As Mario Castellitto bought homes during the pandemic, he realized he had entered a frenzy of bidding wars and skyrocketing property prices. Before the attorney got a home in Connecticut, he made generous offers on several properties, only to lose out to the most aggressive bidders.
“It was incredibly frustrating,” says Castellitto. “A house would come on the market in the morning, and by noon it was gone.” He persevered and finally sealed a deal by offering $16,000 above the seller’s asking price.
This experience has become common during the post-pandemic real estate market. Too many shoppers chase too little inventory. As a result, buyers offer to pay more than list prices. Those with the means can dangle cash offers and even skip appraisals and inspections. “It’s just bananas,” says Andy Sachs, Keller Williams’ agent in Newtown, Connecticut, and Castellitto’s agent during the house search for him.
The pandemic has created an unbalanced real estate market in much of the country, reducing supply and increasing demand. What’s more, mortgage rates fell to record lows for a while, prompting buyers to raise prices even higher.
Buyers face withering competition
As a result of those forces, prices have risen sharply. Even with mortgage rates now climbing back up, inventory shortages are a national trend. Most real estate markets are experiencing strong demand for a limited supply of homes. Real estate agents from Rhode Island to Texas to California are reporting bidding wars and unseen offers.
For prospective buyers, getting a home in this market isn’t just a matter of paying a little more. The shortage of supply has added a new degree of difficulty and drama.
Desirable properties are being stalked by qualified buyers, says Donnell Williams, owner of Destiny Realty in Morristown, New Jersey. “There are 40 people in line. It’s amazing,” says Williams, who is also president of the National Association of Realtors.
Given that reality, buyers must put on a game face. And homebuyers who need mortgages may find themselves at a disadvantage. “Now you’re competing with cash buyers,” says Williams. “You’re competing with people who say, ‘I’m giving up appraisal.'”
Have a great real estate agent on your side
To navigate such a complicated market, expert guidance is more important than ever. He wants to partner with someone who has seen it all before, who knows how to handle challenging circumstances, and who will fight for his best interests. Hiring an experienced buyers agent is a must, one who can be nimble and fast.
Here are six strategies for buying successfully in an intense seller’s market:
- move quickly
- Complete the mortgage subscription before buying
- Make an aggressive offer
- but do not pay more
- Establish an emotional connection with the seller
- be willing to wait
1. Move fast
The shortage of inventory means that houses are selling fast. Sachs tells buyers to be prepared to tour the properties the moment they go on the market. “We advise buyers to attend the shows on the first day if possible,” he says. “It probably won’t last long.”
Plus, with so many buyers forgoing appraisals and inspections, now is not the time to haggle over minor repairs and other minor pain points. “You want to show the seller how excited he is about the house, without hesitating, without complaining, and without asking a million questions,” says Sachs. The need for speed means that many buyers are also making offers before they even set foot inside a property.
2. Complete the mortgage subscription before buying
In calmer times, a pre-approval letter from a lender satisfies most sellers. These days, pre-approval is no guarantee that your offer will be accepted.
Sellers looking for multiple offers will choose the safest. Sachs’ advice? Go far beyond a pre-approval letter. “If you need a mortgage, make sure you’ve fully underwritten it,” he says. “Then all that remains is for the appraisal to come.”
A preapproval letter is based on a preliminary check of your credit score, but it’s not the final word. “Being fully backed, with just an appraisal to complete the process, is sometimes compared to being as good as a cash buyer,” says Sachs.
3. Make an aggressive offer
In normal markets, the selling price of a home acts as a ceiling. It is a number that reflects the aspirations of sellers, but not necessarily the reality of the market.
In this market, however, the sale price is usually the floor. Castellitto says he lost several Connecticut homes that sold well above asking price.
“You have to do your best immediately,” says Sachs. “You must enter the market or above. If you have the ability to offer cash, do so.” A cash offer usually means fewer contingencies around appraisals, inspections, and continued employment, so sellers view such offers favorably.
4. But don’t overpay
In a market characterized by aggressive buyers, paying too much for a home is a real threat. “When you see that several people offer more than the asking price, the fear of losing something arises,” says Castellitto. “As a buyer, you have to be careful. You can get caught up in that and pay more than the house is worth. I walked away from several houses because they just weren’t worth it.”
Castellitto had been watching Connecticut home prices for more than a year before buying. Until the pandemic hit, the state was a buyer’s market. “The houses would stay on the market for a year,” he says. “You would see them go to market at a certain price, and then they would just drop, drop, drop.”
That’s no longer the case, of course, but recent housing market history has given Castellitto some perspective. While housing economists agree that home values are unlikely to plummet, the Great Recession serves as a not-too-distant reminder of the dangers of overpaying.
For sellers in need of financing, the home’s appraisal can act as a barrier against overpaying. While appraisers understand that values are rising, they are unlikely to assign a super aggressive value to a home. If the appraisal falls short and you still want the house, you’ll have to add more cash to the deal to make up the difference.
5. Establish an emotional connection with the seller
This is not always possible, but it is worth a try. If Sachs thinks the sellers of a home will like prospective buyers, he encourages sellers to stay home for the showing. The Strategy: If the seller makes a connection with the bidder, that offer could stand out from other similar offers.
“Residential real estate is both emotional and financial,” he says. “If you can apply the emotional part, and the sellers can imagine you living in your house, where you raised your children and have good memories, that can give you an advantage.”
In previous sellers’ markets, buyers’ agents have tried to make their customers stand out with “love letters,” personal appeals from the bidder to the seller. This time, Sachs says, his local real estate board has discouraged the practice.
In fact, the National Association of Realtors now prohibits its members from delivering love letters from buyers to sellers. He even advises agents not to read them at all. This is due to possible fair housing implications if a buyer discloses personal information in the letter that influences the seller to accept or reject the offer.
6. Be willing to wait
The intensity of this seller’s market took almost everyone by surprise. If you prefer a more leisurely pace, it might make sense to hit the pause button. “Wait for the market,” says Castellitto. “That’s what I would do.”
Predicting the direction of the housing market is silly, of course, but the housing market may calm down relatively soon.
However, the wait has its own downside: Home values soared 20 percent across the country from February 2021 to February 2022, according to real estate data firm CoreLogic. If that trend continues, prices will go even higher while you wait.