BEING A BUYER IN A SELLER’S MARKET -or- Why would I pay more than it’s worth?

Across the country, and certainly in the Detroit Metro Area, we have been in

what is called a Seller’s Market for a quite a while now. A Seller’s Market in real

estate is often defined as a market having less than 6 months of inventory (the

number of houses for sale). In most Metro Detroit markets, and especially at

family-home price-points, we are averaging inventory levels of less than 1

month! The result: multiple offers, appraisal guarantees, waived inspections,

escalation clauses, etc. – along with rising prices!

Rising prices in real estate are nothing new. Prices have generally risen since

World War II with one major exception – and we had to melt down the entire

economy to do that (see the repeal of the Glass-Steagall Act, but I digress…).

Since about 2014, prices in almost all residential markets have rebounded to

pre-2008 levels and trends. Now, an argument can be made that, adjusting for

inflation, home prices have been relatively flat, and some markets have even

occasionally dropped significantly (consider Detroit, for example). But in the

broadest sense, the actualprice of real estate has generally increased, whether

consumers’ buying power has or not.

So, what’s a buyer to do?

First, understand that in residential real estate, value begins and ends with the

consumer. Whatever a buyer will pay a seller in an open market (with no undue

pressures) is the definition of market value. If many people are competing for

the same house, the offer with the higher price (and better terms!) will likely

win the day. Don’t overthink that concept, but instead, consider this: what is

that house worth to you?  Is this your forever home? Are there factors that

make this home THEhome for you (location, history, design – did I mention

location...?)? If so, and you have the means, you might want to consider what

that extra $10,000 looks like over the next 30 years.

Second, stop thinking that appraisals establish value! In short, they don’t. At

best, an appraisal is a snapshot in time of what the house would likely sell for

in the market up to 6 months ago. Being based on a trailing indicator, you can

immediately see the issue: in a rising market, your ‘snapshot’ of value today

will be out of date tomorrow. In fact, with every sale that occurs over the

‘appraised’ value, the market essentially resets – and that sale will be used as a

comparable property to justify a higher appraisal for the next house in that

neighborhood! At worst, that appraisal will simply be the opinion of the

appraiser (hopefully but not necessarily an educated one) about that home’s

value. Notice that any reference to the buyer’s opinion of value (the only one

that really counts) is not a factor. After all, the purpose of an appraisal is to

protect the future position of the lender – period.

But how can a buyer not ‘overpay’ in a rising market, and still be

competitive? By leveraging the terms of an offer.

An offer involves more than just price. What kind of financing is being offered?

Is the buyer offering an appraisal shortfall guarantee to support their price?

Have you addressed (or do you even know) the needs of the seller? Often, the

winning bid will minimize the risks, or perceived risks, to the seller.  That’s

why they say ‘cash is king’ – less risk for the seller. Cash offers usually do not

involve financing or appraisal contingencies. With proof of funds, it’s as close

to a sure thing as a seller can get, and intrinsically addresses the worst-case

scenario for a seller: accepting an offer that does not close! Not only would a

seller in that case have likely lost the other potential buyers and weeks of

marketing time – not to mention all their downstream plans – but they would

then have to re-enter the market having their ‘pended’ property become

‘active’ again. In the perception of the market (aka, buyers), that conveys a red

flag: “There must be something wrong with the property!” This may or may

not be true, but in almost every case, no matter what the cause, it will

negatively impact the market value.

There are many ways to make your offer more appealing to a seller than all the

rest, and the guidance of a savvy real estate professional is vitally important. It

may be price alone, but more often it’s a comprehensive acknowledgement of

the seller’s needs and fears that will set your offer apart from the others and

get you the house you’ve worked so hard to find.