Emboldened by low interest rates, rising rent prices and a stronger sense of job security, more people are making the leap into home ownership. But as they do, many face fierce competition, limited choices and the pressure to act quickly.
The biggest challenge for many would-be buyers is that there are not enough homes on the market. In some areas with low inventory, homes are being snatched up within a matter of hours. That’s despite the rise in home prices, which increased by 5.5 percent at the end of the 4th quarter, 2015 from the year before, according to the most recent data from the Texas Quarterly housing report. “Good for homeowners, not good for potential buyers,” says Lawrence Yun, chief economist for the National Association of Realtors.
In short, it’s getting harder to find a good deal.
More homes are being built, but the pace is still not strong enough to meet demand, analysts say. Construction started on 685,000 single-family homes in June, up 14.7 percent from a year earlier but still close to 40 percent less than what was typical in 2007, according to a report released Friday by the U.S. Department of Commerce.
So what should home buyers do in such a tight market? Here are a few steps people should take to increase their chances of landing the winning bid — and to protect themselves from paying more than they should.
Before you do anything, get a pre-approval letter. You only need to get one. The pre-approval shows the seller that you have been vetted financially. It also gives you an idea of how much of a mortgage you can afford so that you can limit your search to houses within your price range.
In some markets, you may not get to see a house more than once or twice before you move in, so a pre-approval letter also can help you act quickly when you see a home you love. Keep in mind, however, that a pre-approval letter is not a guarantee for a mortgage, brokers say. So be ready to check with other lenders.
Make sure your agent knows the competition. Knowing how many people are interested in the house can help you come in with an offer that will be taken seriously. Your agent can find out from the listing agent how many people came to the open house and if it is likely to receive multiple offers. Something that is too below the asking price or that doesn’t match with the seller’s timeline might get rejected. Your agent can prepare you for a bidding war.
Be flexible with timing. You can improve your chances of landing the home you want if you can show that you are willing to move as quickly — or as slowly — as the seller needs. A seller looking to close the deal within 30 days won’t be too interested in an offer from someone who won’t be ready to move for 60 days. The same for a seller who needs more time before moving out of the property.
Pay more cash up front. Really. Not all home buyers need to put 20 percent down when they make an offer on a home, especially when it comes to programs that are meant to encourage first-time home buyers. Still, you may juice up your offer by providing more money up front in what is called the earnest money deposit. The earnest money is cash provided by the buyer, ranging from 1 percent to up to 5 percent of the purchase price, that gets held in escrow until the sale closes.
The cash works as insurance for the home seller in case the buyer backs out of the deal. If all goes as planned, the money goes toward the down payment and closing costs. It just shows how committed somebody is to that sale. You should ask for clear explanations on how it would work for you to receive a refund and what conditions would cause you to lose the money.