Elizabeth's Tips • February 29, 2024

7 Ways to Compete in a Sellers Market

by Elizabeth Pelley

Buying a home is a team sport, and that’s especially true when buyers are facing the kinds of affordability challenges they are now. Volatile interest rates and tough competition for a limited supply of homes are posing unique issues for home shoppers. If you’ve been writing offer after offer — even competitive offers over asking price — and still not getting anywhere, then it could be time to change tactics.

Strategies tied to mortgage products and seller incentives can help buyers, even in situations involving cash buyers or shoppers offering above list price. These tactics won’t apply to every situation, but they offer buyers an idea about the kinds of adjustments to their offers or financing that can make the difference between getting the keys or attending yet another open house. It is important to note that every real estate market and buyer/seller transaction is unique and results may vary.

1. Offer a partial appraisal waiver
An appraisal establishes the current value of a home, and is used by lenders to determine how much they’re willing to lend buyers for a given home. Buyers who make an offer on a house usually include an appraisal contingency that lets them cancel the deal without a penalty if the house doesn’t appraise for the agreed-upon price.

Buyers in competitive markets can be tempted to waive appraisals, but doing so could require them to bring more money to the table at closing if there’s a gap between the price they offered on a home and what an expert appraiser thinks it’s worth. This is because a mortgage is tied to what the appraiser determines the home is worth. Anything over that amount is the buyer’s upfront responsibility.

Instead of waiving an appraisal altogether, some clients agree to pay a specified amount over the negotiated sales price if there’s a gap between the asking price and the appraised value. That way, the buyer can still write a competitive offer, but not to the point of putting themselves at risk of having to come to the table with a big check — or losing their earnest money.

2. Show sellers you’re serious with a “time off market” fee
In a market where it’s common for buyers to lose a home to a competitor who is offering over asking price, there’s an option that could, in some cases, be just as attractive to sellers and potentially less expensive. It’s called a time off market fee.

When buyers make an offer on a home, they typically put up earnest money — a relatively small amount that can be refunded if certain conditions aren’t met.

With a “time off market” fee or TOM, however, the seller keeps the money regardless of whether the deal closes. It’s paid to them for accepting the buyers’ offer. It’s a bold strategy and it works really well. If the buyer doesn’t close, they still have to pay that money.

A TOM fee in place of earnest money, can be more attractive to a seller than an offer over the asking price, especially if the offer would result in an appraisal gap, where the sales price is more than what an appraiser determines a house is worth in the current market.

For instance, a real estate agent negotiated a deal where a competing offer was about $10,000 over the listing price. Rather than match that offer, they successfully made a case that the house was accurately priced based on the sale of comparable homes; an offer above that price would inevitably result in an appraisal gap that could jeopardize the deal.

This competitive offer strategy can be more attractive to the seller, and ultimately cheaper for the buyer, than making an offer $10,000 over asking.

The size of the TOM fee depends on the price of the house, but usually it has ranged from $500 to $5,000 plus. The buyer has to understand what a TOM fee is and be 100% comfortable with it and be committed to that house or willing to lose that TOM fee in the event they don’t close on it.

3. Pay a lender for a lower interest rate over the life of the loan
Buying “mortgage points,” also known as discount points or simply points, from a lender can help reduce the monthly payment on a home. Mortgage points are essentially prepaid interest that is paid at closing in exchange for a lower interest rate over the life of the loan. Each point typically costs 1% of the total loan amount. The more points you buy, the lower the interest rate.

One point generally reduces the interest rate by a specific percentage, often 0.25%. For example, if a buyer applies for a $300,000 mortgage and decides to buy one point, they would pay $3,000 (1% of $300,000) and receive a reduction of 0.25% on their interest rate.

Buyers considering this strategy should consider how long they plan to stay in the home, how much they’ll save by reducing the interest rate and how much money they’ll have to spend upfront. A loan officer or financial advisor can help determine whether buying points makes sense for you.

