Right now in Montclair, houses are selling for 103% of asking price. Meaning: on average, most sellers are getting 3 percent more than they list their home for. This is great for sellers! But how do buyers protect themselves from considerably overpaying for a house?
I tell my clients there are four things to seriously consider when buying.
1 – Understand the Market Conditions
Most of us are familiar with the concept of supply and demand: The fewer there are of something, coupled with the more people who want the thing, the more expensive the thing is likely to be. In housing, this can be a function of many variables, but I advise buyers to become familiar with the Buyer to Seller Ratio and the Absorption Rate.
The current Buyer to Seller Ratio in Montclair is 37/100, or for every 100 sellers, there are 37 buyers. That’s a lot of buyers for not much housing selection, which means the prices of “desirable” properties are likely to be bid way up.
The Absorption Rate right now is 2.7 months, which means that if no new houses come on the market, the current number of homes will sell out in less than 3 months. An Absorption Rate of under 6 months means that home prices are appreciating; under 3 months means that prices are escalating at approximately half a percent per month. In practical terms: if you bid on a house and lose it, by the time you put in a bid for the next house, it could be 1-2 percent more than it would have sold for a couple of months ago.
The lesson here is, if you find a great house in a rising market, don’t underbid. You may end up paying more in the long run.
2 – It’s Not Only About Price
When you have to compete for a house, you can make your offer stronger by adjusting some of the terms in your contract. If you are savvy about home systems or have family who are in the trades, you might consider waiving your inspection contingency. This can be attractive to sellers for two reasons. 1. They know they won’t be nickel-and-dimed for multiple repairs, and 2. They do not have to be bothered with estimates and scheduling contractors.
If you have the liquidity and you don’t need a mortgage, you can make a cash offer, and waive you mortgage contingency, but you will likely have to show “proof of funds.” Be mindful, however, that in the absence of a mortgage you will not need a bank appraisal, a measure that ensures that the bank is not loaning on a house for far more money than it’s worth.
You can also increase the chances of your offer being accepted by writing a letter to the owners – sometimes an emotional appeal for a beloved house makes you a more popular candidate, especially if the seller has a home that’s been in the family for years and is looking for just the right steward.
3 – Be Aware of Escalation Clauses and Buyer Fatigue
Obviously, if you significantly overbid, you may get the house, but you’ll be stuck with a big price tag. Some buyers include an Escalation Clause in their offer – agreeing to pay, say, $5,000 over the highest bidder. This can work well for some, but it wrests a lot of control from the buyer and often results in Buyer’s Remorse, so most seller’s agents advise against it.
If you underbid consistently, you put yourself at risk for Buyer Fatigue. You’ve lost 10 houses and a contender comes along and, no matter what, you will NOT lose this house. I don’t have to tell you what happens in this scenario. Suffice it to say: you get your house, but at what cost?
4 – Make Your Offer Based on Your Expected Residency
If you pay a bit more for a home than it’s technically worth, you will feel it much more acutely if you’re planning to put it back on the market in 5 years. However, if you’re planning to stay for the long haul, and can ride out market conditions and amortize your investment, most consider the extra money far less of a “real” concern.
One of the things my clients seem to like about me is my interest in educating them about the housing market – in addition to finding them a great home. If you’d like to learn more or have questions about Absorption Rates and Buyer/Seller ratios in other towns– call me! 973.809.5277