Home buyers on the hunt this summer might find the process more expensive, competitive and frustrating than ever.
Faced with higher mortgage rates and a market with too many people vying for too few homes for sale, buyers tired of being outbid are searching for any strategies to stand out.
New-home sales fell 16.6% in April from March to a seasonally adjusted annual rate of 591,000, the lowest level since April 2020, the Commerce Department said Tuesday, as higher mortgage-interest rates pressured buyers’ wallets.
On average, a home that sold in April had nearly six offers, up from around five a year ago, according to National Association of Realtors data. Of homes that sold, 61% had an offer price that was above the list price compared with 53% one year ago.
While the Federal Reserve’s rate increases might mean the housing boom is on borrowed time, for now, many buyers continue to find themselves up against investors and all-cash offers. Short of paying cash or overstretching in a bidding war, here are four strategies to consider.
Offer a bigger deposit, down payment or an escalation clause
One way buyers can make their bids stand out is to offer a larger down payment, or just a larger earnest-money deposit, said Kate Wood, a home and mortgage specialist at NerdWallet. Earnest money is a 1% to 2% deposit the buyer makes to show the seller that they are serious about their offer.
Being willing to make a larger deposit than the standard shows the seller that you seriously want the property, said Ms. Wood. “Even 3% could be an attention getter,” she said.
Consider increasing your down payment to stand out to a seller who has received multiple offers, said Alex Lacter, senior communications specialist at Zillow. A larger down payment improves the chances a mortgage gets approved and diminishes any concerns about how large the loan is in relation to the appraised value.
Amy Schinco, a real-estate agent in Omaha, Neb., said buyers often win by using an escalation clause, which means they are willing to offer up to a certain maximum purchase price and beat out the next best offer by a specified amount.
For instance, a recent buyer she represented offered a purchase price of $360,000 and then proposed an escalation addendum saying they would go to a maximum purchase price of $400,000, beating out the next best offer by $2,000. They got the house.
Help the seller
In this market, sellers might be concerned about the time it takes to find another home. To help alleviate that anxiety, buyers can increase their chances of winning the bid by offering a flexible closing date and a rent back, said Lawrence Yun, chief economist at National Association of Realtors.
For example, offer to close in 60 days and give the seller an additional two months to rent the home until a new residence is found.
Joy Jiang, 25, recently bought from a seller in Burke, Va., who needed to stay in their home until Aug. 15. Unlike other buyers with children needing to enroll in school who offered more, Ms. Jiang could agree to their Aug. 15 move-out date and proposed to rent back the home to the sellers until then. She believes her $785,000 bid was chosen over several higher offers because of this flexibility, she said.
Use your real-estate agent’s connections
Find an agent who can help identify off-market homes for sale or “pocket listings” that aren’t yet posted, said Jane Yoo, a financial planner in Oakland, Calif.
For instance, her clients who recently went house shopping in Austin, Texas, mainly targeted pocket listings with the help of their real-estate agent who has a strong local network enabling her to identify off-market homes.
Ms. Yoo’s clients worked with a local lender, too. The real-estate agent recommended the lender since she trusts the loan officer to respond quickly, including on weekends, said Ms. Yoo. This twofold strategy helped them land a home, she said.
Most sellers are nervous about the financial strength of their potential buyers, said Mark Barnes, a real-estate agent in Charleston, S.C.
To help differentiate his clients, Mr. Barnes has asked his buyer’s mortgage-company contact to proactively call the seller’s agent, so they can have a discussion on the strength of the buyer’s finances.
“It seems like a small step, but I’ve seen it help buyers get the home,” he said.
Borrow against your investments to compete with cash buyers
An all-cash offer might be the most effective strategy in this hot market, but that isn’t an option for many home buyers. Those who have brokerage accounts with large balances can use a margin loan to borrow against those assets without realizing capital gains, said Jim Miller, a financial planner in Chapel Hill, N.C.
The strategy isn’t for everyone and can be risky, especially as the stock market declines and volatility increases.
In general, you are able to take a margin loan of up to 50% of your brokerage-account value. Mr. Miller advises clients to borrow far less than their maximum allowed amount so they have enough room in their budget should a margin call occur. This is triggered by a drop in the price of the assets.
A margin loan allows buyers to compete with cash offers and obtain quick, short-term financing. They often then take out a mortgage after the deal closes to repay the margin loan immediately, said Mr. Miller.
With some margin-loan interest rates of around 2% to 3%, compared with a 30-year mortgage rate of more than 5%, these loans are appealing, he said.
Eric Walters, a financial planner in Greenwood Village, Colo., said several of his clients have used securities-based lines of credit as temporary bridge loans to win the bid. This loan is similar to a margin loan but can’t be used to buy securities and typically requires more paperwork.
Via: Veronica Dagher, The Wall Street Journal
