There are more than a few hot markets in the country right now. House prices are charging to record levels in many, many ZIP Codes. While that may be good for property sellers, it’s far from the best situation for you, if you’re looking to buy. Your goal should be to avoid paying too much for a house in a hot market. Here’s how you can do that…
Know How Much House You Can Afford
The easiest and best way to do this is to schedule a meeting with a mortgage loan officer, who can let you know exactly how much house you can afford. This is a meeting that you should schedule before you even go out looking at properties.
To get the most accurate mortgage estimate, be prepared to furnish the loan officer with as much information and documentation as possible. This includes income documentation, like pay stubs and W-2s, as well as bank statements. The more information that you provide, the more accurate the estimate will be.
Also, get a pre-approval letter. That will strengthen your case when you make an offer on the house.
The reason for doing this is to make sure that you know exactly how much you can afford to offer on a potential home. In hot housing markets, the homebuying process moves much more quickly than it does in more balanced markets. You have to move quickly when you find a property that you want, and the only way to do that is by having accurate information – like how much you can afford to borrow – right up front.
It would be embarrassing to get involved in the purchase offer process on a home, and later find out that you offered more than you can afford to pay. That can waste a lot of time – yours, the property seller’s, and the real estate agents on both sides of the transaction.
Know General Market Values in the Area
In hot markets, it’s very easy to pay more for a house than it’s actually worth. The best way to avoid that outcome is to know what market values are in the area where you are looking to buy a house.
You can do that simply by checking online sources. A good source for general property values in any neighborhood in the country is Zillow.com. It provides estimates for virtually any property available, even if the property isn’t on the market.
If you’re looking for more specific information, such as final closed sale prices, then check out Realtor.com. They will also provide estimates of the value of nearly any property in a neighborhood, but closing prices are the ones that matter most.
You will want to make sure that any offers that you make on any properties don’t significantly exceed closed property values in the neighborhood.
Don’t Panic Buy
Fearful that they will miss out on buying a home, many buyers panic themselves into buying a house. Sometimes this happens because they hear how quickly houses are selling in the area. Other times it happens because they are pressured by real estate agents to make an offer and close the deal.
Not only can panic buying cause you to pay too much for a home, but it can also force you to purchase a property that isn’t right for you. Should you realize that in the sober days after your offer has been accepted, it may be too late to back out of the deal. This could lead you to close on a house that you really don’t want, out of fear of being left homeless.
Hot housing markets are frenzied markets, but that’s the exact reason why you need to keep your head about you if you’re looking to purchase in one. When you panic buy, you’re out of control, and that’s never the right state of mind to buy something as important as a house.
Bow Out of Multiple Offer Situations – You Can’t Win on These!
One of the unfortunate scenarios that develop in hot housing markets is multiple offers on the same property. You find a property that you like, make an offer on it, and before you know it there’s another offer. There might even be two or three other offers. Not coincidentally, this is one of those situations that leads people to panic buying.
Here’s a typical scenario…
Property is listed on the market for $250,000. Because the market is so strong, the real estate agent advises you to make a full price offer to get a quick acceptance by the seller. But within hours of making your offer, a second offer comes in – also at full price.
At this point, you up your offer to $252,000. But the other bidder comes in at $253,000. To make matters worse, the third buyer comes in at $255,000. The second bidders up their offer to $257,000. The third bidder comes back at $260,000. To win the bidding war, you offer $265,000. Mission accomplished – the other two bidders bow out, and your offer is accepted.
Problem: though your offer was accepted at $265,000, the property appraisal reveals that the property can only appraise at $250,000. Since you’re making a 5% down payment, and the mortgage lender will only recognize the appraised value, you will have to come up with the additional $15,000 in cash up front. To make matters worse, you’ll be the proud owner of a property that is worth $15,000 less than what you paid for it.
Understand something that’s very important: the person who wins a bidding war isn’t always the “winner.”
If you make an offer on a property, and one or more other bids show up, politely bow out while you can. And if there’s already a full price offer on a property, simply move on to the next property.
Look for Properties that Have Been Sitting on the Market for a While
This is your best strategy in any kind of housing market, but particularly a hot market. Even in the most active real estate markets, there are always properties that are sitting on the market unsold. Those of the properties that you should target in your homebuying search.
Look for houses that have been sitting on the market for at least two or three months. The herd of buyers has overlooked such property, and it’s ripe for a good deal. Make an offer on such property at a little bit below the asking price. The idea is to make sure that the final price does not exceed either the asking price or the appraised value of the property. That will minimize the possibility of you overpaying for the home.
It should also follow that you will want to avoid making offers on homes that have just come on the market. In hot markets, those are often the properties that attract multiple bids and sell above asking price.
If you’re looking to buy in a hot real estate market, and you want to make sure that you get a good deal on a home, keep your emotions in check, know the real values in the area, and avoid bidding wars. When the hot housing market goes lukewarm, you’ll be glad you did.