If you’re in the process of trying to buy a home, you’ve likely found yourself frustrated and discouraged. There’s no getting around the fact that for many home buyers, it’s been nearly impossible to buy a house this year. That’s because the real estate market in Massachusetts and Rhode Island, like much of the United States, is extremely competitive right now, and highly favorable to sellers. This is due to a historically low inventory of homes for sale. Basically, there are more people looking to buy than there are available homes – low supply, high demand.
As a result, many buyers are getting into bidding wars with one another, driving up home prices far past their original asking price. Cash offers have also become more common, as buyers seek to make their offers more attractive to sellers. Other home buyers are waiving home inspections to make their offers stand out.
With all of the challenges of the current housing market, many buyers are either feeling desperate, or thinking about throwing in the towel altogether. While it’s easy to be overwhelmed with the home buying process right now, it’s important to take a step back and think about the potential long-term implications of each choice available to you. In such a tumultuous market, it’s more important than ever to carefully weigh all of your options.
Here are some tips to help navigate the current seller’s market in Massachusetts and Rhode Island:
Competing Against Cash Offers
A cash offer on a home is when the buyer doesn’t plan to take out a mortgage, and instead offers to pay for the home in full with cash. From a seller’s perspective, a cash offer can be attractive for a few reasons. The first is that the transaction and sale will likely be completed faster. While a mortgage lender typically takes an average of 45-60 days to underwrite and issue a home loan, a cash buyer only needs to retrieve the funds from their bank account. With an all-cash sale, there is also no requirement to obtain an appraisal which can speed things up as well. Cash offers are also less likely to fall through since they’re not contingent on a mortgage approval.
While a cash offer can certainly give you a leg up if you have the necessary funds, the truth is that many home buyers don’t have enough cash on hand to buy a house outright.
So how do you purchase a home when you're going up against cash buyers?
To start, it’s important to get a pre-approval from a mortgage lender before making your offer. A pre-approval is more involved than a pre-qualification, and typically requires you to submit an official application and provide the lender with necessary documentation. The lender will then look into your creditworthiness and if you qualify, they’ll conditionally offer you a certain loan amount. Because a pre-approval involves more research into your current financial situation than a pre-qualification does, it bears more weight with sellers since it’s less likely to fall through. Going up against an all-cash buyer with a pre-approval in hand at least lets the seller know that there is a high chance of your financing being approved.
Another way to compete with a cash buyer is to offer the seller more money for the home than the cash buyer is willing to pay - something that's often difficult, and sometimes risky to do. For starters, you don’t always have a good idea of what other buyers are offering. In years past, sellers would routinely go back and forth with multiple buyers to get their best offers, but these days many sellers are not willing to negotiate because with such a competitive market they’re confident they’ll receive numerous attractive offers. For this reason it’s important to put your best offer out there from the very beginning.
It’s also important to do your own research before making an offer to determine what you can realistically afford to spend on a new home. Just because your lender pre-approves you for a certain amount doesn’t mean it’s always safe to take out a loan of that size. Do some number crunching and take a look at your current budget to determine whether or not you can really afford to make an offer before you do so.
Paying Over Asking Price
If you end up deciding to offer more than the asking price of a home in order to compete with other buyers, there are several things to consider.
First, most mortgage lenders will require an appraisal of the home before they’ll issue you a loan. And, if the home appraises for less than you’re looking to borrow, you may be required to increase your down payment. This is because until you pay off your mortgage with the lender, the property belongs to them. In other words, they hold the property as collateral until you pay back the borrowed funds and interest. If that collateral is worth less than the money they’ve lent you, their investment isn’t protected.
Another thing to consider before you submit an offer that exceeds asking price, is that you can’t predict what’s going to happen to the housing market down the road. If you purchase the home at top dollar only to have the market crash afterward, you could risk being underwater on your mortgage, or you could lose a significant amount of money if you need to sell the property before home prices creep back up.
Foregoing a Home Inspection
Another tactic some buyers are using to make their offers more attractive is to waive a home inspection. Typically, an offer is contingent on the home passing an inspection. If any major deficiencies are found during the inspection, the buyer can usually either opt out of the contract, or ask the seller to remedy the issues. As such, an offer to forego a home inspection can be very appealing to a seller – especially one who knows that their home has issues. But while this can make your offer more competitive, it can also be a risky decision. There could be a major problem with the home that could cost you a significant amount of money to repair. If you’re already paying above asking price, this could be even more problematic.
A potentially safer alternative would be to waive aspects of the inspection contingency, rather than the entire thing. For example, you could agree to overlook all issues that have a repair value below a certain dollar amount, while still giving yourself an opportunity to back out of the contract if major structural issues or health hazards are found.
Most mortgage lenders don’t require you to obtain a home inspection before issuing you a loan, but just because it’s not mandatory doesn’t mean that it’s okay to skip it. If you’re contemplating waiving your home inspection, evaluate all of the pros and cons, and be prepared for any potential implications. It’s not a decision to take lightly.
How to Buy and Sell a House at the Same Time
Unless you’re a first-time home buyer, you must also consider the challenge of buying and selling a home at the same time. In a buyer’s market, it’s possible to make a purchase offer that’s contingent on you selling your old home, but such offers are not very attractive in today’s seller’s market. However, keep in mind that if you need to sell your home to afford a new one, you do have a lot of control as a seller right now. Consider listing your own home with a contingency that you find suitable housing. That way you can secure a buyer, and then get to work finding a new home.
Building vs. Buying a House
Building a home is generally more expensive than buying one. But in such a competitive market with bidding wars driving up home prices, you may find the opposite to be true. And, if your offers keep getting rejected, it might be one of your only options.
Building a home can have many advantages, such as the opportunity to customize things to your liking and install new, energy-efficient systems and appliances. It also gives you a good amount of time before you’ll have to start worrying about major repairs like replacing a roof or repainting the home. Another plus is that you can potentially hold off on selling your old home until construction is nearly complete on your new one. Depending on your current financing situation, you may be able to fund your home build through a construction loan or bridge loan, rather than carrying two mortgages at the same time.
While building your own home can sound like the ideal solution to this year’s home buying challenges, there are some potential drawbacks to consider as well. Keep in mind that your timeline for moving in will likely be much longer than if you were to buy an existing home. Before breaking ground on a new home, you’ll need to find and purchase land, ensure it has the appropriate permits and zoning, and hire a builder. It’s also worth considering that the current housing market could look completely different by the time your home is finished.
A seller’s market can often be discouraging to those looking to buy a home, especially if you are a first-time home buyer. What you are willing to sacrifice or offer when bidding on a home is ultimately your choice. Above all, it’s important to get grasp of your current financial situation, understand how much home you can afford, and consider what you are and are not comfortable with. A home is one of the largest purchases you’ll ever make, so take your time – even in this crazy housing market.
BankFive is committed to helping you navigate the home buying process every step of the way. If you’re interested in buying a home in MA or RI, contact us to start a conversation today.