Regardless of the kind of market you find yourself in when buying your next home, there are key tactics buyers can use to make the process both more successful and considerably less stressful. What are these key homebuying tactics and how can you use them to navigate your next home purchase to a successful close? Find out in this edition of the Oregon Real Estate Podcast.
Listen to the audio podcast version of this article by clicking here or the ‘play’ button:
How Homesellers Think
There are plenty of factors that can influence how sellers think. Among the most important of these is motivation, or a seller’s reason and/or need to sell. For example, expect different seller responses depending on if a homeseller is in no hurry, compared to other sellers needing a fast sale in order to purchase their ‘dream home’ or move for a job transfer. That’s frequently among the most frustrating elements for homebuyers, the variability not just in homes and seller pricing strategies, but navigating homeseller personalities and motivations.
Given the significant tasks involved with selling a property, some homebuyers may understandably wonder: Aren’t all sellers motivated? Sometimes the answer is both ‘yes’ AND ‘no.’ Consider a divorce situation, where one spouse desperately needs money and the other does not wish to move at all. Or consider an estate, where there are multiple family members, each with varying degrees of interest in selling; One family member may greatly need proceeds from a home sale, while the others are independently wealthy and perfectly willing to wait to sell, perhaps for tax purposes.
This means it’s helpful to first realize that as when fishing, you’ll never really know what you’ll be dealing with until you have them ‘on the line.’ Looks can be deceiving and no matter how a homeseller may outwardly behave, their motivation for selling is sometimes hidden and an important factor to determine as early as possible. The situation can be further complicated if sellers have a large mortgage on their property being sold. In such a case, they’re not really negotiating with ‘extra’ money. They simply have little price flexibility in order to pay off their home loan and pay closing costs.
For an example of how disparately homesellers can behave, let’s say you drive up to a house your Realtor found for you. Walking up the steps to the porch, you begin your home tour. Upon entering, you immediately see the home is immaculate, the view grand, the layout ideal. It’s a great house. Yet compared to other homes you’ve seen, the price still seems a little high. In fact, you’re pre-approved, but purchasing the home at the seller’s asking price would be a tight squeeze.
Because it’s a great house and you’re ready to buy, you meet with your Realtor that night and write a ‘clean,’ yet not quite full price offer. Your Realtor forwards the offer to the seller’s Realtor and makes sure to include your lender’s pre-approval letter. The next day, your Realtor calls you with an update.
“Your offer was not accepted. But the sellers sent you a counteroffer at full price.”
You’re stunned: “Full price! Why is that?”
“Well, they just placed the property on the market, are not in hurry and figured they could do better than your initial offer.”
Welcome inside the world of seller motivation.
Knowledge is Power
Given situations like this, it helps to know as much as you can about the local real estate market, the property, the sellers and details about their situation. For example, sellers frequently exhibit less price flexibility early on in the listing period. That’s because if the property is new to the market, their opinion is often strongly in favor of their home’s benefits and sometimes they don’t even know where they will move yet. It’s also common for sellers to think ‘I can always come down in price if it doesn’t sell.’
Fast forwarding a month or two into a property’s market time, the situation and seller’s attitude can look considerably different. By then, buyers have ostensibly toured and rejected the property as being ‘too high’ by a handful (or more) of qualified buyers. ‘Why doesn’t someone just bring us an offer,’ some sellers might then ask. The saying ‘Price cures all ills’ is sometimes hard for sellers to hear, but generally true. Buyers are constantly comparing the home they’re looking at to others they’ve toured. One home may have a more desirable floorplan, another home may have a better view, another may have an extra bedroom, bathroom, or larger garage.
So why don’t some buyers write an offer for less than asking price? Here are just a few reasons:
- Buyers not wanting to offend the seller
- Buyers not thinking the seller would respond favorably
- Buyers not even aware the property is for sale, given the high price
- Buyers concerned that the property would not appraise high enough
- Buyers plan to make changes to the house, which requires additional cost
Another independent, yet primary factor to consider when homebuying is inventory, or the amount of competing homes on the market. If the real estate market is flooded with properties, expect different behavior from most homesellers compared to a market where homes are scarce. Let’s briefly consider the concept of equilbrium, buyer’s market and seller’s market.
When neither buyers or sellers dominate, a real estate market is considered to be balanced or in equilibrium. In our region, the range of 3 to 6 months of home supply is generally considered to be favoring neither buyers or sellers and otherwise ‘normal.’ Inventory figures are released monthly by multiple listing services.
