John Kelly
(651) 238-5649

Buying a Home in a Buyer's Market


Of course everybody has heard that this is a buyer's market.  But not everybody knows what that means, or what's unprecedented about today's real estate market.  Historically, a buyers market has simply meant a market where there were too many sellers and too few buyers.  One way to quantify this is to say that a buyers market is when the current inventory of homes equals more than the number of homes expected to sell in the next 5 months.  We have that situation now in most of the Twin Cities metro area, but I remember having too many sellers and too few buyers back in the 80's.  This market is different.  In fact I would suggest that this real estate market is unique in having low interest rates, and attractive financing options, and at the same time still having a shortage of buyers.

In previous markets, I remember that low interest rates were a mixed blessing for buyers.  Every time interest rates went down, home prices went up and homes sold faster.  It seemed that lower interest rates benefited sellers more than they benefited buyers.  As I recall, my sellers spent more time hoping interest rates would fall than my buyers did.  I remember when interest rates finally fell below 10%, sellers and home builders were thrilled-they knew that it would benefit them.

In today's market, with rates hovering around to 5%, it's hard for me to get too excited when they move up or down by a fraction of a percent.  I remember doing deals at 12%, so anything close to 5% sounds pretty good.  Considering that mortgage interest is tax deductible for most people, and that homes are priced substantially lower than just a few years ago,I think this is a great time to be a home buyer.  People with dinged up credit might argue with me about that, and it is true that many of their options have dried up.  So it would probably be more accurate to say that for buyers with solid credit, this market has everything they could hope for: great financing options, motivated sellers, and an abundant inventory of homes in the Twin Cities to choose from.

I believe that the confluence of lower home prices and low interest rates is a unique occurrence.  It is at least unique to me in my 20 years as a Saint Paul area real estate agent.  In all endeavors, unique situations lead to unique opportunities--but only for people who are informed and ready to act.  There are several things buyers can do to take advantage of the current real estate market in the Twin Cities.  If you can't do all of them, do as many as you can.

Get Pre-approved for a Mortgage:

I know everybody has already told you to do this.  Just about every mortgage lender has a website discussing how important this is.  But after I reiterate all of the important and true things that they are going to tell you, I want to share with you a couple of things they probably aren't going to tell you.  Meeting with a banker, getting a good faith estimate, and getting pre-approved will help you know where you stand.  You'll have an idea what your monthly payment will be, and what your closing costs will be.  Of equal importance, you will be in a stronger position when you begin negotiating with your seller.  Sellers love to know that the financing has already been approved by a reputable lender.  They are more likely to consider less than full price offers when they can be assured that everything is going to go smoothly, on time, and with no surprises.

Now here is where your mortgage loan officer might not tell you everything, or where different loan officers might tell you different things.  The established Twin City lenders are going to tell you how important it is to work with a reputable, local bank.  This part is true.  Your sellers will be more impressed with a pre-approval letter from a local bank than they will with one from an out of state bank that you found on the internet.  Also, their agent will remind them that the underwriting, loan package, and other closing documents should be taken care of locally; there are fewer last minute surprises that way.  But a short internet search will find that there are many lenders claiming to have lower interest rates, or lower fees.  So which side should you listen to?  Both sides!!  It isn't just sellers and Realtors who are facing slow times right now.  Mortgage bankers are finding that they need to be more competitive too.  There is absolutely nothing wrong with shopping rates and terms.  The internet is a great place to shop interest rates, but it is a bad place to choose a lender.  Take the rate and terms you find on the internet, and see if a local, reputable lender can match them.  If they can, that's great.  If no local lender can match what you find on the internet, then that should tell you something too.  Some things really are too good to be true.  Use a local lender, but don't hesitate to negotiate the best terms you can get from them.  Even if they can't match something you found on the internet, just letting them know that you're shopping will ensure that you are getting their best rate and best terms.

Be Flexible:

I'm not saying you should buy a home you don't like, or live somewhere you don't want to live.  I'm just suggesting that if your goal is to get the best deal possible, you want to keep your options open.  Especially for first time buyers, part of your search criteria should be to find a home that is a great value.  The more doors you leave open for yourself, the more likely you are to find a great value.

