I bet you’ve heard people say, “I’m going to wait to buy when housing prices start going down” more than once over the last couple of years. Well, guess what? Housing prices are decreasing, but we aren’t seeing an influx of new buyers. Many of the same people who were waiting for housing prices to fall are now saying, “Interest rates are too high. I’m going to wait for them to go back down.”
Many people will continue waiting for market conditions to be absolutely perfect before they consider buying. The problem is that market conditions will never be perfect. It’s very rare that you’ll ever find a perfect deal. Buyers find great deals when they are actively looking for them. Over the last few years, the economic opportunity was to outmaneuver the competition of multiple bidders to get a home under contract at a historically low interest rate. Now, times have changed.
If you want to get off the sidelines, here are four ways buyers are winning in this current housing market.
Every real estate investor I know agrees that there hasn’t been a better time to negotiate in years! From the beginning of the pandemic through Summer 2022, it was an extreme seller’s market induced by record-low interest rates. When sellers told us to jump, the response was “how high?” Now, the tables have turned. Buyers have the power, especially if a home isn’t listed in great condition.
Here’s what you need to snag a great deal.
Know your goals
Having goals that guide your decision-making is key when looking for a property. Whether that’s cap rate, cash-on-cash return, or cash flow, setting goals will guide you in the home search and negotiations. A strategy I’m helping my investor clients utilize is looking for properties that will break even and pay for themselves, and then how much the property would cash flow or return after a refinance opportunity in the next few years.
If you can get a property at a significant discount now, let it pay for itself, and then get a cash-on-cash return of 10% plus after refinancing at a 5% interest rate (which is conservative), I’d encourage you to strongly consider such properties. Upon refining your goals, you begin to ask, “what do I need to purchase this property at for it to be a great deal?” rather than simply seeing how much of a discount you can get on a property you like.
Find an investor-friendly real estate agent
It all starts with getting a great real estate agent who can help you identify deals in line with your goals. A crafty agent will see the potential to find a property listed outside of your search criteria that fit your purchase price and meet your goals. An agent who can see possibilities, run numbers on your behalf, and pick up the phone to try to put a deal together can help you create a lot of wealth in this market.
Look for distress
I look for listings in markets like these that other buyers may overlook because of specific factors. Some listings are passed over because of obvious things: the home is in bad shape, has a weird layout, has structural issues, etc. What I’m looking for is a little more subtle. Are the listing photos bad? Is the listing description bad? Is it back on the market after a recent purchase, making others think something must be wrong with it? Are the days on market high? Is it simply overpriced? All of these factors can lead to a home sitting, not getting offers, and open up opportunities to negotiate with the sellers of these properties.
Implementing these criteria into your property search will lead to opportunities to negotiate and land great deals. I’ve had the opportunity to negotiate over $100K off of multiple properties in the last few months, but the goals of my clients have guided those negotiations. Get your goals together and get ready to negotiate hard to land a great deal!
Negotiating seller concessions is an extension of the negotiation tactics listed above. Many sellers have circumstances that implicate them to sell their property. In this market, many sellers will have to make concessions to sell. Negotiating these concessions is another great way you can make a deal work. You can get a property under contract closer to the seller’s listed price and plan to bring them down during the inspection period.
If you find unsatisfactory inspection items (which you can be very liberal on what constitutes an unsatisfactory item), you can negotiate with the seller to give you concessions towards closing costs. Those closing costs can be used to actually pay closing costs (lender and title fees), or you can use those concessions to pay down the interest rate of the loan or pay for a temporary buydown.
Many buyers are utilizing 2-1 buydowns these days, which means you buy down your interest rate by 2% for the first year and then have it increase by 1% for the next two years until it reaches the original market rate. Of course, if you can time these right, you could wind up paying the reduced rate long-term if rates come down within three years and you refinance.
Another way buyers are winning in this market is by assuming seller loans.
Rather than getting a new loan on a property, as the buyer, you can assume the current property owner’s loan. The buyer goes through an application process with the seller’s mortgage provider to assume the loan, and the transfer is made if approved.
In almost every case, there is a sizable difference between the seller’s listing price and their loan balance. The easiest way to cover this difference is with cash. Where assumable loans get tricky is if a buyer doesn’t have enough cash to cover the difference between the purchase price and the loan balance. Each lender sets their own rules on how they would go about this. Some will allow a second or “junior” loan, but they set the rules on if it would have to be with them or from another lender.
That said, many properties were purchased or refinanced in 2020 and 2021 and have locked in low interest rates. If a buyer can assume a loan at 3%, that is a huge win. Crafty real estate agents will know the questions to ask sellers to see if the loan can be assumed. Many sellers also list their homes with the loan being assumable in the listing description. A simple keyword search with “assumable” on Zillow or Redfin will give you access to homes with assumable loans on the market.
Seller financing is also on the rise. Rather than going to a lender or bank to acquire a loan, a seller can give the loan to you. This can create a win-win situation because sellers can stop managing a property and create a passive income stream. They also have a good chance of getting the price they want if they can produce favorable terms for the buyer. Buyers have the opportunity to negotiate terms they wouldn’t otherwise be able to, like the down payment and interest rate.
House hackers always win, but they are especially winning in this market. Any other individual or couple buying a primary home has to pay a much higher monthly payment due to interest rates. Fewer homes sold equals more inventory, more days on market, and more opportunities to negotiate on the front end of purchasing a home.
House hackers can get into a home for a much better price in this market. Although their monthly mortgage payment will be higher because of high interest rates, they can mitigate that payment with the income they produce from renting out part of their home.
Builders are desperately trying to unload their inventory as they see the market continuing to decline until mortgage rates reverse. Over the past couple of years, going through a new build process was insane. In some cases, buyers had to put down deposits to be on a waitlist, and builders would reserve the right to increase the price of your home if the market appreciated.
You could not negotiate prices or terms. Now the tables have turned! To get these homes off the books, builders are slashing prices and giving massive credits through their in-house lenders to market lower interest rates. Buyers can negotiate the price as well. I have buyers set to close on a new build this month at $90K less than the original listing price and at a fixed 4.5% promotional interest rate!
The market has certainly changed in the latter half of 2022, but real estate investors always look for opportunities that any market presents, and there are plenty of opportunities in this new environment. I hope these strategies will inspire you to win on your next purchase!
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.