The following is a post written by Luke Babich, a guest contributor to the DealCheck blog.
Every real estate purchase is unique, just as every purchase negotiation follows its own blueprint.
But deals take place in the context of the larger market, and whether you’re in a buyer’s or seller’s market can have a huge influence on how your negotiation unfolds. Millennials are learning this now, as they enter an uncertain market of sky-high interest rates and low housing supply.
Understanding each type of market — and turning it to your advantage — can be the difference between a difficult, expensive transaction, and a fast, profitable one. Let’s touch on some basics about seller’s and buyer’s markets, and how smart real estate investors adjust their strategies accordingly.
The Seller’s Market vs. the Buyer’s Market
The difference between a buyer’s and a seller’s market is determined by the ratio of supply and demand.
In a buyer’s market, there’s generally more supply. This could be due to a large amount of new inventory hitting the market (for example, a lot of new properties coming to market at the same time), or it could be due to a decline in demand (like when mortgage rates go up, driving many would-be buyers out).
The fact that supply surpasses demand means that buyers have the upper hand, since sellers know that if they don’t give the buyer the deal they want, the buyer can simply move on to another property.
A recent example of a buyer’s market was the market following the 2008 financial crash. In that market, buyer demand evaporated almost overnight, as banks pulled back on lending and Americans stayed away from an unstable housing market. Sellers who wanted to sell a property had to make big concessions to lure in buyers, and it often took months to finally close a sale.
In a seller’s market, the situation is reversed. Demand surpasses supply, and sellers have the upper hand. These conditions could be caused by a big jump in demand (caused, for example, by low mortgage rates that make it cheap to buy), or a constricted supply (as in our present market, where housing supply is very low following a decade of under-construction).
Sellers have the upper hand because they can pick and choose between multiple prospective buyers. A recent example of a seller’s market is the pandemic housing market, when historically low mortgage rates and a huge number of highly motivated buyers willing to move long distances from the city to the country sent home prices skyrocketing.
Unless you’re using a real estate investing app that makes choices for you, you’re going to have to adopt different approaches for each type of market (but having an app like DealCheck to help with property analysis is still the way to go!).
How Do You Invest in a Buyer’s Market?
A buyer’s market gives you, the investor, a big advantage at the negotiating table. So how do you use that advantage to pick up some great deals?
Make Sure You Get Preapproved
Buyer’s markets are formed when there are more buyers than available homes. You’ll have the advantage just by showing up, but if you can show that you have strong financials by getting a mortgage preapproval letter, you’ll maximize that advantage.
Target Properties That Have Reduced in Price or Changed Agents
If a property lingers on the market, the first thing an agent will suggest is a price cut. So it’s reasonable to assume that properties that have reduced their asking price have failed to get the level of interest that the sellers had hoped for — and that those sellers might be extra motivated to sell.
Sellers that have changed listing agents likely did so because their first agents wasn’t able to get the results they wanted. If they’re on their second (or third or fourth) listing agent, the seller will probably be eager to sell as well.
Negotiate the Price
This is probably a no-brainer, but if you’re a qualified buyer in a buyer’s market, you should negotiate pretty firmly on the price.
How tough you should get depends on the strategy you and your agent agree on. Look at how long the property has been on the market, as well as the final sale prices (and price reductions) of similar properties that sold in the past few months. That should give you a pretty accurate idea of how much of a discount you could get.
Ask for Contingencies
Contingencies are essentially protections for you, the buyer, that allow you to back out of a deal with your earnest money deposit. In a balanced market, sellers are generally reluctant to include many buyer contingencies in the purchase contract since they could sink the deal.
But in a buyer’s market, you should pursue as much security as you can. Ask for a financing contingency (which allows you to exit the deal if your financing doesn’t come through), an appraisal contingency (which protects you against a low appraisal), an inspection contingency (which protects you against any unpleasant surprises from the home inspection), and any others your agent suggests.
Negotiate Closing Costs
In a balanced market, buyers and sellers usually split closing costs. For example, sellers typically pay the real estate commission, and buyers typically pay appraisal fees and title insurance.
But the truth is that closing costs are fully negotiable. If you’re dealing with a highly motivated seller, you can ask them to cover some or even all of your closing costs.
Don’t Be Shy About Asking for Other Credits
If there’s anything you don’t like about the property, address it at the negotiating table.
If you think you’ll replace the wallpaper or the flooring, ask for a credit. If you like the kitchen appliances, ask the seller to throw them in. If you’re getting the appliances, ask the seller if they’d purchase a warranty that will cover the appliances against breakdown for your first year of ownership.
Talk to your agent about all the different credits and extras you can ask for in the closing phase of the home-buying process.
How Do You Invest in a Seller’s Market?
You won’t have much leverage in a seller’s market, but there are still good deals to be found. In many ways, investing in a seller’s market is the reverse of investing in a buyer’s market — with a few notable exceptions.
Loan Preapproval Is a Must
In a seller’s market, the seller has the luxury of being picky about which buyers they entertain.
Buyers with preapproval for a loan will have a much better chance of making the cut than ones who haven’t been to their lender yet. Preapproval letters are only valid for 60 to 90 days, so make sure that yours is relatively fresh when you start making serious offers.
Brace for Competition
Seller’s markets have a surplus of buyers, so it’s a good bet that you’re going to be facing a lot of competition. Don’t be surprised if you’re drawn into a bidding war. Establish your absolute upper limit on price, and don’t let emotions draw you into blowing past it. Accept that you’ll probably lose a few properties before you win one.
There’s not much you can do to make your offer stand out — aside from making it an all-cash offer. If you can swing that, sellers find cash offers very appealing, and will almost always take a cash offer over a financed one.
Make a Serious Offer
On that note, you won’t have a protracted negotiating process to slowly inch toward your best offer. Make your initial offer an appealing one, or the seller may write you off right from the start.
One strategy that can be very effective in a seller’s market is to submit a high initial offer with an inspection contingency. What this tells the seller is that you’re serious about buying, as long as there are no major problems with the place. And if the inspection does uncover something like a faulty foundation or a leaky roof, you’re not on the hook to pay top dollar for a flawed property.
Keep Contingencies to a Minimum
Contingencies give you, the buyer, an out if the deal doesn’t go right. If your financing doesn’t come through, or if the inspection finds problems, you’re able to walk away from the deal with your earnest money.
But contingencies undermine a seller’s confidence and certainty, and in a seller’s market, many sellers may simply refuse to accept them. Make your offer more attractive by taking out any contingencies you can live without.
Be Patient
A seller’s market is, by definition, tilted in favor of the seller. As we touched on above, you may lose several bidding wars before you finally purchase a property. One of the keys to navigating a seller’s market — aside from deep pockets and great negotiating skills — is patience.
It may take a while for you to triumph over the competition, but you can’t win the game if you don’t stay in it.
Summing It Up — Know What Type of Market You’re In
Many successful real estate investors will attest that it’s completely possible to find and close on great investment properties at any time of the economic cycle, no matter if the real estate market is tilted in favor of buyers or sellers.
At the same time, savvy investors will understand the type of market they find themselves in, and will adjust their acquisition strategies and negotiating techniques accordingly.
By being a little more aggressive during buyer’s markets and more reserved in seller’s markets, you can continue growing your real estate portfolio and buying great rental properties or flips year after year.
Luke Babich is a licensed real estate agent and is the co-founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions.