A buyer’s market exists when there are more sellers than buyers. Usually this means there is an abundance of homes to choose from, so it’s considered a market favorable to buyers. In our region, more than 6 months of home supply is generally considered to be favoring buyers. Home prices are typically falling, market times are longer and sellers are competing for buyers.
A seller’s market exists when there are more buyers than sellers. This is indicative when there is low home inventory to choose from, so it’s considered a market favorable to sellers. In our region, fewer than 3 months of home supply is generally considered to be favoring sellers. Home prices are typically rising, market times are shorter and buyers are competing for properties.
A relatively minor shift in interest rates can price some of the properties a buyer might consider buying ‘out of reach.’ And while interest rates are a factor outside the control of both buyers and sellers, they remain part of the market landscape through which everyone needs to navigate.
Market environments are important, but unless the element of seller motivation is well understood, you could even be dealing with an unmotivated seller in a buyer’s market and see poor results. That’s because the factors of seller motivation and home inventory, for example are not linked, but variables for homebuyers to consider.
If homes are scarce and prices are rising, understand that buyers are likely to feel pretty good about their property. As a result, presenting a clean and very strong offer is likely to work best in any market, but especially in a competitive situation with other homebuyers. Also include your lender’s pre-approval letter to confirm that you are able to afford the home you’re bidding on.
If the market is balanced, with neither buyers or sellers holding the ‘upper hand,’ the playing field is more level. But you still must deal with seller motivation. As a homebuyer, it’s to your advantage if the seller has a real, time-sensitive reason for selling. If you’re buying in a buyer’s market with lots of homes to choose from, realize that while most sellers will adjust to the market with reasonable prices in order to compete, there are still ‘hold-outs’ who remain less motivated.
Dealing with marginally motivated homesellers can be frustrating, but sometimes helped by determining if there are any areas that matter to them. For example, if your offer gives the seemingly unmotivated seller an extra two weeks to move out at no added cost for ‘rent back,’ he or she may then reconsider a less-than-full-price offer. Figure the ‘pain point’ of a seller and you may be able to craft a ‘win-win’ offer.
Keeping the important consideration of seller motivation in mind, here are five tactics to make your homebuying more effective and less stressful:
Homebuyer Tactic #1: Do Your Homework
Have your Realtor research the property before you consider making an offer. The answers to certain questions can help reveal insights. How long has it been on the market? Have there been any price changes? How many different listing Realtors has this seller gone through? Observing that more than a couple Realtors worked with the same seller within a relatively short time period can suggest an unreasonable seller who is either not willing to seriously look at the market, or one that is simply ‘difficult.’
Understand that even if a property is significantly overpriced, early in the process many homesellers remain enthusiastic about any interest in their property. In this situation, each showing early on confirms the seller’s belief that theirs is the best home in town. Experienced Realtors know the process well and by simple observation can become astute in understanding seller behavior. And sometimes the occasional ‘lightning strike’ will occur, where a seemingly above-market price offer is made for more than a property appears to be worth. But generally speaking, this is the exception and not the rule. And by staying with an above-market price over an extended period of time, sellers then run the risk of their property becoming ‘shop worn,’ with buyers wondering ‘What’s wrong with it? Why hasn’t it sold already?’
As a result, most experienced agents understand a seller’s price that turns out to be ‘above the market’ can change with time, or until at least a few qualified buyers walk away without making an offer. Further complicating the situation is if a seller is not particularly motivated, which is sometimes difficult to address. This underscores the importance of homebuyers understanding the homeseller’s motivation. Does the homeseller have a deadline, such as a purchase agreement already in place, a time sensitive job transfer, or an expiring interest rate lock, in order to purchase another property?
Homebuyer Tactic #2: Write a Strong Clean Offer, with Minimal Contingencies
Offer close enough to avoid triggering a counteroffer. Sometimes a homeseller will not want to ‘rock the boat’ if an offer is fairly close to their asking, despite not being full price. Once a counteroffer is ‘triggered,’ additional items in the original offer may be changed, since a counteroffer essentially restarts the negotiation process anyway.
This is also where comparable research can be helpful. If you’re convinced that the property is overpriced and you’re unable or unwilling to offer what the seller is asking, consider including a market analysis with your offer and include truly comparable property information that shows why your offer is not for full price.
