Just like any other market, the US housing market is influenced by the forces of supply and demand in real estate. These real estate market trends will determine whether it is a buyer’s market or seller’s market.
A common question that real estate investors ask is whether they should purchase an investment property in a seller’s market or wait for a buyer’s market to come around. Before we answer this question, let’s look at what a seller’s market is.
What Is a Seller’s Market?
A seller’s market in real estate happens when demand for investment properties for sale exceeds the housing inventory. This means that buyers that are ready to buy a real estate investment or a primary residence outnumber the homes for sale available in the market. A seller’s market usually results in multiple offers on a single home, thus leading to bidding wars.
On the other hand, a buyer’s market happens when the properties available for sale exceed the number of people that want to buy. With such low demand, real estate investors and buyers can negotiate for property prices below the market value.
How to Determine If It’s a Seller’s Market
One way of classifying and measuring the real estate market is to consider the sales-to-new listings ratio. This compares the number of sales in the market to the number of listings, showing how much demand there is for property in that area. In a seller’s market, this ratio is usually 60% or more, which means six or more sales for every ten new listings.
Another way of telling whether it is a seller’s market is by looking at the number of months of inventory (MOI). The MOI is basically the rate at which homes are selling in the market. So, how many months of inventory is a seller’s market? A seller’s market happens when the MOI is four months or less.
Should I Buy in a Seller’s Market?
So, you have determined that the real estate market of your choice is a seller’s market and now you’re wondering “Should I buy in a seller’s market?” Buying investment property in a seller’s market can be a very intimidating idea, especially for beginner real estate investors. However, this should not stop any investor from learning how to buy in a seller’s market. Even if the prices are high and the competition is stiff in a seller’s market, you can still find a great real estate deal.
In addition, some housing markets are not likely to slow down any time soon. Therefore, buying in a seller’s market would be wiser than hoping for a miracle. If you wait too long, the prices might be even higher.
7 Tips for Buying a House in a Seller’s Market
Rather than sitting on the sidelines and letting real estate deals pass you by, learn how to buy in a seller’s market. Here are 7 tips for buying a house in a seller’s market:
1. Know how to find the best investment property for sale
Finding the right property in a seller’s market is not easy. However, platforms such as Mashvisor will make your search faster and stress-free. Using Mashvisor’s Property Finder, you can locate both Airbnb and traditional income properties within minutes. Investment properties can be evaluated based on their performance in terms of listing price, occupancy rate, cap rate, rental income, and cash on cash return. You will find rental properties that meet your expectations in terms of return on investment, optimal rental strategy, and property type. With this real estate investment tool, you will be able to easily find the best real estate deals, even in a seller’s market. Try it out for free now.
2. Get pre-approved for financing
When it comes to buying rental property in a seller’s market, speed is very important. In the hottest real estate markets, you might not have more than two days to submit your offer after viewing the property. To enhance your chances of clinching the deal, you need to get pre-approved for financing well in advance. Getting pre-approved is having the lender ascertain your ability to buy a property for a specific amount. Approval for a mortgage is based on factors such as your credit score, debt-to-income ratio, and income. Having proof of funds will show the seller that you are qualified and serious about real estate investing. This could help you come out ahead of the competition in a situation where there are multiple offers on the table.
3. Work with an experienced real estate agent
Though you don’t need a real estate agent to buy a home, working with one will give you an edge when looking for the most profitable investments in a seller’s market. Find a realtor that is familiar with your target neighborhood and has a proven record of winning offers. The real estate agent should also possess the following skills:
- Honesty and integrity
- Knowledge of how to navigate a seller’s market
- Negotiation skills
- Communication skills
You can find the right agent by searching online or seeking referrals from family and friends. Working with a good real estate agent will save you lots of stress and time.
4. Keep your offer simple
Many offers come with contingencies that need to be fulfilled before the real estate deal moves forward. This could include things such as appraisal, home inspection, title search, and mortgage contingency. When looking at offers, property owners view contingencies as opportunities for the deal to fall through. As a result, they are more likely to go for an offer that has less risk of potential hang-ups. In a seller’s market, you should make your offer more competitive by reducing or removing contingencies. However, consider the level of risk you are willing to take on when putting together your offer. For example, removing an inspection contingency means that you are ready to buy the property regardless of the state it is in.
5. Make the offer even sweeter
Besides removing or reducing contingencies, you can make your offer more attractive in the following ways:
- Put down a larger down payment – This will show the seller that you are serious about the deal
- Be flexible on the closing date – Being considerate of the seller’s schedule will make you stand out from other potential buyers
- Agree to their terms – This makes the transaction more hassle-free for the seller. For instance, if they have a temporary structure in the front yard they would rather leave behind, allow them. You can always remove it yourself later
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6. Offer a strong sales price
In a hot real estate market, money talks. Therefore, you need to know how much to offer in a seller’s market. Sellers are likely to be lured by a high offer price or a cash offer. Since you are competing with multiple buyers, be sure to put your best foot forward. The first thing you need to do is consider the asking price. If the house meets your requirements and is within your budget, don’t negotiate. You could even add a little more to get the attention of the seller. However, make sure your offer doesn’t exceed the maximum amount indicated in your pre-approval.
7. Write a compelling offer letter
When there are multiple offers on the table, a personal note to the seller could set you apart from everyone else. In a few words, explain why you love the house and compliment them on how they have maintained it. Tell them what you plan to do to take care of it. Connecting with the owner emotionally through an offer letter will enhance the chances of your offer being chosen.
Whether you buy an investment property in a buyer’s market or seller’s market, you can still find a good deal. In a seller’s market, properties don’t remain on the market for too long. This is why you need to move as fast as possible. With the right amount of preparation and due diligence, you will boost your chances of securing the most profitable investment property out there.
Do you have a free Mashvisor account? Use our Property Finder to find lucrative investment properties that match your criteria in a matter of minutes, even in a seller’s market!