Buying In a Hot Market

Written by Jim the Realtor

March 19, 2011

Travis left this comment at #30 a couple of posts back here:

I purchased my first home without knowing about value aside from recent comps. This time around I am trying to better understand “fair value” using indicators such as price-to-rent ratio. I sense that many in the BubbleInfo audience may also be looking at value in similar way.

Unfortunately, I observe that other buyers are not paying attention to value or have a different metric for determining value because I continue to see sales prices that I consider to be over-valued. If there are a line of buyers willing to pay market price even if over-valued, then as Jim said about the Not Players, those looking for a deal may have to wait a long time or get lucky.

This is what we are all battling. 

The least-informed buyers create the market – especially in the Value Buys category.

When the market is hot, buyers get emotionally charged up, and rush into buying before being adequately prepared – and end up paying too much. 

In areas where there is enough inventory, a run of these sales can create a trend. 

The first few buyers who over-pay could look smarter a year later if the trend takes off, but it’ll be accidental.  You want to be more deliberate with your purchase, because that same trend could go the wrong way.

What can you do?

1. Know your target neighborhoods – See the interiors of as many listings as you can.  Even if you don’t buy them, the market knowledge gained about recent comps is a big advantage.

2.  Take your shots – Make offers on those that interest you, but always at a comfortable price.  Leave some gas in the tank too, in case you need to compete with other offerors later.

3.  Be comfortable with fix-ups – Plan on spending $25,000 to $50,000 on any house you buy.  Very few sellers spruce up their home to sell, and if they do, it’s usually just a cosmetic fly-by.  Expect to at least carpet & paint, and there will probably be a few miscellaneous repair items too.  If the sellers contribute, terrific (and we’ll fight for that), but if they refuse, don’t be surprised.

4.  You are going to lose some – The less-informed will out-bid you on occasion.  Shake it off, and get back on the horse. 

5.  Tie the property up – You don’t need repair quotes or appraisals to make an offer – you have the 17-day investigation period to find out what you are buying.  

6.  Winning the bidding war – You have to know how much mustard to add, and should rely on your agent for support.

The agent’s role is critical.

A realtor’s  job is to: (a) provide an accurate interpretation of the value based on the comps and market conditions, (b) identify the other offers on the table, and (c) size up the listing agent, so we find the way to win – without overpaying.

How much do you offer in order to win?

A good agent should be able to pinpoint that number.  Generally, most buyers hit the wall at 5% to 10% over list, so it’s a matter of how bad you want it!

7.  Depending on how picky you are, be prepared to search for 3-36 months – Be deliberate and take your time, but don’t hesitate.

Get good help, and best of luck!

Signed, Mr. Mustard

15 Comments

  1. tj & the bear

    The least-informed buyers create the market

    Yes, but since when have the “least-informed buyers” been the ones with the most money?

  2. James

    You hit the nail on the head. I think I went through everyone of the steps you were talking about before I saw “the one” in the market I was looking in. It was on sdlookup for about 2 hours before I drive there, saw it, loved it and went in right at the top of asking (it was ranged (295-305) with no other bells and whistles.
    From all the crap I saw out there in that price range, this one was a cut above the rest and still is.

  3. Thaylor Harmor

    All indicators is that trying to get financing will be more difficult than it is now in the near future. Maybe there’s a “rush” now to preempt those difficulties?

    I’m wondering after we hear builders slow new home starts that’ll it’ll just mean this sideways market is what we can expect for at least two more years.

  4. Susie

    Well, my home searched went on for 4 1/2 years! I certainly learned #4. Someone came in (CEO of a company in Mexico) and offered full price when I was an inch away in negotiations with the seller on a home six months ago. (Sellers in ID can negotiate at any time with any buyer even during negotiations with another–that was news to me.)

    Update: A guy came over to fix a couple small leaks in my gutters today. (I have a 1-year warranty since it’s a new construction). He told me he put new gutters on the house next door to that house I lost, and new owners just moved in.

    So I guess the deal with the other buyer from Mexico never materialized. He had asked for a 3-week extension last October because of financing problems. So evidently, that seller had to wait another five months to close the deal with a different buyer.

    Me? I’m incredibly happy I bought the home I have. Even though I had tears in my eyes when my agent told me I lost the other house–in the end–it worked out perfectly for me. I love my location too. And the new entrance/exit from that other subdivision has yet to be completed, even though the builder promised it would be completed by 12/31/10.

  5. Jim the Realtor

    Yes, but since when have the “least-informed buyers” been the ones with the most money?

    I qualified it “especially in the Value Buys category”. 😉

    Big money definitely chases the trophy properties, but whether any buyer takes the time to get educated is a separate issue.

    Many go looking for a house that makes them feel good. When they find it, they pay the price – without putting too much thought into it. As long as they can afford it and are happy, then good for them.

    The “education = smarter decisions” program is optional, and requires a substantial investment of time.

  6. Kishan Khurana from Karolbagh

    “Many go looking for a house that makes them feel good. When they find it, they pay the price – without putting too much thought into it.
    As long as they can afford it and are happy, then good for them.”
    … very true and definitly a trend in High End. A major factor that keeps on propelling High End.

  7. Jim the Realtor

    “especially in the Value Buys category”

    Top Condition = Top Dollar.