4. Pay a lender to temporarily lower your interest rate
Another way to lower a monthly mortgage payment is to cut the interest rate for the first one to three years of the loan. The most common mortgage product to do that is a 2/1 buydown. It allows a borrower to ‘buy’ a lower interest rate for the first two years of their mortgage by prepaying a portion of the interest on the loan. For example, a borrower who applies for a 30-year, fixed rate mortgage at 7% can lower the mortgage to 5% the first year and 6% the second year by pre-paying the interest they would have paid at the 7% rate for those two years. The mortgage then reverts to 7% in the third year.

It’s important to note that the buydown cost is separate from other closing costs, and can be paid for by the seller, builder or buyer. Buyers who adopt this strategy either plan on interest rates dropping so they can refinance or on their incomes increasing over the two years that the lower rate is in effect.

Loan officers can provide accurate and up-to-date information on the cost of a 2/1 buydown, and provide specific details based on different loan amounts, interest rates and loan terms.

5. Bump up the offer price in exchange for a lower, seller-subsidized mortgage rate
This tactic is most effective when negotiating with a seller whose house is not selling as quickly as expected or when the market favors buyers.

Example: Offering about $8,000 over list price and asking the seller to credit that money back so the buyer can purchase a lower mortgage interest rate from their lender at closing.

In effect, the buyer increased the loan amount so they didn’t have to pay out-of-pocket to get a lower rate. The result: a lower monthly payment and the ability to spread the cost of the buydown over the life of the loan.

There’s a risk if it doesn’t appraise at the higher amount, but if you can use that money for a 2/1 buydown, or just buy the rate down by a certain percentage point, you can lower the monthly payment.

The 2/1 buydown temporarily lowers the mortgage payment for two years while buying points lowers payments over the life of the loan.

In the mentioned example the client was able to buy down the mortgage rate by 1.5 percentage points, putting them in a better position on their mortgage payments than if they’d paid the listing price without the lower interest rate.

6. Ask for a lender credit to buy down the mortgage rate
This is where professional relationships are especially important. Agents who work closely with lender partners can help buyers make a better, more competitive offer in neck-in-neck situations, he says.

While some of these scenarios may seem complicated, an experienced agent and loan officer can talk through options. Buyers who want to explore different scenarios can do so with the many resources available.

7. Consider new construction
While buying new construction isn’t a competitive offer strategy, it provides one avenue for more affordable mortgage rates. The added bonus: in certain markets there is less competition, no bidding wars and clients get a brand new home. A lot of builders offer great incentives with in-house financing, such as a 4.99% interest on financing. The rate was about 2% lower than the rates on a 30-year mortgage.

While builders might hold firm on the asking price so as not to affect prices on homes in the rest of the development, they may be more willing to negotiate around concessions and financing.

Whether you’re in the hunt for a home or you’re still in the dreaming phase, it can help to familiarize yourself with strategies on making competitive offers in a sellers market, so that when the time is right, you know your options — be sure to talk to your agent to know for sure. Every tactic comes with some degree of risk, and it’s critical that buyers understand tradeoffs and consequences and how the tactics fit into the bigger picture.

Why should you buy a home? Well, it’s hard to say without knowing a few details about your individual situation, but the below list will seek to cover some of the best reasons one might decide to become a homeowner.

10. It’s yours.
Seems simple enough but think of the greater implications of that particular statement. If you want to paint zebra stripes on your wall, turn your garden shed into an Airbnb, or do laundry at 3 a.m., there will be no one to stop you. It’s your home. Your investment.

9. Personal Finance.
Most first-time homebuyers are astounded to learn just how little money is truly needed to get to the closing table. There are so many different programs, loans, and services to help first time buyers succeed in their goal of homeownership, without the need of the assets or equity that a seasoned buyer might have at their disposal. There’s also the cost of the monthly mortgage payment itself. Another shocking revelation for a lot of people is the fact that their mortgage payment is often comparable or even less than a month’s rent. Plus, you’ll have the benefit of a fixed rate, so you don’t have to worry about a large increase in your monthly payment. Yes, you might have to cut the grass and you’ll be on the hook for repairs but any work or improvements you do to the home are likely to work in your favor on a resell. When you rent, you’re essentially making someone else’s mortgage payment. This means you get neither the risk nor the reward of ownership.

8. Its investment potential.
We may have touched on this a little in the previous couple paragraphs, but it bears repeating: when you make improvements to a property you own, you’re setting yourself up for a bigger payout down the line if you choose to rent out or sell. Whether you’re buying your primary residence, a potential rental, or a flip, there’s a lot of opportunity to build equity and personal wealth.

