Home Depot (NYSE:HD) has decided to hire 80,000 seasonal workers this year — a 14% increase over a year ago — including 10,000 in the spring alone. While this is a promising sign for the company’s growth prospects (and the stock, which has more than doubled since late 2011), it also is further proof of the new reality for the housing market.
See, back in 2006, selling real estate was a real challenge, as buyers were everywhere. Fast forward past the real estate meltdown of 2007 to 2011, past the beginnings of a turnaround in 2012 and … well … less than you expect has changed.
Now, an artificially created lack of inventory has led to a feeding frenzy among buyers, who are competing for a paucity of new listings. The banks and Fannie Mae continue to release their shadow inventory of foreclosures at a snail’s pace, which is stabilizing real estate prices but extending how long it will be until foreclosures represent only a fraction of total homes listed.
Until (and unless) prices rise another 15% to 20%, homeowners who are underwater on their mortgages will still be unable to list their homes for sale. In the meantime, we keep seeing a slow drip of new listings, so Realtors are rushing their customers out to see each property the day it’s listed. Houses are selling within just a few days and often with multiple offers that are above the list price.
Just recently, I wrote offers on three different foreclosed homes for three different customers — over the span of one week. In each case, I received a notification that there were multiple offers on the respective properties, so I would need to submit the customer’s “highest and best” bid.
My customers’ offers were strong, too. Two were all cash, and one would be financed with a 20% down conventional mortgage. The cash offers were raised to slightly above the list price, while the customer with the financing came in exactly at the list price.
Yet within a few days, all three offers had been rejected, as the bank had accepted superior bid. In the 16 years that I have been selling homes, I have come to accept that this is part of the job. But usually, for every offer you lose, you win another one. Going 0-3 in the same week was pretty hard to swallow.
My customers are, of course, equally disappointed when they don’t win their bids. Still, a losing bid is often followed by finding an even better property — proof that patience is a necessity in real estate.
In that vein, the $40,000 townhome actually came back on the market a few weeks after we lost the bid, as the winning bidder had a change of heart about buying the home. When given a second opportunity to bid on the property, my customer raised the original offer by a few thousand dollars and won. We are scheduled to close this coming week.
With such a story in mind, the question is simple: What strategies can a prospective home buyer use to successfully compete with other buyers? Well, here are a few:
- Don’t wait to look at new listings. With homes selling so quickly, the longer you wait, the less likely you are to get the home you want.
- If you can purchase a home with cash, do so. It makes your offer stronger than those who have to get financed. With a cash offer, there is no risk of a loan being denied, and a quick closing saves the seller money on insurance, taxes, utilities and maintenance. If you don’t want to tie up your funds for a long period of time, speak with a mortgage loan officer about re-financing the home into a mortgage after six months of ownership. Your interest rate could be a bit higher and you will have a few more closing costs than had you financed it upon purchase. However, the money you save in having no mortgage for the first six months will more than compensate for those costs.
- Refrain from making your highest bid until you know if there are other offers on the property. If there are other offers, you will be notified and given a second chance to bring in your “highest and best” offer.
- Consider buying a fixer upper that’s been on the market for a long time. Yours will probably be the only offer, so you may be able to negotiate a lower price and can use the savings to make the repairs and cosmetic improvements. Both FHA 203k and Fannie Mae Homepath Renovation loans allow the borrower to roll repair costs into the mortgage.
- Don’t be reluctant to bid above list price on a foreclosure. Most of these properties are priced well below fair market value for the neighborhood, so you will likely still be buying the home below the appraised value. If you are buying an investment property as a long-term rental, it makes sense to bid above list price as long as your monthly cash flow is still in double-digit percentages. To determine the annual gross potential return (i.e. before expenses), multiply the likely monthly rent times 12, and then divide that number by your cash basis (cash paid + fix up costs).
Of course, another possible strategy is to wait for this strong real estate market to taper off. A recession or drastic rise in interest rates could throw cold water on the hot market.
Of course, the chances of this happening any time soon are slim to none, so if you need to buy a home right now, just get out there and give it your best shot.
As of this writing, Ethan Roberts did not own a position in any of the aforementioned securities.