Emboldened by low interest rates, rising rent prices and a stronger sense of job security, more people are making the leap into home ownership. But as they do, many face fierce competition, limited choices and the pressure to act quickly.
The biggest challenge for many would-be buyers is that there are not enough homes on the market. In some areas with low inventory, homes are being snatched up within a matter of days. That’s despite the rise in home prices, which increased by 4.9 percent in April from the year before, according to the most recent data from the Standard & Poor’s/Case-Shiller 20-city home price index. “Good for homeowners, not good for potential buyers,” says Lawrence Yun, chief economist for the National Association of Realtors.
In short, it’s getting harder to find a good deal.
More homes are being built, but the pace is still not strong enough to meet demand, analysts say. Construction started on 685,000 single-family homes in June, up 14.7 percent from a year earlier but still close to 40 percent less than what was typical in 2007, according to a report released Friday by the U.S. Department of Commerce.
So what should home buyers do in such a tight market? Here are a few steps people should take to increase their chances of landing the winning bid — and to protect themselves from paying more than they should.
Before you do anything, get a pre-approval letter. You only need to get one. The pre-approval shows the seller that you have been vetted financially. It also gives you an idea of how much of a mortgage you can afford so that you can limit your search to houses within your price range.
In some markets, you may not get to see a house more than once or twice before you move in, so a pre-approval letter also can help you act quickly when you see a home you love. Keep in mind, however, that a pre-approval letter is not a guarantee for a mortgage, brokers say. So be ready to check with other lenders.
Make sure your broker knows the competition. Knowing how many people are interested in the house can help you come in with an offer that will be taken seriously, says Brian Block, a realtor in northern Virginia. Your broker might be able to find out from the listing agent how many people came to the open house and if it is likely to receive multiple offers, he says. Something that is too below the asking price or that doesn’t match with the seller’s timeline might get rejected. “That in turn will inform me as to how aggressive we have to be,” he says. It also lets buyers know if they should prepare for a bidding war.
Add an escalation clause to your arsenal. Bidding wars reached record levels leading up to the housing bubble of the early 2000s, and they haven’t really gone away since then. If you expect to compete with multiple offers on a property, consider using an escalation clause, which lays out how much more you are willing to pay over a competing offer. The clauses are more common in popular neighborhoods with low inventory, says Suzanne Des Marais, a broker based in D.C., but they aren’t used on every home.
Including an escalation as part of the offer can help you show that you’re serious, since it lays out how much more you’re willing to pay. But as The Post’s Emily Badger has reported, buyers should watch out for sellers who price their homes unusually low in order to set off bidding wars.
Be flexible with timing. You can improve your chances of landing the home you want if you can show that you are willing to move as quickly — or as slowly — as the seller needs, says Will Wiard, a broker who works in D.C. and Virginia. A seller looking to close the deal within 30 days won’t be too interested in an offer from someone who won’t be ready to move for 60 days, he says. The same for a seller who needs more time before moving out of the property.
Tug at the heart strings. Are you and the person selling your home both veterans? Can you already picture little Jonnie playing on the tire swing or attending that great school in the neighborhood? When sellers are facing multiple offers, getting a personal letter from buyers that shows why they love the house or how they plan to use it might help to set the offer apart, Wiard says. Sure, many sellers are just going to go with the highest bidder. But some people with emotional attachments to the home they’re selling may want to know it is going to a family or couple that will look after it and appreciate it as much as they did, Wiard says.
Get a pre-inspection. Anything you can do to speed up the buying process and make it easier for the seller might improve your chances of getting the home you want, brokers say. For example, some people might pay for a pre-inspection before they make the offer so that they know ahead of time if the house is in good condition. That eliminates the need for further negotiation with the seller after the offer is made.
Pre-inspections are usually shorter than a regular inspection, says Des Marais. Some people who pay for a pre-inspection, which can cost $300 to $400, may still not get the house. But the effort shows that the you have some skin in the game and are serious about the home, she says. And you can decide then if you are comfortable with any repairs that need to be made or you can choose not to make an offer if the issues are too problematic.
Pay more cash up front. Really. Not all home buyers need to put 20 percent down when they make an offer on a home, especially when it comes to programs that are meant to encourage first-time home buyers. Still, you may juice up your offer by providing more money up front in what is called the earnest money deposit. The earnest money is cash provided by the buyer, ranging from 1 percent to up to 5 percent of the purchase price, that gets held in escrow until the sale closes.
The cash works as insurance for the home seller in case the buyer backs out of the deal. If all goes as planned, the money goes toward the down payment and closing costs. “It just shows how committed somebody is to that sale,” Des Marais says. You should ask for clear explanations on how it would work for you to receive a refund and what conditions would cause you to lose the money, she says.
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