When I mention being flexible, most buyers assume I'm only talking about the features and location of the home.  But being flexible in terms of time will also help you take advantage of today's market conditions.  If you absolutely need to close on a home next Thursday, you need to understand that you just limited your options.  On the other hand if you can be flexible with time it will help you in two important ways.  First of all you'll have more homes to choose from.  Secondly, you can use time to your advantage when negotiating with a seller.  By offering to close when they want to close, you just made the other terms of your offer more acceptable to your seller. Right now there are many foreclosed homes for sale.  Banks appreciate non-contingent offers with quick closing dates.  On the other hand, traditional sellers have varied needs as far as closing dates.  Find out when they want to close.  If you can accommodate their closing date, then you're in a better position to ask for what you want.

Learn to Think Like a Seller Part One:

If you can understand what sellers want, you are in a better position to negotiate with them.  Give them a pre-approval letter.  Close when they want to if you can.  This will help you get the price and terms you want.

Learn to Think Like a Seller Part Two:

This part is much more important than part one, because in my experience most buyers understand part one.  You need to think like a seller, because someday you're going to be one!!  In this uncertain economy that day is coming sooner than expected for many home owners.  You don't want to own anything that you couldn't sell if you had to.

Almost all buyers understand the importance of knowing what's for sale and at what price.  It's true they do need this information.  And this information is easily accessible on most St. Paul area real estate websites, including this one.  The problem is that having all of this data readily available gives buyers a false sense of security.  It can be a powerful feeling to sit at a computer and instantly see all of the active listings in your price range.  Buyers think they are searching the entire MLS, and that they have all of the information they need.  Nothing could be further from the truth.  The most important information on the MLS is not available online to consumers. A smart seller would never make the mistake of using only active listings to decide what their home is worth.  But buyers make this mistake all the time.

When determining the value of a home, there are a several pieces of information that must be considered, and almost none of them are available without the help of a professional real estate agent.  The most important piece of information is accurate data showing what similar homes in the same neighborhood have recently sold for.  MLS data will show how long the homes took to sell, their list price, sale price, and how much the seller contributed to the buyer's closing costs.  A look at "pending" listings is next in order of importance. "Pending" means there is a signed purchase agreement, and that a closing has been scheduled.  You won't know what the actual sale price is until it closes, but a search of pending listings is critically important, because it shows what is happening right now.  And the ratio of pending listings to active listings gives you an idea of how many buyers you're competing against.  I'd also want to look at expired and cancelled listings.  If there are a lot of similar homes that are failing to sell at all, you want to know about it.  As far as establishing value, homes are definitely worth less than the list price of similar homes that failed to sell.  The expired and cancelled listings at least show you what you don't want to pay for a home.  And if there are too many expired and cancelled listings surrounding the home you are interested in, you might want to consider another location entirely.

Before taking a listing, all competent real estate professionals go over all of this information with their sellers.  It's really impossible to establish value without a detailed analysis of sold, pending, expired, and cancelled listings.  Of course agents and sellers consider active listings when they determine value, but the smart ones understand that active listings are only one piece of the puzzle.

So what does it mean to think like a seller?  Educated sellers list their homes with somebody they trust to represent their interests.   They have their agent prepare a detailed market analysis that considers sold, pending, expired, and cancelled listings as well as active listings.  I see too many buyers do just the opposite.  Many of them don't even retain a  buyer broker to represent their interests.  And even buyers who do have their own agent representing them generally don't demand the same level of accountability from their agents that sellers expect. For the last several years, I watched too many people buy homes that they never would have purchased if they had seen all of the data that sellers typically are given.  I can only assume that the buyers didn't know what to ask for and that their agents found it easier (and more profitable) not to give it to them.

