Three Blunt Truths Buyers Should Learn when Buying a House in a Seller’s Market

Note:  This is the continuing series of posts about the ABCs of buying, selling and investing in real estate.   I choose a letter every week (B this week) and write up a fictional story around it.  The story is fake, but the advice is very real(ty).  

This is a continuation of the post, Three Be’s All Buyers Should Follow in a Tight Seller’s Market.  

Barney has called me to ask about how to function better as a buyer in this tight seller’s market.  Barney was a story time performer for libraries, going around the state doing his act of singing his original kid songs to packed audiences.   He had done well enough to save the needed 3.5% to get a mortgage.  Now, he had done his homework on buying a house and knew we were in a seller’s market with very low inventory.  He had made a promise to himself that he would work quick and fast on making offers on homes and not give up until he got his home.  Barney knew that what he read online might not always be the true nature of the market.  Was it really a seller’s market?  Did the seller’s market mean he wouldn’t be able to find a house?   What exactly were multioffer deals?   What other “truths” did Barney need to know about before he went out to the wilds of the jungle of home buying today.  

This is what I told Barney….

I told him that we had been in a seller’s market for the past several years.   How did I know this?   Real estate experts determine the type of market, either a buyer’s market or a seller’s market, by looking at the inventory of homes available.  The inventory is determined by figuring how many months it would take the current list of homes on the market to sell out.   A good balanced market has a six months inventory.    A buyer’s market is above six months while a seller’s market is below six months.   In the DFW area, we have averaged below 2 months of inventory for several years now.  It is a seller’s market!   We simply do not have enough homes on the market for the numbers of buyers.   Why would a buyer even consider getting into the fray with such a tight inventory?   Prices are way up due to the high demand and low inventory so the incentive is low to get into the market right now as a buyer.  However, if you want a home now, you don’t want to wait.  Frankly, I can’t blame anyone who wants to buy a home.  There is not a better purchase to be made than buying a place you will call home!   To answer Barney’s question then, there some hard truths that buyers will have to face entering into this market.   Here are three of them.  

1. There are not many homes to pick from – Inventory is historically low in the Dallas-Fort Worth area.   When buying a house, buyers have to expect fewer options than they did ten years ago when the market was flush with homes.   Today, you are lucky as a buyer to see one to three homes a week that match your specifications.   A blunt truth is that you will be spending a lot less time looking at homes versus rushing to see it and then get an offer to the seller.  Most homes are selling very quickly so buyers can’t waste time thinking about a property.  You have to go with your gut.  You either want the house or you don’t.  If you sleep on the decision, there will be a good chance the house will not longer be available.   Buyers agents should be ready to go with an offer before even going out to a house with you.  It is a great idea to sit down with your buyers agent to go over the terms found in the Texas Real Estate Commission’s One to Four Family Residential Contract (Resale) (which is what all agents use when making offers). In this way, you have a boilerplate offer that can be quickly modified on the specifics of a particular property.   

2. You might not get the first home you want (or the second, or the third….)  – The low inventory means you might have to less picky about the house you are seeking.   There is a very good chance you will need to put in several offers on homes before you get through with the winning bid.    I have been known to show ten or more homes to a seller, put in multiple offers for the buyers and then finally get a winning bid on a home that was not perfect but checked off enough items off the buyer’s list for them to move on putting in an offer.   Patience and fortitude would be two characteristics that all buyers in this market will need to have in order to remain calm and level headed.   If you can’t be either of these, I would highly recommend putting off the home search and keep saving until the market calms down.   

3. You will end up paying more than you want – Do you have a budget in mind for your home?   If you do, you might want to increase it by 10 to 15 percent.   Homes on the market are going multiple offer more often than not and they are seeing buyers put in outlandish offers in order to get the home.  Of course, the danger here is that you will bid too high for a house and it will not appraise at sales price and then you have to fork over more cash to get the home, or negotiate with the seller to lower the sales price.   It is not a pleasant experience.  It also does not bode well for your long-term financial health as many feel the prices are artificially escalated at the moment and will drop back down in the down cycle.   You will be underwater(owe more than the value of your home)  on your home almost immediately.   

Barney sighed when I was finished.  He said he was aware of these blunt truths when buying a house, but was hoping things had calmed down a bit.  He was not sure if he liked seeing fewer houses and having to settle.  He especially didn’t like the idea of going over budget to get a home.  However, he felt better knowing these blunt truths so he was willing to give it a go for at least awhile before his services were needed again in the libraries.