Since then end of the Great Recession, some properties are selling far over asking price. Many are selling in the first week of marketing with multiple offers, many are going to buyers with cash or very large down payments. This is especially true in areas where there is a low number of properties for sale. In those areas, prices have gone up considerably, since the end of the last recession. Buyers are forced to make quick decisions. How do you make the right compromises?
How to respond to a hurry-up?
Look at these things to determine whether a property is worth buying in a bidding war:
- On-market time of similar properties.
- The price of this property compared to similar properties.
- Perception of the number of buyers who saw it and what they were thinking. (If it is open at an open house, watch the expression of the other buyers.)
Asking prices can be way over or somewhat under what the house is worth, based on a Comparative Market Study. But first, consider that asking price is an awful measure of whether a buyer is getting a good deal. I contend that asking price is a fiction created by the seller or the seller’s agent or both that reflects the wishful thinking of the seller or the seller’s agent, or both.
For a seller or listing agent to identify a price that is compelling for a buyer is both science and art. It is not so easy to find a price that will make a number of buyers jump. The masters and mistresses of the bidding war do just that. The ones who do it well are very good at Comparative Market Analysis (CMA.) It’s done by looking at the properties that are most like the one for sale, the “target.” The like-kind properties’ prices are then adjusted so one can compare apples with apples, by deducting value from the target for things that are worse and adding value to the target for things that are better.
Once they establish a market price, they list the house at or just below the market value, where they expect a number of buyers will respond. The risks: if the price is too high, no war; if the demand is lower than expected, it is hard to bring the price up again (although some do it.)
Before making an offer:
- Establish the fair market value by hiring a true buyer’s agent. (The agent on the team with the listing agent can legally call themselves a buyer’s agent, but I don’t recommend you hire that person).
- Establish the point where you could be overpaying for the house. By knowing the walk-away point, a buyer can go into a bidding war without losing their head.
- The most important thing for a buyer to do is to keep a perspective. If the property is unique (special architecture or special location) there is more reason to go into a bidding war. If the property is typical for the area, consider sitting out the madness.
What about the talk of another real estate recession?
Buying in a rising market, with hints about a recession coming. What to do? If a real estate recession is coming, these are the risks:
Short-term real estate purchases are riskier than buy-and-hold property ownership. When you buy with the intention of living there for five or more years, you spread out the costs of purchasing, selling, and nesting. As a general rule, it costs 10 percent of the property cost to buy and sell it. Those costs include mortgage fees, inspection fees, broker fees, moving costs, and the cost of repair, maintenance, and making the property your own.
If you are buying for the short term, and a real estate recession hits, here are the risks:
- Improve and sell buyers (flippers) are taking on an increasing risk of buying at peak, then having less demand for your improved property.
- Buyers who plan to owner-occupy for less than five to seven years may also find that they have not gained enough in appreciation to break even on the sale of their purchase.
Long-term purchases are less risky during a recession.
If you are living in the house, the decreased market value of it does not affect your life there. In most of Massachusetts, your property value will return after the recession and begin to increase again. If you are living there, and don’t need to sell, you can ride out the decrease in value and wait until your equity has grown again.
If you want an additional hedge against losing money in a recession sale, avoid properties that are harder to sell during a recession. When buyer have more choices, they will refuse compromises that buyers would make during a hot seller’s market. Avoid these:
- One-bedroom or studio condos. This is especially true in places where two-bedroom condos are common in the housing stock.
- Two-bedroom houses. This is especially true in places where three-bedroom, or bigger, houses are common in the housing stock.
- Houses or condos on busy streets or other unpleasant micro-locations, like near gas stations, bus stops, marshy areas..
- Properties with living space in the basement.