It's a seller's market for now and while things may be shifting, it is still one of the most frustrating markets for first time home buyers and investors. As a buyer, you always want to get the best deal possible however, whether you know it or not, the psychology behind "anchoring" is working against you in this market. This is the number one reason why I see many friends and clients getting discouraged and giving up. So let me explain what this is and how you can overcome it and get on that property ladder before you get priced out entirely.
The concept of "anchoring" is when you see a price on something and you instinctually base your expectations around that. So whether it is a good value or not, it doesn't matter. You are emotionally tied to that set number because you saw it in writing. I'll give you an example. Recently I bought a McDouble from McDonald's. Yes, I know it's not healthy, but I did it (and enjoyed it...A LOT). However, I'm still used to the McDoubles being on the dollar menu. This McDouble cost me $3.16! Ouch! What happened?!? I remember a time when I worked at McDonalds and it was like 99 cents! So what do I do? Not buy the McDouble and never buy them again because it's gone up? No. I'm still hungry and I still need the sustenance to avoid a hangry spell! So I buy it, eat it and enjoy it. I also realize that I make way more than I used to so $3.16 isn't anything crazy in the grand scheme of things.
Anchoring, it is emotionally painful initially, but if you overcome it, you get to reap the rewards.
Unfortunately right now houses are listed for a specific price and usually going well above listing price. This makes the buyer feel as if they aren't getting a great deal if they get their offer accepted. It can be exhausting putting in offers that are asking price or below and getting rejection after rejection. But you know what? That strategy isn't working. You have to shake it up. Know that this feeling is normal in a seller's market. You are not alone, and just remember persistence pays off.
When I bought my cottage a year ago, I paid market rate. At the time I resented it. I really did. Here I am an investor and a realtor and I hear all the time about people getting these amazing off market deals...what was wrong with me? I paid market rate for a property from the MLS! I was such a fraud!
Well less than 6 months later, post renovation, I don't regret the decision for a single second. You know why? Equity and inflation both more than paid for themselves. Additionally, loan rates have only gone up. Had I waited for that grand slam of a deal, or even whittled away further at what I thought was a reasonable deal, I would have ended up with nothing. Sometimes you have to give a little more in the beginning to get the grand prize in the end.
It also helps to have a savvy realtor that can help you navigate the murky waters of placing offers in this every-man-for-himself market. You need someone who is going to be honest with you, but also give you some tough love when you have a good deal on your hands and you might not be able to see it entirely yet. Here are a few strategies that are a bit outside the box, that may help.
Strategy #1: Back on Market Listings or long term listings.
Select listings with that have been on the market an unusually long time, especially if they have been placed back on the market.
Pros: Most people think there is something wrong with the house and that is why it hasn't moved. Do your investigative work. Most properties in this situation have a really, really motivated seller. With a motivated seller, that means you have more of a chance to snatch a deal. Find out the reason why it hasn't sold and solve that problem. Perhaps it's really difficult to show because it has a tenant who is uncooperative? Perhaps it has foundational issues or a septic tank that needs to be replaced? Maybe it's owned by an estate that has feuding siblings? Whatever the reason for it, there is usually a problem that needs to be solved and can be, you just have to do a little bit more work in figuring out how to solve that problem.
Cons: Solving the problem could be a headache. It's not for the faint of heart, but that's where really good deals can be found. Also, sometimes we overestimate how complicated a problem can be. If it needs a new roof, sure that sucks, but call out a couple roofers, get a quote and factor that cost into your offer.
Strategy #2: Escalation clauses
An escalation clause is when you offer a set amount over the highest bid up to a certain number. For example, you may put in an offer for $220 K on a house with an escalation clause that says you will pay $1,000 over any other highest bidder up to $230K as your final price.
Pros: You have a greater chance of winning the bid and you can still ensure you don't go above your max budget.
Cons: Some listings like REO's don't accept an offer like this. Also you are revealing your top number negotiation wise early on. This isn't a problem if the seller's agent is ethical, but some may not be. You might not want to reveal all your cards that early. And always, always put it into writing that they are required to show you proof of the next highest bid.
Strategy #3: Remove contingencies
Contingencies are conditions you make when you place an offer and they are there for good reason- to protect you. Some examples of contingencies include: a clean inspection report, you being able to secure a mortgage, that the house appraises for what you are willing to pay, etc.
However, not all buyers have the same needs. Sometimes certain contingencies aren't needed. For example, I have a buyer who intends to put down a significant amount of cash no matter what because they want to have lower monthly payments. In this particular case, the higher down payment removes the need for an appraisal contingency. Because she has no need for it, and really loves the house, we removed it to make her offer more appealing against other offers. So closely examine which ones you absolutely need in your particular situation, and remove any that you don't. Your goal is to make your offer one of the easiest and surest bets if a seller were to accept it.
Pro: You look more appealing to the seller. Less contingencies means there is less of a chance you as a buyer will fall through. And in this market, when there are so many offers coming at sellers, they are going to choose the easiest, most surefire one because there is nothing worse than the stigma of a property coming back on the market after a deal fell through.
Cons: You take on a slightly greater risk if you don't know what you are doing. If you walk for a reason not related to a contingency you forfeit your deposit. So contingencies are put in place to give you wiggle room to remove yourself from a deal should you need to if you discover any deal breakers. Again, I use the appraisal contingency as an example. If you go to buy a place and the bank says the property is only worth $400k but you won with an offer of $450k, then you have the opportunity to cancel the deal or come up with the difference. Contingencies are there to give you choices so be very selective about which ones you remove in order to make your offer more appealing.
Strategy #4: Choose the easiest form of funding if you can.
Again, the easier and quicker your money is ready to move, the more advantage you have. Cash is king. Hard money and quick closing private loans are queen. Conventional loans are next and then there are loans like FHA that sound great in theory, but send chills down a seller's spine because of the extra inspection hurdles it requires.
Pro: Use cash if you can. Refinance later if you need the money back. But cash is still king. Any other form of loan that can close in 30 days or less is next. This is super appealing to buyers, especially those who want to move quick.
Con: FHA loans are awesome for first-time buyers in terms of the perks they will receive (lower downpayment, lower interest rates, etc.) but they are terrifying to sellers. The reason being there is an entire second inspection component that can be very stringent. These loans often require the seller to make repairs to the property, using their own funds, before the property will be cleared to close by the lender. This totally disincentives the seller from leaning towards that offer if they have others that are less rigid and can close quicker.
So long story short. There are always ways to make your offer stand out but it may require you taking a slightly different approach than you would in a normal market. Every time the market shifts, it requires buyers and sellers to shift their mindset and approach.
Remember that buying or selling a home is never an easy process and anyone who does it always wonders: am I getting a the best possible deal? While this is a normal thought, it is usually the most detrimental to you. The question isn't whether or not you are getting the best possible deal but whether or not this is the right time and decision for you, right now in your life.
Seldom do people look back 20 years down the line and think, "I could have gone back and made an extra two grand if I countered one more time!" Keep the big picture in mind. If you need a home to live in, and you have the means to buy responsibly, then now is the time for you. If you have a home to sell, and you want to get on to the next phase of your life (whatever that might be), then now is the right time to sell. Just find an agent who is knowledgable about your market enough to be honest with you, but also go out and get you a great deal in your market. If you do both those things, you won't regret your decision. In fact, you will no doubt look back on it with pride and confidence that you made the right decision for yourself at that time.
Good luck! You got this! Happy hunting and happy selling!
Forever grateful,
Mack
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