Real Estate Insight

Secrets for Timing The Real Estate Market – pt. 3

Market Conditions – The Good and the Bad

If this is your third visit looking for the next lesson, congratulations! It shows that you are eager to learn; an essential ingredient of all successful real estate investors. If you are new here, go back and read the previous lessons. We’ll wait. You don’t want to miss any lesson since each builds on the last. This lesson will focus on conditions and types of different real estate markets. You need to understand each because different conditions will dictate different strategies. A market condition can last for months or years. They can also change very quickly. In hot markets, delaying a decision by as little as an hour can be the difference between making or losing thousands of dollars. How do you keep tabs on the current “temparature” of the market? The best way is by carefully choosing your Realtor. If you’ve done your homework and have chosen a Realtor that’s an expert in both his/her market and real estate investing, you will get the most up to date information and conditions. No one has a better pulse on the market than an experienced Realtor.

Types of Real Estate Markets

While there are many variations, real estate markets basically fall into three categories; Buyer’s Markets, Seller’s Markets and Neutral Markets.

This lesson will cover Buyer’s Markets; what is considered a Buyer’s market, the advantages and strategies for buyers.

Buyer’s Markets -A Buyer’s market exists when the inventory of homes for sale exceeds the number of buyers looking to buy homes. Experts agree that “months of remaining inventory” is the best indicator to determine what type of market exists. A Buyer’s market is one in which there are 6 or more months of remaining inventory. The higher the number, the stronger the Buyer’s market. The formula to compute Months of Remaining Inventory is: Total number of active listings divided by the total number of closed or sold transactions for last month. That number will be your Months of Remaining Inventory or MRI.

When the number of homes for sale is up, buyers make the rules. Buyers have more choices, less or no competition; and Sellers know that. In a cold real estate market, serious sellers are more willing to negotiate. Buyers can offer less money and ask for more, including closing costs, contingencies, even inventory. When I bought my last home, it was a Buyer’s market. As I was touring the home I eventually bought, I noticed a beautiful brand new big screen TV in the living room. Joking, I said “how about throwing in the TV?”. Not expecting anything but a chuckle from the owner, he responded without even a pause by saying “Put it in the offer.” Long story short, I now have a $4000 TV in my living room.

If you are a buyer, the best time to buy is in this market. Ironically, during Buyer’s markets, I often hear “I’m going to wait for prices come down even more.” As you learned in lesson 1, no one can precisely time a market. I’ve seen countless people try, only to miss out on another great opportunity. These people sit on the fence looking for the market’s bottom and find it after it’s too late. It’s easy to spot these people. They’re the ones saying “I remember when…, If only I had bought then.” You also learned in lesson 1 that it’s okay to buy “high”. Remember that “high” is relative. If you bought a home considered high at the time for $250,000 and 5 years later it was worth $500,000, does it matter that you bought that home for a “high” price? Not only does it not matter that you bought high, it would have been a mistake not to have bought that home. Everyone wants a deal, but you will never know when the market has hit bottom until it’s on the way back up.

What to Look For

Signs of a Buyer’s Market include: inventory increases each month, there are more than 6 months of remaining inventory, comparable sale prices (sales of recent comparable homes) are higher than active listing prices, the number of closed sales in current month is lower than previous months, median sale prices are declining, properties remain on market longer (DOM).

Buyer Benefits & Strategies in Buyer’s Markets
Lower Sales Price - in a Buyer’s market you will generally see both lower list and sale prices. Buyers many times can get properties at prices below market value. Be careful though. A Buyer’s market doesn’t mean that buyers can offer less for all properties. Buyers must consider other factors including days on market, desireability, scarcity and the list price. If a property was just listed yesterday at a price already below market value and is in excellent condition, that property will more than likely sell at list price.

Concessions and Repairs -in Buyer’s markets, buyers can ask for a lot more. Regardless of the market, all terms of the sale are negotiable; buyers are just more likely to get sellers to agree to give more. Common consessions include having Seller pay Buyer’s closing costs and inspection costs. Buyers can also ask for repairs or credits. Once again, other factors need to be considered. It’s not uncommon to have multiple offers in Buyer’s markets. In that case, a serious buyer would forego asking for much.

Renegotiate the purchase price after the inspection -depending on what is found during the inspection, major repair items can be the basis for negotiating either credits or lowering the purchase price.

Other Strategies - Ask for contingencies. Shorten the period a seller has to respond to your offer. Ask for extras (remember my $4000 TV?). Ask for things you don’t want. If a Seller doesn’t want to give it up, use that to negotiate. “Well, since you won’t give in on that item, let’s lower the purchase price.” Sometimes that works. If it doesn’t, who cares, you didn’t want it in the first place.

Get in the game!

These are just some of the strategies buyers can use in a Buyer’s market. An experienced Realtor that’s an expert at negotiating will know how and when to use different strategies. The bottom line is, if you’re a serious Buyer, get in the game. This is your time. Don’t be the one years later saying “If only…”

Up next – Seller’s Markets

Until then, happy house hunting!

Elliot Lau