Similar to other industries, the US housing market is influenced by supply and demand in real estate. Whether it is a buyer’s market or seller’s market depends on these real estate market trends.
A common question that real estate investors ask is whether they should purchase an investment property in a seller’s market or wait for a buyer’s market to come around. Before we answer this question, it’s important to understand what a seller’s market is.
The Definition of a Seller’s Market
A seller’s market in real estate occurs when the demand for investment properties for sale exceeds the housing inventory. This means that buyers that are looking to buy a real estate investment or a primary residence outnumber the homes for sale available in the market. Multiple offers on a single home is a common characteristic in a seller’s market, which ultimately leads to bidding wars.
On the other hand, a buyer’s market occurs when the properties available for sale exceed the number of people that are looking to buy. With such low demand, real estate investors and buyers can end up negotiating for property prices below the market value.
How Do You Know If It’s a Seller’s Market
A good way to classify and measure the real estate market is to consider the sales-to-new listings ratio. This ratio compares the number of sales in the market to the number of listings, revealing how much demand there is for property in any specific area. In a seller’s market, this ratio is normally 60% or more, which means six or more sales for every ten new listings.
Another way of determining whether it is a seller’s market is by looking at the number of months of inventory (MOI). The MOI is essentially the rate at which homes are selling in the market. So, how many months of inventory is a seller’s market? A seller’s market occurs when the MOI is four months or less.
Should I Buy Real Estate in a Seller’s Market?
So, you have decided that the real estate market of your choice is a seller’s market and now you’re curious “Is it a good idea for me to buy in a seller’s market?” Buying an investment property in a seller’s market can be a very intimidating thought, particularly for new real estate investors. Nevertheless, this should not stop any investor from understanding how to buy in a seller’s market. Even if the prices are high and there is a lot of competition in a seller’s market, you can still find a great real estate deal.
Also, some housing markets are not likely to slow down in the near future. Therefore, buying in a seller’s market would be smarter than hoping for a miracle. If you wait too long, the prices might be even higher than they currently are.
7 Tips for Buying a House in a Seller’s Market
Instead of sitting on the sidelines and letting real estate deals pass you by, figure out the best way for you to buy in a seller’s market. Here are our 7 tips for buying an investment property in a seller’s market:
1. Understand how to find the best investment properties for sale
Locating the right property in a seller’s market is not easy. However, platforms such as vrmco.com will make your property search faster and stress-free. Using VRM Mortgage Service’s Property Finder, you can locate foreclosed and VA owned properties within minutes. Investment properties can be assessed by looking at listing price, cap rate, occupancy rate, rental income, and cash on cash return. You can find rental properties that meet your expectations in terms of return on investment, property type, and optimal rental strategy. With our real estate investment tool, you will be able to easily find the best real estate deals, even in a seller’s market. Try it out for free now.
2. Get pre-approval for financing
When it comes to purchasing a rental property in a seller’s market, speed is imperative. In the most competitive real estate markets, you may not have more than a couple of days to submit your offer after seeing the property. To improve your chances of closing the deal, you need to get pre-approved for financing well in advance. Getting a pre-approval means the lender determines your ability to buy a property for a particular amount. Approval for a mortgage is determined by factors like your credit score, debt-to-income ratio, and income. Having proof of funds will show the seller that you are qualified and serious about investing in real estate. This will help you come out on top in a situation where there are multiple offers on the table for a property.
3. Choose an experienced real estate agent to work with
Although you don’t necessarily need a real estate agent to buy a home, working with one gives you an advantage when looking in a seller’s market for the most profitable investments. Work with a realtor that is familiar with your desired neighborhood and has a proven record of winning offers. Your real estate agent should also have the following skills:
- Honesty and integrity
- Negotiation skills
- Communication skills
- Knowledge of how to navigate a seller’s market
You can find the appropriate agent by searching online or asking for referrals from friends and family. Working with a good realtor agent will save you lots of time and stress.
4. Keep your offer simple
Many offers can come with contingencies that need to be taken care of before the real estate deal closes. This could include things like the home inspection, appraisal, title search, and mortgage contingency. When considering offers, sellers view contingencies as potential opportunities for the deal to fall through. As a result, they are more likely to go for an offer that has a lower risk of potential hang-ups. In a seller’s market, buyers should make their offer more competitive by reducing or removing contingencies altogether. Nevertheless, consider the level of risk you are prepared to take on when putting together your offer. For instance, eliminating an inspection contingency means that you are ready to buy the property regardless of the state it is currently in.
5. Make an offer they can’t refuse
In addition to eliminating or reducing contingencies, buyers can make their offer more attractive in the following ways:
- Be flexible on the closing date – Being considerate of the seller’s schedule will make you stand out from other potential buyers
- Put down a larger down payment – This will show the seller that you are serious about the deal
- Agree to the seller’s terms – This makes the transaction more hassle-free for the seller. For example, if they have a temporary structure in the back yard they would rather leave behind, allow them to. You can always have it removed yourself later.
6. Offer a solid sales price
In a competitive real estate market, money talks. Therefore, you need to know how much to offer in a seller’s market. Sellers are likely to be more attracted to a high offer price or a cash offer. Since you are competing with numerous buyers, be sure to put your best foot forward. The first thing you need to do is consider as a buyer is the asking price. If the house you’re looking to purchase meets your requirements and is within your budget, skip the negotiation. You could even offer a little more than the asking price to get the seller’s attention. However, make sure your offer isn’t more than the amount indicated in your pre-approval letter.
7. Write a compelling offer letter to the seller
When there is more than one offer on the table, a personal letter to the seller can set you apart from everyone else looking to buy the property. In a few words, explain why you love the house and compliment the seller(s) on how they have maintained it. Tell them what you plan to do to take care of it. Connecting emotionally with the owner through an offer letter will improve the chances of your offer being chosen.
The Bottom Line
Whether you buy an investment property in a buyer’s market or seller’s market, you can still find a good deal. Properties don’t remain on the market for too long in a seller’s market. This is why it’s important to move as fast as possible. With the proper amount of preparation and due diligence, you can boost your chances of acquiring the most profitable investment property on the market.
Use VRM Mortgage Service’s Property Finder to find lucrative investment properties that meet your criteria in a matter of minutes, even in a seller’s market!