6 Strategies for Buying a Home in This Extra Hot Market

Buying a home in this crazy market isn’t easy. Many buyers are bidding over asking on homes, only to be turned down again and again. What gives?

There are many factors at play right now, and there are a few strategies that potential home buyers can employ to increase the odds of landing a home in 2021. Here's what Realtors are advising buyers to do.

Problem 1: 15% over is often too low

One problem first-time and experienced home buyers alike are having is that they simply underestimate the competitiveness of the market. Making an offer for 10% over the asking price may sound like a sure win - until you hear what other buyers are doing.

“What we’re seeing is that homes in poor condition are going for 15% over asking,” observes Lisa Armellino, a buyer agent who specializes in the Philadelphia suburbs. “If the house has more than a couple of really desirable features, the bids are going into the 25% over asking range. And if a house is fully move-in ready – it's actually in decent condition, it’s clean, and everything is great – it can go for 35% to 50% over asking price.” 

So what can you do?

Strategy 1: Re-think what you’re willing to spend

Having an experienced Realtor, as well as an experienced mortgage advisor, will be essential for figuring out how much money you can actually spend. Especially with interest rates being so low, you might be able to comfortably spend more than you thought. 

“People often say 'I only want to spend such and such a month,' but realistically they can spend more based on their income, debt-to-income ratio, etc.,” explains Baltimore buyer agent Katie Buscher. “The lender can break it down by showing how they can go up to this amount just by doing something a little differently. Going up $30,000 on a house isn't that different in payment - it’s less than a car payment at a 2.75% interest rate.”

Having the flexibility to pay more for a home can help you be more realistic when bidding. Just don’t go into it guessing: make sure you understand exactly what you’ll be paying each month, and how that fits into your budget.

Strategy 2: Use an escalation clause

An escalation clause, if the seller allows it, means that if another buyer bids above you, your bid can “escalate” to a higher number. 

For example, you might offer $300,000 for a home with an escalation clause in increments of $2,000 up to a price cap of $310,000. That means that if someone bids $290,000, your offer remains $300,000, but if someone bids $304,000, your offer escalates to $306,000. 

Some sellers don’t accept escalation clauses because they want every buyer to submit their best offer in the beginning, but other sellers will accept it because it streamlines the paperwork process and encourages buyers to try and outbid each other. 

Problem 2: Buyers are offering, but the home isn’t appraising

When home prices rise quickly, one issue people encounter is that the appraised cost lags behind the selling price. Appraisals are determined by a variety of factors - including what nearby, similar homes (comps) have sold for recently. If there’s been a lot of recent sales nearby, the appraisal may match the selling price. But if there haven’t been many sales this year, the appraisal can lag behind - especially if you’ve been involved in a bidding war.

Plenty of potential buyers are missing out on their homes because sellers are wary of a gap between the appraised cost and the agreed-to sale price. To avoid having to cover the costs themselves, sellers are opting for cash-only purchases that don’t require an appraisal in the first place.

Strategy 3: Statement of cash to bring to closing

Cash offers are preferable because sellers seem to be looking for the path of least resistance to closing. If you can indicate that you have cash on hand, it helps assuage the seller’s concerns.

“If you're not a cash buyer, what you have to be doing is making a statement to the seller as to exactly how much cash you are willing to bring to closing, in case the house doesn't appraise for the offer price,” Lisa recommends. “That’s a major factor in why people are getting outbid.”

Strategy 4: Re-tool your mortgage to get lending credits

It’s always a good idea to have an in-depth discussion with your mortgage advisor about all your options. Lender credits can be the way to go if home buyers want to bring more cash to the closing table. In exchange for a higher interest rate, lenders can give you money upfront to offset closing costs. 

“A lot of buyers have figured out that with interest rates so low, they can take a slightly higher interest rate and receive a lender credit to put towards closing costs. That’s helping my first-time homebuyers who don’t have a lot of money on hand,” explains Katie.

