A National Association of Realtors “30 Under 30” agent, serving the Del Mar/San Diego luxury residential market with Anderson Coastal Group.
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With headlines claiming the hottest real estate market in decades and a clear advantage for sellers, many home buyers — especially those pursuing real estate for the first time — are balking at the stiff competition. In April, over half of homes sold over list price and seven out of 10 buyers faced bidding wars, according to Redfin.
But before backing down and saving their homeownership dreams for another time, I’d encourage buyers to take a second look at their options. With the right strategic approach, first-time home buyers can take advantage of low interest rates to purchase their first home, even in a hot seller’s market.
Get Organized Before You Start Searching
The market is moving quickly, which means you will need to be able to act fast to secure your next home. There are a few tasks you should complete before even beginning your search. The first step is to interview real estate agents and pick the right partner for your journey. They should have a network of other professionals crucial to your purchase like CPAs, lenders and estate planners. Work with them to organize your finances, determine which loan product is right for you and choose how you plan to hold the title for your next home.
Your agent should also walk you through the purchase agreement specific to your state so you are familiar with all of the language and terms when the time comes to make an offer. I call this an “offer workshop,” and I always host this early on in the process to ensure my clients are prepared to move forward confidently and quickly.
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Lower Your Top Price Point
Bidding wars are driving purchase prices up across the nation, and to combat this, I am advising my clients to cap their search about 10% to 20% below the top of their budget. For example, if you need to stay under $2 million for your purchase, I’d recommend looking at homes listed between $1.6 million and $1.8 million. By creating a cushion between list price and the top of your budget, you can position yourself as the top competitor in a bidding war and/or put more money down upfront. It can also be a good opportunity to use an escalation clause to make your offer stand out and beat the competition.
Put More Money Down
Thirty percent is the new 20% when it comes to down payments, and the more cash you can show, the better. Many first-time home buyers are hesitant to put all of their hard-earned savings into one large purchase, and I don’t blame them. But a strong lender will be able to advise you on the most efficient and creative way to structure your mortgage to get the most bang for your buck without breaking the bank.
Down the line, you can also look at borrowing against the equity you’ve built in your home with a home equity line of credit (HELOC). This allows you to access that cash you made via down payment and the equity you’ve built since your purchase. Some people will use that cash for renovations, and others may use it for another purchase. Ultimately, it’s a low-cost method to get cash out of your home without having to sell.
Decide Which Terms You Could Compromise On
Part of the importance of understanding your state’s purchase agreement is knowing which terms you are comfortable negotiating. In this market, we are seeing everything from free rent-backs to waiving contingencies like your inspection and appraisal contingencies. Thinking through your priorities ahead of time will prepare you to respond to counter offers on a tight timeline. If you aren’t in a hurry to move, a free rent-back could be a selling point. If you have a little cash left over, offer to pay for your own home warranty. But whatever you choose, make sure you are consulting your own personal risk tolerance and using the tools at your disposal to protect yourself.
Don’t Get Discouraged
It’s easy to get frustrated when you’re a buyer in a seller’s market. But it’s important to remember your home purchase is a business decision and a long-term goal that takes time to accomplish.
Don’t move too quickly, pay too much or settle for a home you don’t really want because the pressure of purchasing a home is getting to you. Be just as strategic as you would be in any other market. A strong real estate agent can help manage your expectations and guide your strategy so you don’t get burned out before finding the right home.
If you have written multiple offers and still don’t have a home, you should take another look at your personal risk tolerance. When it comes to waiving contingencies, putting more money down and the general pace of the market, purchasing right now may not be the best next step for you. And that’s okay. There are many other ways to passively pursue your dream of homeownership until you are ready. Historically, real estate cycles always come back around, and no seller’s market has ever lasted forever.
Rent For A Year
If you aren’t able to be competitive with the strategies above, consider renting for a year to see how the market moves. You can save additional money for your down payment, and you could even book a series of short-term rentals to explore different areas and narrow your search.
All signs are pointing toward a more balanced market in the coming months, with buyer demand cooling, pending home sales and new listings falling in numbers, mortgage applications decreasing and asking prices falling. If you aren’t ready to make a purchase, keep watching for the opportunity; but if you are, don’t let the fast-paced market scare you away. With the right team, level of organization and mindset, you can successfully purchase whether it’s your first time or tenth.
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