money-wise, and don’t forget to budget for immediate repairs and ongoing maintenance of your home. New homeowners may not leave room in their budget for a new furnace or A/C unit. Those buying bigger homes will likely have higher monthly expenses too. You don’t want your financial health to suffer because you failed to plan for what could and will eventually happen with various systems in your home.
- Decide what you are comfortable paying. Just because you are preapproved for a specific amount doesn’t mean you should spend that much on a home. Consider your overall financial goals and come up with a number that you are comfortable with. If you only look at houses at the top of your budget, you won’t have room to “bid up” in multiple offer situations.
3. Find a responsive and knowledgeable real estate agent.
In a seller’s market, you need an experienced agent who understands what you’re looking for, communicates well, knows the area of your home search, and has the time to devote to finding you a home. Consider working with a full-time agent and seek recommendations from people you trust.
4. Tell family, friends, and colleagues at work that you’re looking for a new home.
When you’re vying for a property in a hot market, take any help you can get! You may be able to buy a home through a word-of-mouth sale rather than having to compete with others.
You’ve taken the time to prepare, and now you’re ready to act. While you hope to find the perfect home, you understand that you may have to compromise to buy a house in a seller’s market.
5. Watch for new listings and stay in touch with your realtor.
Your realtor will contact you with the latest listings. But you can also look at houses for sale online on Zillow, Trulia, or Realtor.com. Clear your calendar when it’s time to view a place that’s for sale, and be ready to put in an offer immediately if you’re interested.
6. Put in a strong, clean offer.
Your realtor will likely encourage you to put in a full asking price offer (or close to it) on a well-priced home in a hot market. They may even suggest bidding over asking in some cases. There’s no doubt that the highest bid will generally be of most interest to a seller. But solid offers with few sellers’ contingencies or demands may also be noticed and could score the win. You may also decide to put down more earnest money or guarantee the home’s sale a specific amount over its appraisal to reflect your seriousness of the purchase. For example, if the purchase price of the home is $200,000 you would guarantee the appraisal up to a certain amount, say $10,000. So if the home appraises under $200,000 but at least $190,000, you will go through with the purchase of the home by paying the $10,000 difference in cash to the seller.
7. Consider contingencies carefully.
While you should never skip a home inspection contingency (unless you’re prepared to deal with the results of that decision), you may decide to limit other contingencies you’ve planned for, such as financing, appraisal, or a review of HOA documents. If you add any contingencies, consider shortening the period for them to expire to help convince the sellers that they won’t impact the sale of their property.
8. Don’t make demands of the sellers.
Try not to ask for anything extra from the sellers in a hot real estate market. Focus on getting your offer accepted and be as flexible as you can to meet the seller’s needs. You can always consider offering to purchase existing furnishings or appliances from the seller after acceptance of your purchase offer.
9. Include an offer letter.
While many sellers only care about accepting the highest offer, adding a personal touch to a strong bid may be enough to create an emotional connection with someone selling their home. You don’t need to write an essay (often brevity is better), but being honest about why you want to buy their home matters. Consider including what attracted you to their property, mention any personal touches you admire, and share how you plan to make memories in your new home.
10. Be ready for a bidding war.
In a seller’s market, you’ll likely end up in a multiple offer situation at some point. Negotiations are a time of high emotions. Even though you may feel the temptation to bid higher, focus on sticking to your budget. If there’s some wiggle room in your offer, you may decide to add an escalation clause up to a predetermined limit. This helps you from being outbid when you’re competing with other buyers.
Be Patient and Persistent
When you put in an offer and aren’t chosen by the seller, frustration or even anger may result. If this happens more than once, you might begin thinking that it’s a waste of time even trying to compete. But, if you want to buy a home in a hot real estate market, you need to:
11. Be patient.
While you may not like the cliché, you’re in a marathon - not a sprint. Unless you have to move fast, remember that more homes meeting your needs will be listed on the market at some point.
Take the time you have between viewing listings to go back and revisit your preparation. Has your financial situation changed at all? What about your needs vs. wants? Should you reconsider what’s most important to you now that you’ve lost some bids?
While it’s normal to be disappointed, use this time wisely to improve your chances of having your next purchase offer accepted.
12. Be persistent.
Some people think of house shopping in a seller’s market as their part-time job. While you won’t be cashing any paychecks for the time you spend looking, receiving an accepted purchase offer will be worth your effort.
Keep searching house listings and stay in close contact with your realtor. As long as the market remains hot, it’s necessary to continue taking an active role in the home search process.
Buying A Home (Or Not) in a Hot Market
While there are plenty of things you can do to improve your chances of having a seller accept your purchase offer, there are other factors out of your control. You’ve probably done all you can in a challenging real estate market if you’ve prepared, acted on listings you’re interested in, and reviewed what happened with rejected offers.
Keep in mind that not buying a new house is still an option too. If you’re renting, look for apartments or rental homes with the amenities you want in a location you desire. Paying a bit more to rent an apartment or house may still be a much better option when considering all the expenses involved with homeownership.
If you already own a home, re-evaluate your needs and timeline. Do you need to be competing for a new home during a hot market, or could you wait a few years (and save more) and look again when there’s less competition? Remodeling parts of your home may address some of your needs as well.
When the stress of the home buying process gets you down, keep in mind the old saying - your home is where your heart is. As long as you are with the people that matter to you most, you’re at home. Eventually, you’ll find a new house if that’s what you need and continue making memories.