Problem 3: Buyers have an FHA loan

Cash has often been king for 2021 home sales, which have put FHA loan home buyers at a disadvantage. FHA loans allow buyers to put down as little as 3.5%, which can help first-time homeowners who may not have a lot of cash on hand. The downside is that homes are often going to buyers who can pay 15% or more over asking - which is often impossible for these borrowers. 

“When you have FHA loans or VA loans, those are really difficult to win with right now,” observes Katie. “People have the cash to waive appraisals. I work with a lot of first-time homebuyers, and they just don’t have the money to do that.”

Strategy 5: Work with an experienced agent who can access unlisted homes

In this crazy market, you’re going to want to work with a Realtor who's willing to go the extra mile to get you a home. For FHA loan home buyers, this is especially important because the typical avenues to homeownership may not work right now. 

“An important key to buying real estate right now is having an agent who will do more legwork than just looking at the MLS,” explains Katie. “As an agent, you’ve got to reach out on social media to other agents, or to your sphere of influence. In this market you have to have an agent who’s willing to dig and dig to find a house; that’s the only way you’re going to get one on your terms.”

Rather than simply looking for homes that appear on the MLS, experienced agents can tap into their network of associates to find homes that aren’t even listed yet. “It’s more work on our end, but otherwise we’re going to sit here and not have a sale,” notes Katie.

Problem 4: Other buyers are waiving inspections

According to data collected by Redfin in 2020, about 30% of successful offers that month waived inspections. Although this data was specific to four popular regions - Boston, Portland (Oregon), Washington, D.C., and the state of New Jersey - real estate agents say this has been happening all over.

It can be extremely tempting to waive the inspection on a home you love, especially if it seems to be in decent shape/is relatively new/or is available at a good price. Consider, though, that a home is one of the largest financial transactions you’ll likely complete in your life. Even if there’s only a small chance that there’s a shifting foundation or a rotting roof, you’re risking a huge chunk of your financial security. 

“I will never, ever recommend waiving an inspection no matter the house,” advises Lisa. “I don't think many people are considering that when inspections are waived, it leaves all of the involved parties open to post-settlement litigation. Taking a closer look actually passes the liability from the seller and the buyer to the home inspector. It's always the buyer's choice but in my mind, waiving an inspection is not a wise decision.”

Strategy 6: As-is with right to terminate

Katie recommends a compromising approach. “I have all my clients write ‘as is,’ with the right to terminate,” she explains. “So they can still do inspections, but the home is 'as is.' They have the right to walk away but they’re really just looking for something major - they’re not nitpicking.” 

Although it’s not waiving an inspection, this move can reassure sellers that you’re not going to ask for $10,000 off the selling price due to a loose shingle.

Make buying a home your priority

If you’re planning to buy a home this year, be prepared to treat it like a second job; this isn’t a buyer’s market where you can comfortably schedule a showing for a weekend that’s more convenient to you.

“What our team is seeing in the field is that the buyer has to schedule a tour within the first six to eight hours of that house being on the market, otherwise you're not getting inside that house,” warns Lisa. “You have to act very quickly to schedule your appointment and in most cases, there will already be a deadline for offers already expressed in the listing.”

Once you view a home, you’ll need to make a decision very quickly about whether you want to bid on it.

Come to the market ready and prepared to buy.

• Get pre-approved for your mortgage
• Schedule tours immediately
• Bid competitively 

Real estate agents recommend: Don't give up

It’s not an easy time to be buying a home, even if it’s an exciting time to be buying a home thanks to exceptionally low mortgage rates. 

“Buyers shouldn't get discouraged if they do get outbid - they just have to keep plugging at it,” advises Katie. “If they get outbid, they should ask their agents why they lost it, if they can, so they can learn what to do differently next time - and hopefully it doesn’t just come down to price every single time.”

For further reading

• Should I Buy a House in 2022? The Answer, Surprisingly, Is Yes.
• FHA Loan Limits Increase in 2022: Why It's Good for Homebuyers
• Will the Housing Market Crash in 2022? Don't Count On It - Here's Why