Note: This is the next post in my series of ABCs of buying, selling and investing in real estate. This post is centered around the letter E by exploring expectations and gives some examples of when buyers set them too high in a seller’s market. I set up a fictional character in a fictional scene to explore the topic.
Nancy was eager to start looking for a house. She had been saving for over two years now and finally had enough of a down payment to start the house hunting. She is very picky about what she wants with a want list two pages long. She is looking to get a good price on her home and does not want a fixer upper. She wants a move-in ready home. Nancy tells me all of this during our initial conversation. She asked me if she was expecting too much.
This is what I told Nancy.
A seller’s market is a tough situation for any buyer, much less one with Nancy’s expectations. In a seller’s market, you have more buyers than you have properties available. Our tight seller’s market has had around 2 months supply for at least a year. A healthy market will have six months supply. For buyers in this seller’s market, you have to set your expectations accordingly. Nancy is so excited about buying a house and that is good. Buying a home can be one of the most beneficial investments one can make in their lifetimes. However, Nancy needs to fully understand that a market like this one will be furious and fast. Offers have to go in almost immediately after seeing the property. You do not have the luxury of waiting to make a decision. For example, I called an agent recently to inquire about a fixer upper in an older neighborhood that does not necessary have the best reputation. He told me that he had already received numerous calls about the property and expected to have several offers in his mailbox at the end of the day. This was for a house that was not move-in ready and in a less than desirable neighborhood. For homes that are move-in ready in highly sought after neighborhoods, most listing agents will automatically announce a multioffer situation, before they get any offer at all. It is not a market for a timid buyer. I told Nancy that if she was timid in personality than she might want to continue to save until the market become more healthy, but if she insisted on pursuing a home now. I told her these are three expectations that need to be curtailed.
1. Sales Price – Nancy is a cost conscious house hunter and there is nothing wrong with this approach. Everyone with any sense wants to get a good price on a home. You are talking about the largest purchase in an individual’s life so even a few thousand off market price seems like a solid expectation to have. It is, if you are not in a seller’s market like we are today. Buyers have to realize going into the house hunting that homes are going way over where they were two years ago. In my farm area of the Alliance Corridor (from north Fort Worth to Denton), we have seen a 19% increase in market prices since 2014. Sellers are getting what they asking for their homes and many are even getting over asking price. I was involved in a multioffer deal two months ago where my buyers placed a bid ten thousand dollars above asking price and it was still sent back asking for them to bid higher. Buyers need to reset their bargain hunting expectations to a more realistic level of “we hope to get it at the price it is listed.’ Nancy balked at this advice. She asked numerous questions. Is this really the right approach? What happens in three years when the market turns and the bottom falls out of the market? Won’t my house suddenly be under water (where you owe more than the house is worth). I told her that these were all legitimate concerns, but if she really wanted a house today, she was going to have to risk seeing the house value come back down to earth in a couple of years. I also told her that most first time homebuyers stay in their homes for 8 to 12 years so there was a chance she could live through a downturn and then another upturn before she is ready to move. It depends on her intentions on how long she stays in the home whether she worries too much about the house value.
2. Repairs – It amazes me how many deals fall apart during the repair negotiations, Since Nancy was a first time home buyer, I had to educate her on how this all works. In Texas, all purchases are as-is. The buyer does buy an option period from the seller to get the house inspected and then can send an amendment to the seller based on what is found. Most of the time the buyer will request the seller repair certain items. Some items can be small, like leaky faucets, torn carpet, paint touch ups while other repairs can be major like roof, foundation, plumbing or electricity. Buyers also have the option of requesting consideration such as a lower sales price or closing cost allowance in lieu of the seller making the repairs. No matter what the buyer decides to request when it comes to the repair amendment, the buyer needs to set their expectations that the seller is going to be less accommodating with the repairs in a seller’s market than a buyer’s market. Sellers know that if this deal falls through, they will have other buyers waiting in the wings wanting to put in an offer. Buyers need to look over their list of repairs and classify them into must do, should do and could do. I told Nancy that she can send over as many repairs as she wants but should expect the seller to reject everything but the must dos.
3. List of Must haves – Nancy is like most other first time home buyers I have helped during my career. They have a very long list of Must haves for their home. Most first time home buyers will want all the amenities like fancy counter tops through out the home, nice hardwood floors, large laundry rooms and pantries and a large backyard for Rover to have room to move after being cooped up in an apartment. I patiently listen to all of Nancy’s list as she reads it to me and nod my head to let her know I am listening. I then tell her that she needs to tear up the second page of her list. It is difficult enough to find a home in a seller’s market much less one with a long list of deal breakers. Most buyers will reach this conclusion on their own after looking at several homes, making offers to only lose out to an offer that goes way beyond reason. Buyers will realize that there will have to be some degree of settling for the best they can get in a seller’s market. I tell Nancy that she can still have a list, she just needs to keep it down to less than five deal breakers, the most important ones. I remind her that this is her first home and she will be moving out in 8 to 12 years so she can shoot for more of her must haves in the next house during a healthier market.
In summary, Nancy came to me asking if her expectations were too extreme. I told her that in a seller’s market she needs to be a little more realistic and set her expectations on the sales price of her home. She will most likely not going to find a bargain in this market. Repairs can still be done but she should expect the seller to only grant the ones deemed most severe. Finally, her list of must haves need to be narrowed down to a list of five or less deal breakers, otherwise it would be best for Nancy to keep saving until we see a healthier market.