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Successful Home Buying Strategies for a Seller's Market

Home buyers in Cambridge and Somerville are facing a seller's market. Many buyers have become frustrated after losing out in multiple offer situations. In this issue we the discuss successful home buying strategies for a seller's market.

Causes of the Seller's Market

Historically Low Mortgage Interest Rates

Mortgage interest rates for 30 year fixed rate loans are currently under 3.5%. This compares to a rate of 6.11% five  years ago. The impact on how much a buyer can borrow is dramatic. A buyer that could borrow about $370,000 at a rate of 6.11% can borrow about $500,000 at 3.5% Since buyers can afford more they are willing to offer more, leading to bidding wars.

High Rents

The economy has strengthened in Cambridge in Somerville, creating strong demand for housing. There has been significant expansion in employment by companies such as Akamai, Google, Novartis, Microsoft, etc. In addition, many potential buyers were scared to buy during the real estate downturn and decided to remain renters. According to the Cambridge Community Development Department, the median price for a one-bedroom apartment increased from around $1,400 to $2,000 a month from 2000 to 2011 - a 43 percent increase. For three-bedroom apartments, median rents increased from roughly $2,000 to $3,000, or 33 percent, in the same time period.

Subsidized Buyers

Many university and corporate buyers have generous housing subsidies to attract talent. These range from monthly housing allowances to below market rate mortgages. These subsidies put further upward pressure on real estate values.

Low Inventory

Inventory is very low (36% below December 2011 and 71% below December 2006). A large pool of well qualified buyers combined with low inventory is placing upward pressure on home values.

Buying a Home in a Seller's Market

Although buying a home in a seller's market is challenging it can be worth the effort. There are many benefits of owning a home, especially since owning is often less expensive than renting in Cambridge and Somerville.

Utilize a Local, Full Service Buyer's Agent

The advice of a knowledgeable buyer's agent that specializes in the local market is a highly important first step in the process. Limited service buyer's agent may cost a little less, but in our opinion, cannot provide the local and in-depth advice of a full service agent. Full service agents have the commitment to physically preview the inventory and study the market in depth. I personally spend several hours a week going to broker and public open houses to fully understand the inventory.

Increased First and Second Deposits

Real estate transactions in Massachusetts typically have two deposits. The first deposit is delivered with the offer. The customary first deposit is $1,000. Once the purchase and sale agreement is signed a second deposit is made. The customary second deposit is 5% of the purchase. Increasing one or both deposits demonstrates that the buyer is financially committed to the purchase.

High Down Payment

A higher down payment amount shows financial strength and commitment. If there are multiple offers at close to the some purchase price the offer with a 50% down payment will be favored over an offer with 5% or 10% down.

Cash

One of the best ways to win in a multiple offer situation is to pay cash. As long as the offer price is competitive sellers will usually choose a cash offer over an offer with a mortgage contingency. Cash offers many advantages:

- No risk of a low appraisal (unless there is a an appraisal contingency)

- No risk of a mortgage rejection

- Speed: cash deals can be closed quicker. 2 - 4 weeks versus 6 - 8 weeks for a deal with a mortgage

Because of these advantages sellers will sometimes accept a lower offer if it is cash.

Quick Closing

Offering to close in 2 - 4 weeks will often make an offer more attractive. The longer that a transaction remains pending the more that can go wrong. Over the course of 8 weeks many events, such as the loss of the buyer's job or change in their credit rating, can unravel a transaction. Quick closings can only usually be done with cash.

Letter to Sellers

Since emotions play a big role in real estate a personalized letter to the seller may help the buyer's offer to stand out in a multiple offer situation. A letter from the buyer should convey several things including:

- What they love about the home and neighborhood.

- Some information about themselves and their family

- Background about education and employment, especially if it conveys financial strength.

- Areas of common interest such as travel, alma mater, hobbies, pets, etc.

Sellers sometimes will choose a lower offer if they feel good about the buyers.

Pre-Approval from a Reputable Lender

Since obtaining a mortgage is very difficult in 2012, sellers and their agents need to be assured that the mortgage will be approved. For this reason the pre-approval must come from a reputable lender. There are several large national and online lenders that have poor reputations for closing loans on time or at all. Seller and their agents will often reject offers with pre-approvals from lenders with a poor reputation. I recently saw a listing that stated that offers with a pre-approval from a specific national bank would not be considered.

Elimination of Contingencies

The more contingencies in an offer, the more likely it is that the transaction will fail to close. Typical contingencies include:

Home Inspection

A home inspection contingency allows the buyer to terminate the agreement if the inspection is not satisfactory. In our opinion, waiving the home inspection is extremely risky because there there can costly hidden defects in many homes. Sophisticated, experienced investors and developers that have strong financial resources will sometimes waive the inspection contingency to win in a multiple offer situation.

Mortgage

Eliminating the mortgage contingency makes the offer much stronger because the seller has the right to retain the escrow deposit if financing is not obtained. There is a higher risk of mortgage denial today than in the many years. Mortgages are often denied for reasons out of control of the buyer. Therefore, the only buyers that should waive the mortgage contingency are buyers that have cash to fund the purchase if the mortgage is denied.

Sale of the Buyer's Home

Many buyers need to sell their home to be able to buy another home. In a buyer's market sellers would sometimes accept an offer contingent on the sale of the buyer's home. In a seller's market it is highly unlikely that this contingency would be accepted.<br><br>


Offering Above Asking Price

Multiple offers are a regular occurrence in Cambridge and Somerville this year because demand is exceeding supply. In fact, the list to sale price ratio for the past 3 months in Cambridge and Somerville is 100%. This data indicates that "low ball" offers will not be accepted by sellers in most cases.

To win in a multiple offer situation it is often required to offer significantly over the asking price. Properties are routinely selling for $50,000 - $100,000 over asking price. For buyers that need a mortgage the challenge is having the appraisal support the sale value. Since the market is appreciating, past sales indicate lower values. In some cases the buyer needs to come up with additional cash to bridge the gap between the appraised value and the sale price.
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