THE TIDE IS CHANGING
It should be obvious to you by now that sometimes coming up with original content week after week can be a challenge. In fact one that from time to time I suffer to achieve. However, from time to time my articles write themselves (actually the topic hits me between the eyes and says here I am dummy run with it).
This week is one of those weeks. Twice in the past two days I had agents come to me and ask for advice. Both of them represent well qualified buyers and they are having a difficult time getting offers accepted.
Now forgive me please as I am about to share an I told you so moment. For the past year, I have spent a preponderance of this column encouraging buyers to get off the fence and buy while we were still in a buyer’s market. I predicted over and over again that we would soon be in a seller’s market. And that a golden opportunity might soon be lost.
Buyers (as I have often said) never buy in a buyer’s market. Instead they wait for the shift to a seller’s market to signal that the bottom has finally hit. This is a classic mistake that can often cost thousands for the buyer who falls into this trap. Because, once the market shifts in favor of the seller, the bottom is just a blip in the rear view mirror.
Competition fuels buyers to offer more and ask for less. And inevitably prices go up.
Now back to my agents and their buyers. Agent one is a talented agent well trained and utterly frustrated. Her buyers have high FICO’s low debt and are fully qualified to purchase the homes that they are bidding on. Their offers are full price, they are not asking for cost and they are putting a substantial earnest money deposit in an effort to demonstrate their sincere desire to complete the purchase. Offer after offer is rejected in favor of cash offers above asking price virtually assuring a quick closing without need for appraisal or loan contingencies.
Now you might say why on earth would an investor ever pay more than market value for a home he does not intend to occupy and that would be a valid question. The answer is simple. The investor today recognizes that he cannot build a home for the price he can purchase today. And, the rents he will collect represent a far greater return on investment than any other investment vehicle available today.
Agent two also experienced, is frustrated because her buyers are fully qualified for an FHA purchase up to one hundred and forty thousand dollars maximum. And, like the clients from agent one, they are consistently being out bid.
Because the buyers have lost the leverage they enjoyed just a couple of months ago, I offered both of them the same advice. And that is to shop in the next lowest price point and offer slightly more than full price. That is the only way either will be competitive in today’s market.
In other words Agent Two should be directing her clients towards homes that are priced between one hundred and thirty thousand and one thirty five. Doing this will allow her buyers to compete on the same level as the cash buyer who is paying above asking.
Now I recognize that this is not a perfect solution in that lenders are not allowing buyers to pay above market value and when faced with this scenario are often requiring the buyer to come in with more cash to bridge the gap between the required loan to value ratios and the agreed upon purchase price. However, thanks to our friendly investor, prices in many areas are rising and this is becoming less and less of an obstacle.
Second, if the property does not appraise, sellers will often consider a reduction in the purchase price in order to avoid the hassle of having to find another buyer.
Agent one’s client unfortunately will need to follow the same strategy if he is to be successful in his quest to purchase. And, they will need to do so largely for the same reasons.
This past weekend I spent eight hours listening to Bruce Norris explain not only how we got where we are today, but also where we are headed if the trends continue along their current course. Next week I will share with you the fascinating story that he weaved and the stunning projections that he has for our future.
Until then, see you in escrow.