Back it Up
A pre-approval letter made for the exact purchase price can help make your ‘strong, clean offer’ stronger . You may not want to telegraph that you’re qualified for a home loan in excess of your offered amount, which is why lenders frequently will send your Realtor a pre-approval letter that precisely matches your offered price. Otherwise, if you show a seller you’re approved significantly above the offered price, the seller may simply respond with a full price offer, figuring you’ll pay more because you can afford it.
Homebuyer Tactic #3: Escalator Clause
If you expect the property you want to buy will have multiple offers, one way to both stand out and enhance your odds of success is by using what’s sometime known as an ‘escalator clause.’ Under this scenario, your offer is made and in it, you agree to beat any other offer up to a certain maximum dollar figure and usually in an increment of say, $1,000 or other specified amount. There can be various elements to an ‘escalator’ clause. If your ‘escalator’ offer is accepted, proof of the second best offer is typically provided to confirm the appropriate purchase price above which the winning buyer then must pay.
Homebuyer Tactic #4: Activate ‘Stealth Mode’
If you’re a ‘choosey’ homebuyer, or seeking to buy in a certain area or neighborhood with few homes for sale you’re interested in, consider having your Realtor go into ‘stealth mode.’ This could mean having your agent knock on doors, collaborate with other Realtors having a ‘pocket’ or unofficial listing, or simply become hyper observant. Many buyers don’t even consider this approach, which while unconventional, can sometimes pay off with work, persistence and a little luck.
The Pre-Listing Stage
In the early phases before a property is formally placed on the market, there are various pre-listing indications you might notice. For example, a location company is often contacted to spray paint where utility lines are located. This prevents a real estate sign placement company from digging a hole and hitting a gas or electric line. How does this matter? If you or your Realtor observe such ‘utility locator’ paint, or a dumpster, a storage ‘pod,’ a moving truck, a U-Haul van, or a ‘hanging signpost’ without a real estate sign yet placed, these hints can sometimes indicate a property is being put up for sale…giving you a headstart before other buyers find out about the home. If the average market time for a given area is weeks or months and you have a ‘heads up’ even before day one of the property hitting the market, you have a tactical advantage.
For currently listed properties, other examples of ‘Stealth Mode’ could include your agent researching information on a property or homeseller for potentially helpful tidbits. This might be helpful legal information such as an estate, lawsuit, divorce or inheritance. Other possibly helpful records to consider may involve tax records, old listings from the local multiple listing system (or a separate more distant MLS altogether), since sometimes property history will not always be found in the usual multiple listing system.
Homebuyer Tactic #5: Prepare for a 2nd Bite of the Apple
Once your offer is accepted, that’s it, right? Not necessarily. A well-prepared homebuyer always keeps an extra tactic or two ‘tucked away.’
So as ‘back up’ tactics go, one might consider such ‘deep concealment’ techniques much like an ankle holster: Maybe not your first line of defense, but nice to have, ‘just in case.’ What is an example of such a ‘back up’ homebuyer technique and why might it be considered so stealthy?
First, it’s important to understand that like homebuyers, homesellers are typically most ‘on guard’ during formal negotiations. This period usually begins once an offer is written, plus during any ‘back and forth’ by buyers and sellers. Once an agreement is reached, even though there remains significant time, work, patience and even negotiation until the sale is officially closed, most buyers and sellers relax a bit psychologically. But therein lies the problem, since realistically, two key factors usually remain that could interrupt, or even destroy the existing sale now in place.
These two key factors include the inspection and appraisal, both which the seller has little control over. So if the home inspection reveals there are now plenty of heretofore unknown repairs, there are several possible scenarios on the inspection alone:
- Seller pays for everything
- Buyer pays for everything
- Buyer and seller negotiate
Assuming any home inspection items are successfully ironed out, this still leaves the appraisal. What could go wrong there? Two of the more common appraisal ‘minefields’ are (a) value and (b) additional repair and/or code factors. If a barn does not have a permit, the home inspector missed an issue important to the appraisal, or the appraisal comes in low, expect more potential negotiation between buyer and seller to close the transaction.
Most buyers don’t necessarily focus on getting a ‘second bite at the apple.’ But if you feel your initial negotiation in purchasing a property didn’t go perfectly, sometimes the inspection and/or appraisal provides a renewed source of redress. And if the property has material defects, the seller is required to either disclose or fix them, in the event your transaction doesn’t go through. And regarding the appraisal, there is no guarantee a different appraisal will come in much different. So if the appraisal is low, renewed negotiation can occur here, as well.
Do you have questions about buying or selling Oregon real estate? Contact Realtor Roy Widing using the convenient form below or call 800-637-1950 for a free consultation.