Write non-contingent offers:

I mean non-contingent on the sale of a home you already own.  If you're interested in  purchasing a foreclosed home,you should know that banks generally won't even read contingent offers.  In fact all sellers prefer to look at non-contingent offers.  When you write a contingent offer, what you're really saying is "maybe I'm going to buy your home."  The word maybe is a real downer for sellers.  They understand how tough this market is, and now you're asking them to trust that you'll get your home sold.  And you can't even promise when you're going to close, because that depends on what you can negotiate with a buyer you haven't even found yet.  Even if you do get a seller to accept a contingent offer, the chances are that you could have negotiated a lower price if you had presented them with a non-contingent offer.  And the seller is going to keep marketing their home looking for a non-contingent buyer.  So now you're in a position where you have to sell your home fast--before somebody comes along and buys the one you want. Being forced to sell fast is no way to get top dollar for your home.  So by writing a contingent offer, you'll probably pay too much for the one you're buying, and get too little for the one your selling.

Writing a non contingent offer is easier for some buyers than it is for others.  First time buyers are in the best negotiating position right now because it's easy for them to write non-contingent offers, and they generally can be flexible with time which will work to their advantage.  But if you already own a home you have some advantages of your own, especially if you are moving up to a more expensive home.  Emotionally it is difficult to sell your home for less than you could have very recently.  But I always ask move up clients how it would help them to wait for prices to come back up.  If they get 10% more on the one they're selling and then pay 10% more on a more expensive home they have actually lost money by waiting for a "better" market.

This market is hard on sellers emotionally as well as financially.  But when they think with their heads and not their hearts, they realize that this is a great time to move up to a bigger home.  So their only question is do they get their home sold, and put themselves in a position to be a non-contingent buyer, or do they go looking for homes and write a contingent offer?  The only reason I would ever write a contingent offer is if my needs for my next home were so specific that I was afraid I might sell my own home and then not find anything I wanted to buy.  This just isn't happening right now to very many people.  There are too many homes for sale in almost every price range.

If you own a home, you need to decide whether to sell first and then buy, or write a contingent offer.  Here's how you decide.  Become educated on what's available in your price range.  Chances are there are lots of sellers who would welcome non-contingent offers.  In this case the decision is easy:  Get your home sold, and now you're in position to negotiate a good deal on your next home.  On the other hand, if there is only one home that you're interested in, you may need to consider writing a contingent offer.

Search for Value:

Too often buyers ask me how much sellers typically are willing to "come down."  I always tell them that they are asking the wrong question.  Many of the best values sell for close to full price.  And many of the sellers that are willing to accept low offers are still not offering a great value.  As we discussed, you need to know what similar homes are actually selling for--then you're in a position to recognize a good value when you see it.

Have the Sellers Pay Your Closing Costs:

Typically your closing costs are going to be around 3% of your mortgage amount.  Almost all lenders will allow you to have the sellers pay the closing costs.  And a good buyer broker should be happy to help you negotiate this point with your sellers.


Negotiate, Negotiate, And Negotiate:

Times are hard for sellers right now.  Buyers know this.  The smart buyers are taking advantage of this market, and negotiating strongly with sellers.  Be sure to negotiate on price and closing costs.  Also, your purchase agreement should be contingent on an inspection.  If the inspection finds significant problems, you should negotiate again to get the seller to help fix the problem.  Sellers want to hold onto buyers once they find one.  The inspection addendum allows you to cancel the agreement if you're not satisfied with the results of the inspection, so you are in a strong position to negotiate.

Wow, negotiate with the sellers.  That's really innovative advice!!  Well this market has been slow for everybody in the business.  Everybody is hungry, and everybody has to be more competitive.  You should be negotiating with lots of people.  Negotiate with the bank to get the best rate and terms.  They won't be offended--they want your business.  Use a title company that offers competitive rates for title insurance and closing fees.  You can save a few hundred dollars here.  Some of the more expensive title companies will also match rates if you show them a quote from another company.

There is one more place to negotiate.  Negotiate directly with your real estate agent!!  I represent Minnesota's Largest Discount Broker.  So I always have sellers asking me about our low commissions.  Buyers almost never ask me.  They don't think they're paying me.  They're wrong. Without their participation and money there isn't going to be any money to pay anybody at the closing.  It's just not much of a closing without a buyer.  I can't speak for all agents. But when a buyer asks me to share some of my commission I do it more often than not.

Good luck looking for homes:

This is a great time to be a buyer!!  Take advantage of the situation you are in.  If you have any questions please don't hesitate to contact me.

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