    The Value Buyer opts for the scruffy house because it sounds like a deal – but have they properly estimated the repairs?

    Look at Doug S., who still comes around.

    A few years back he was adamant about buying without an agent.

    He picked up a 1970s fixer in Solana Beach, and is still working on it! He has mentioned here how he underestimated what he was buying, and how big the job has gotten.

    Would he have not bought it if I were involved?

    I don’t know, but at least he would have had more data to work with. Talking people out of buying is part of the job, and realtors should do more of it.

  8. just some guy

    We have only started looking two months ago, but now we are about to sign a year lease on a rental…again. The owner of our current rental put it on the market and terminated our month to month lease. We were looking for our first home and our range was 400-450 in Carlsbad. Our commute is too far to the south so it pretty much rules out All of San Marcos, especially San Elijo. We have been living in Carlsbad for about 6 years and we know the area pretty well, but we are not too well familiar with the older parts.

    Here is a summary of our brief experience:
    low 400s in Carlsbad gets you crap. And by crap I mean 30+ yr old homes that need a minimum of 40K to remove the “Ick” factor. Homes between 450 and 500 are in much better shape, but the pricing in certain neighborhoods is chaotic. Prime example is Rancho Carillo. There are so many REOs, short sales, and equity sales pitted against each other that trying to figure out what the “real” value should be to us is an exercise in futility. Keep in mind, we are looking for the typical starter home of 1700+ sqft 3 bd/2+ba. However, many of these starter homes that are in good shape are listed as though they are 2700+ sq ft.

    We want to do FHA financing, but we do have 10% down. If we put 10% down around the 450k mark, we will wipe out all of our liquidity so we will have nothing left over repairs/maintenance and the eventual new car. Therefore, we were looking for something that didn’t need much work or that we could live with for a while. FHA financing has a hefty PMI attached to the monthly payment that is going to go up further next month. So, factor in the PMI (pay for minimum 5 years) with HOAs, maybe Mello-Roos then any property 450k and above is way out of the price/rent ratio. Besides, putting 10% down against 3.5% required for FHA financing strikes me as dumb since I am putting my money at risk.

    We will watch the market for while we rent and save again and I am confident we will be in a better position next year or the year after. We have better feel for the neighborhoods and the type of home we want.

  9. just some guy

    4. You are going to lose some – The less-informed will out-bid you on occasion. Shake it off, and get back on the horse.

    I am sure some of this is being fueled by FHA financing. People want to hurry up and buy with as little down before the down payment requirements go up. Also, the PMI associated with FHA financing is going up 0.25% next month.

  10. Thaylor Harmor

    /ramble

    I’m pretty disgusted with the whole market right now for home. I’m in an apartment (first time ever in my life), and I like it. Nothing to worry about, service technitians take care of everything.

    Where I live there is no one above or below me – bonus!

    Other than not being able to have packages left on your front door I’m a happy renter.

    If I do decide to go back into the market it will be because rents go up where it make financial sense again.

    Right now (someone correct me if I’m wrong), but the mortgage-to-rent ratio is about 1.5:1 right now for me.

    Also unknown job situation / economy makes me hesitant for any long term investment. Might as well just save the cash and buy whole in 10 years.

    BUT, inflation is killing savings – is this 1973 all over again?

  11. Charlene

    LOVE the mustard picture!

    I found all the points to be true, and some of those lessons were harder to learn than others for me.

    “The agent’s role is critical” is also a lesson I learned the hard way. Buyers, however savvy, need an expert in the field and in the area, to represent their interests amongst other agents.

    I had been working with someone who was an agent as a hobby or side job. I lost out on house after house, and towards the end, she was telling me things like “maybe you should look for a condo instead” and “there really isn’t anything out there for you in your price range.” After a 18 months of disappointment, I got lucky and found a realtor who was well established and had a great team to support her. She knew my territory and the local agents knew her well and respected her. I had an accepted offer within 3 months.

  12. JordanT

    Right now (someone correct me if I’m wrong), but the mortgage-to-rent ratio is about 1.5:1 right now for me.

    Rich Toscano from Piggington.com claims that the rent to monthly payment ratio is less than one now, this will depend on how much you can put down. I know the house I bought over a year ago, with 20% down has a PITI that’s the same as rent in the area. Of course, at the high end the mortgage:rent ratios are much more skewed because the wealthy are likely to put a larger premium on owning versus renting. If the mortgage to rent ratio was 1.5:1 for me, I don’t think I would have bought.

  13. Travis

    Thanks for the tips and reassurance, Jim! The search continues…

  14. Jinx

    Susie, I know what you felt. We offered over list on a dump in Cardiff last year. We were on the phone with our agent and the listing agent until 10pm working out the final details (owner wanted to keep appliances, no repairs, etc). They were going to send the final signed papers first thing in the morning…It never happened. An investor came in some time between 10pm and the early morning and offered 5K more. That was it. They didn’t even call us back or counter! I had to stop looking at houses for a few months to get over it. Then, guess what? It happened to us AGAIN! So we stopped looking for a few months. I could go on and on. It’s been a bumpy couple of years.

    So this sort of goes along with Jim’s #5 above, “tie up the property”. Make the seller send you a signed contract ASAP!

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