7. The market is right for it.
There are simply times in history where buying is the absolute best decision you can make. Let’s look at interest rates for example. The average interest rate for a 30-year loan is hovering at around 7% right now. Yes, that’s higher than where things were this time last year. However, it’s still much lower than the historical high of just under 19%, in 1981. In the year 2000, they were at about 8.5%. Worst case scenario: pay your mortgage on time, build some equity, and carefully manage your consumer credit and you can always refinance for a lower percentage rate later on.

6. It’s the right time in your life.
If you’ve been thinking about buying a home for some time, it feels right, and you have the means and support to do so, why not? Your local trusted REALTOR can help you address any lingering questions and concerns you may have. Even if you’re not ready to say, “yes,” why not see what’s available? You have nothing to lose.

5. You need more space.
If you own your property, you won’t have to fight for a parking space or access to extra storage for items inconvenient to store in your unit like a bicycle, motorcycle, kayak, ladder, etc. Plus, if you’re marrying, taking a roommate, or expanding your family, you might need an extra bedroom or two. Find the home that best suits your needs while keeping your monthly expenses under budget.

4. It’s an experience.
While it may seem irresponsible to make such a large purchase purely for the experience of doing so, you can certainly learn a lot from homeownership. If you’ve always wanted to try your hand at drywalling, stone masonry, carpeting, minor electrical and plumbing, painting, flooring, roofing, decking, or landscaping, there’s a good chance you’ll be getting acquainted with a little bit of all of it in your first home! The good news? You learn some new skills or at least enough to patch things up while waiting for the professionals to do a proper fix. Of course, if you get really good at something you can save money with a little old- fashioned DIY. Owning a home almost certainly guarantees a unique and rewarding experience.

3. Stability.
Maybe you’re just tired of moving or you really want to settle down in one place and build a stable life. You might be tempted to relate homeownership to an anchor, keeping you held in place, but what if you want to be held in place? If you like the neighborhood, you like the town, or you just adore the house and you can see yourself living there when you’re 25 and when you’re 85, maybe it’s time to commit to it. No one really knows what life has waiting around the corner and there are always refinancing or selling options. However, if all things go according to plan and you can’t stand the thought of toting your vinyl record collection up another set of stairs, there’s nothing wrong with settling down.

2. The available support.
There are a lot of great REALTORS and support tools out there to help you assess your homebuyer priorities. Sometimes, just speaking to the right person can be enough to help you make a decision one way or another. They’ll show you the ins and outs of homeownership and connect you with affiliates who provide services in financing, settlement, closing, and insurance. When you’re your own personal advocate, the process can feel tedious, daunting, even impossible. Getting that critical support might be all it takes to change your mind about everything.

1. The market is coming back, big time.
That’s right. Don’t let the unprecedented market fluctuations that have defined the post-Covid era deter you from achieving your goal of homeownership. It’s not 2021 anymore. Buyers began to hesitate as homes entered and left the market in hours with offers well above asking price. What we’re seeing now is a market correction of sorts. Homebuyers are much more likely to have successful bids. If projections hold true, the market is going to take off toward the end of the year. Why wait until then when competition is up again? If you’ve been thinking about making a move, the board is all yours.

7 Signs You’re Ready To Buy

1. You Want to Get to Know Your Neighbors

2. You Want to Customize Your Space

3. You Want More Space or Amenities

4. You Regularly Drive by Your Favorite Neighborhoods

5. You’re Eager to Put Down Roots

6. You’re Constantly Browsing Home Improvement Sites

7. You Have Money Saved Up for a Down Payment

7 Ways to Compete in a Sellers Market

Invest in Yourself by Owning a Home

Should Baby Boomers Buy or Rent After Selling Their Houses?

Your Home Equity Can Offset Affordability Challenges

Today’s Housing Market Has Only Half the Usual Inventory

Four Ways You Can Use Your Home Equity

The Impact of Seasonality on the Real Estate Market

Evaluating Your Wants and Needs as a Homebuyer

Top 10 Reasons to Buy a Home

Home

Properties

About Me

Blog

Neighborhood News