Buying a home in a seller’s market: What you need to know

When entering the market to buy a home, it is essential to understand what type of sales market you are entering.

The kind of market will impact how you approach making an offer and the pricing of the homes you wish to view. The simple breakdown of market types includes the buyer’s market, the seller’s market and the more typical market. Within each of these different markets, the rhythm of searching and ultimately buying is quite distinct.

Typical market

A typical market is where there is roughly a two to four-month inventory of homes immediately available. You will see homes selling for near asking price or something just below. While there are exceptions to the rule, most home purchasing advice assumes this as the sales environment.

Buyer's market 

A buyer’s market is where home sales are slower or too much inventory exists. As with most sales, this is a supply versus demand scenario. There is usually a bit more room to barter on either price or other concessions from the sellers in a buyer’s market. From the buyer’s perspective, this is the ideal market. For the most part, this is where the customer is always right.

Seller's market 

A seller’s market is most noted by limited inventory in comparison to the demand. In a seller’s market, homes will frequently sell within a week of listing in the highest-demand areas with average inventory levels of less than two months. It is in the seller’s market that buyers need to be especially prepared. Doing a bit of homework will help immensely towards buying the home you want with the lowest chance of heartbreak with losing the house to another buyer.

What steps to take

When entering the home buying process, an early recommended step is to meet with a mortgage broker regardless of the market type. In this era, it is relatively easy to be pre-qualified online. While this helps you determine how much home you can afford, this information does little to strengthen your position when searching and making an offer on a home.

In a seller’s market, pre-qualifications do not enter into consideration from the seller’s point of view. When you are ready to enter the market, it is best to get pre-approved for your loan. Pre-approvals include verification of background information, credit scores and income. Pre-qualifications do not. When presenting an offer to a seller, pre-approval tells the seller that you have financing arranged and in place.

With your pre-approval in hand, you are ready to begin the process of finding your next home. Be aware: this process can be challenging in a seller's market given the limited availability and high demand. In this heightened market, get prepared to move quickly. Checking for new listings daily or even multiple times daily is a good idea.

The standard rhythm has Thursday as the top listing day, with an offer review day set for Tuesday. Sellers’ brokers will move this around to Wednesday to Monday or other combinations in part to stand out. Regardless, viewing a home on the first day of a listing is quite beneficial as it allows you, the buyer, the most time to strategize with your broker on what will be your offer.

Contingencies

Another area of consideration as a buyer are contingencies. Contingencies are an area that can create significant protection for you. While on the surface, this sounds good, in a seller's market, this can work against you.

Financing is one area of contingency consideration. Perhaps you are using an FHA loan with only 3% down. If you place a financing contingency, you now require the home to appraise at or above the full offer price. If the appraisal is lower, you as the buyer have an easy out of the transaction. Of course, if you still want the house, you can make up the difference since the bank may only loan 97 percent of the appraised value. From the sellers’ perspective, you could walk away, leading to time delays among the sellers’ other negatives.

When homes are frequently selling above asking, this situation happens more often than in different market types. For this reason, the seller might accept a full cash offer for less money since there is less risk of the transaction falling through.

Inspections

Inspections are another area one should consider carefully. Especially with older homes, it is advisable to get a full home inspection before buying. If you have viewed the house early in the listing, it is usually possible to get an inspection done before the offer review date. In this way, you have the time to protect yourself, knowing the home is sound, while also making an offer without an inspection contingency.

The seller will often have a pre-inspection done before listing that can be made available to you at their discretion. While it is always better to contract for an inspection yourself, these are frequently around $500 each. If you don’t get the home, you just spent this money for nothing. If the seller has a pre-inspection report, most likely it will have been conducted by a reputable inspector. If this is the case, it may make sense to use this inspection as another way of eliminating an inspection contingency.

These are only two potential contingencies. In a seller's market, be prepared so you can make the most direct offer possible. Making sure you have put together an acceptable offer is one area a broker representing you can help get you a great deal.

If you engage with a broker early in your process, your broker can help you start with finding a good mortgage broker to the end of the process, where you are given the keys to your new home.