Updated by Craig Berry.
Buying a home is part of the American Dream. Buying a home in a seller’s market, however, can make things a bit more challenging.
Homes go relatively quickly in a hot seller’s market, when there simply isn't a lot of inventory.
Unlike a buyer’s market, price isn’t always the main factor that determines who wins in multiple bidding scenarios, says Brad Nix, COO / Owner of Path & Post Real Estate in Woodstock, Georgia.
According to Nix, other terms matter almost as much, if not more, than price. “In a seller’s market, sellers generally assume they’ll get their asking price.”
Here are six things to know when buying a home in a seller's market:
No. 1: Home-buying competition is fierce
From a buyer’s perspective, not only do you have fewer choices in a sellers’ market, you’re likely to have bidding wars, all-cash buyers and quickly escalating prices.
In this type of environment, there are more buyers than there are homes available for sale. Less inventory breeds competition. Gone are the days of lowball offers. In a hot market, buyers need to be prepared to pay full price for a home, or sometimes pay over the asking price. But don't give up if you don’t get the first home you bid on.
"It’s not unusual for buyers to submit three or four offers before finally submitting that 'winning' offer," observes Nix.
Even after your offer is officially accepted, it's best to hold the excitement until after closing.
No. 2: Get a great Realtor
The resources, experience and skills of a realtor are priceless when it comes to buying in a seller's market. Agents offer advice, education, networking and advocate and negotiate on your behalf.
Every detail matters, says Nix. “Working with an agent who’s experienced in these types of hot markets can make all the difference and save you lots of time in the long run.”
Remember, some agents work exclusively with buyers and some have more experience with sellers.
"You definitely want your own agent who can guide you in the process, tell you how and what to offer," advises Brendon DeSimone, real estate agent with offices in San Francisco and New York City and author of “Next Generation Real Estate.”
Your buyer's agent may have a relationship with the listing agent of a home you're putting a bid on. If you're using a well-respected buyer's agent, it can make a big difference and get your name at the top of the list, according to DeSimone.
DeSimone says that listing agents are often more apt to go with a buyer whose real estate agent is reputable and can get the deal done efficiently, especially if the seller needs to turn around and purchase a home quickly after the sale.
A good buyer’s agent knows how to set proper expectations according to the market they are in.
Preparing the buyer for a more difficult home-buying process than they imagined is also a crucial part of an agent's job, notes Rigsby. "You want an agent who tells you very bluntly what to expect and how to prepare for the harder parts of the process," she explains.
How do you know if you're in a seller’s market?
To see whether or not your local area is a seller’s market, Caroline Rigsby, Realtor for Zeitlin & Co., Realtors in Nashville, Tennessee, says to look at the market absorption rate, which is usually measured by using at least six months’ worth of housing data.
This is done by counting the number of sold and pending sales in a particular neighborhood going back six months. Then, divide by six. You then count the number of active listings and divide the former result. If that number is great than six, it’s a buyer’s market. If it’s less than six, it’s a seller’s market.
No. 3: Preapproval letters are important
"Preapproval letters are key to the home-buying process," says Kim Kerbis, broker associate at @properties in Chicago.
Anyone can make an offer, she says, but a true, bona-fide offer has either a preapproval letter or proof of funds documentation.
Nix agrees: "If a seller is going to take their home off the market to accept your offer, pre-approval strength is key because if that deal falls through, you’re costing that seller tons of money. Not only will pre-approval letters help you compete, they will give you parameters for what you can buy.
In a seller's market, you're going to be competing with other buyers who are going after a small amount of inventory. Buyers who are pre-approved, working closely with a mortgage professional are the ones who are going to get that home.”
Kerbis recommends including the contract, a mortgage preapproval letter, a copy of initial earnest money check, any signed disclosures and a personal note to the sellers if it's a multiple-offer situation.
No. 4: Start the mortgage loan process early
Once you’ve decided you're going to buy a house within the next year, talk to a mortgage professional, says DeSimone.
"Recent regulatory changes have pushed the length of the process in order to protect the buyer," says Koss. "This flies in the face of sellers asking them to move quickly like a cash buyer.”
In addition, you'll need to provide lots of documentation, including but not limited to:
- Thirty days of pay stubs
- Two years of federal tax returns
- Sixty days or a quarterly statement of all asset accounts - checking, savings, and investment accounts
- Two years of W2s
There are many things that could prevent you from getting a mortgage on time -- a small ding on your credit, a new job or limited savings. Speaking to a mortgage professional in advance can help limit any last minute surprises, and help you understand and plan for buying in a seller's market.
No. 5: Be prepared to make a quick decision
Possibly the most difficult part of a seller's market is having to make rush decisions. Buying a home, is typically the largest investment you’ll ever make.
But moving quickly can mean the difference in whether or not you get that dream home.
"Most buyers will have to decide upon a home in less than 10 minutes," says Rigsby.
That's how long it usually takes to walk through a home, and the majority of purchasers in a seller's market make an offer after only seeing a home once, she notes.
One way to make those decisions easier is to figure out priorities ahead of time, says Rigsby. For example, can you live without a garage, a finished basement?
"Anything buyers can do to prepare themselves to act quickly should be done before seeing the first house on the list," says Rigsby.
No. 6: Be prepared to make strong, flexible offers
In a perfect world, you’ll be making an all-cash offer. For those who can’t, however, it is still possible to compete.
Since many cash buyers want a discount for paying all cash, one way to get an edge is, by offering more money. It’s not always a lot of money that makes the difference. Sometimes it’s that extra thousand or two that separates your offer from the others, observes Nix.
Another strategy: Ask for a seller's preferred closing date. “Your contract may very well be accepted simply because of your flexibility on timing,” notes Rigsby.
Finally, make a strong offer.
"In a competitive seller's market, your offer has to be complete. It has to be clean.
Clean offers mean no contingencies.
Your offer has to be competitive, without contingencies and you must be ready, willing, able and flexible.
Nix offers some additional insight on a unique and competitive offer in a hot market. “If everyone else in your market is offering 10-day due-diligence periods, and you know it’s a great home, make your due-diligence just 5 days.” Little things can make a big difference in a hot market.
Now that you’re ready to view homes in a competitive housing market, it’s time to get a sense of current mortgage rates to determine just how much your mortgage payment will be. If you have a question for us, be sure to fill out the “Ask the Expert” form on HSH.com.
More help from HSH.com
Metro area definitionsGeographic definitions for the 50 metropolitan areas in "The salary you must earn to buy a home in 50 metros"
Home price recovery index: Which metros have improved the most, least?Have home prices in your area fully recovered from the declines suffered during the Great Recession, or are they still struggling to make it back to the peak it reached before the crisis?
12 essential tax questions for homeownersKnowing the answers to these 12 critical tax questions will help homeowners keep their tax bill as low as possible.
Can these home price trends predict the next NFL champion?But is there any specific relationship between home prices, mortgage rates and success in the NFL? Of course not. However, it's fun to forecast the winner of Super Bowl LII based off certain housing market characteristics!
Should I consider my home an “asset”?The answer is "yes", or even "maybe" or "it can be", usually modified by "but not right away, if ever." When it comes to the financial aspect of homeownership, the answer is rarely simple.