A "seller's market" is a market where there are more home buyers looking to purchase a new home than there are homes for sale. This shortage of supply causes a number of frustrations for buyers: increasing prices, multiple offers, short listing periods, fewer options and less negotiating leverage. While it is easy to think about the challenges that buyers face trying to purchase a home in a strong seller’s market, there are challenges on the seller's side as well:
Rushing buyers may be unprepared.
In this kind of a market, buyers have to make quick decisions and often have less information available to make those decisions. A home listed on Friday may likely be sold by Monday, especially if it is in a desirable neighborhood or priced well. Buyers are watching the available home inventory shrink and homes disappear as quickly as they are listed. Pressured by this fast pace, buyers may be tempted to make a quick-impulse purchase decision without being completely prepared – or worse, they may write an offer on a home that they don't really love out of fear that they won't get one at all. This has two impacts for sellers:
(1) The buyer who rushes into a contract on a home that they are not in love with is more likely to terminate the contract during the option period once they have had more time to think about it.
(2) A rushed buyer may not have gone through all of the proper steps to make sure their financing is in order, which could result in a delayed closing or no closing at all. While there is not a lot a seller can do about a buyer who changes their mind, there is something they can do to identify a buyer with weak financing.
TIP: Check the buyer's pre-approval letter to make sure that the lender has reviewed, in writing, the buyer's income, assets and credit. If the letter does not say it explicitly, call the lender to ask. What you are trying to get at here is whether the lender has really reviewed all of the important documents that they need to make a loan, or if they just received an inquiry over the Internet and issued a letter without reviewing anything.
The higher offer is not always the stronger offer.
I find this to be true more than half of the time. There are many factors that make up a good offer and price is just one of them. As the seller, you want the highest price for your home – that goes without saying – but more importantly, you want to accept the offer that is going to actually close.
If a buyer offers you $350,000 on a house that was listed at $325,000 because there were multiple offers, it does not mean that you are going to close the sale at $350,000. The largest obstacle in this situation is the appraisal that will be ordered by the buyer's lender. The lender will only loan based on the lower of contract price or appraised value, and appraisals are lagging indicators that must use past sales data to establish market value.
TIP: Get Your Home Evaluation
The adage, "A house is worth what someone else will pay for it," is true if the buyer is paying cash – but if there is a lender involved, then the house is worth what the appraiser can support based on past sales.
Another common scenario is for the buyer to ask the seller to pay some of the buyer's closing costs and then add that amount to the sale price. This can also lead to an appraisal problem if the new sale price is above market value.
For example: You have your home listed at $325,000 and you receive two offers. One offer is $322,500 with conventional financing and one is $330,000 with you paying $5,000 of the buyer's closing costs. On paper, the second offer is better because it is $2,500 higher than the first offer ($330,000 - $5,000 = $325,000, which is higher than $322,500), so you accept it.
Now, when the appraisal comes in, it is $323,000. The appraisal typically comes back about 20-25 days into a 30-day closing period, so you are through the inspections and any repair negotiations at this point, and you are ready to close.
If you lower the sale price to the appraised value, you are at $318,000 after you net out the closing costs. If you don't lower the price, the buyer will either back out or have to come up with an extra $2,000 at closing (which many cannot do). You can try to lower the amount of the seller-paid closing costs, but the buyer may need them to be able to close the purchase and may not be able to close without them.
Now you are at risk of losing the sale, 20-25 days in, and having to put your house back on the market and paying the expenses (mortgage, property taxes, insurance, HOA fees, utilities) until it sells. Had you accepted the first offer, you would be $4,500 ahead and ready to close without a problem.
TIP: Include a provision in the contract that says that if the property does not appraise for the sale price, any seller-paid closing costs will be reduced as the price is reduced until you reach the appraised value. This will trigger any conversations about the buyer needing closing costs early on in the negotiation and will avoid losing the deal later.
The type of loan the buyer is using.
There are many types of mortgages and each has their upside and downside for the seller as well as the buyer. A buyer who has chosen a 20% down conventional loan is a stronger buyer than one using a 3.5% down FHA loan, because the first buyer has cash on hand to absorb unforeseen costs and can switch to a 10% down loan if necessary.
A VA buyer has to ask the seller to pay some of their closing costs, called the "VA Non-Allowables," where a conventional-loan buyer does not. A USDA-loan buyer has to go through double underwriting, once by their lender and then again by the USDA, and so their loan may take longer and has more opportunities to fall apart. VA loans have their own appraisers who can also call for repairs to be made, and they must be made prior to closing for the loan to go through. Both VA and FHA loans have certain minimum criteria that the property must meet in order to qualify for financing – so if your home needs work or repairs, you may not want to accept those buyers.
TIP: In my experience, the loan that the buyer's lender is most likely to bend over backwards to find a way to fund is a "Physician Loan" being made to a doctor. If you see a buyer with a pre-approval for a physician loan, that is very likely a solid buyer.
It is difficult to time a sale and subsequent purchase.
Once you sell your home, you become a buyer for your next home, and you will be on the other side of the market. In a slower or more evenly balanced market, a seller can time their sale and subsequent purchase so that they can move straight from their current home into their new home.
In a seller's market, this becomes much more difficult to do because you will likely sell quickly and you will have competition buying your new home. This competition means that you are less able to control the timing and terms of the purchase to line up with your sale. To make matters worse, you may need to sell your current home in order to qualify for the mortgage on your new home (or you may not want to be in the position of having to make two payments); so you have to make an offer contingent on the sale of your house, which puts you at a great disadvantage compared to other offers.
TIP: Negotiate to lease back your home, once you have sold it, for 30 to 60 days. Since you have the upper hand when you are selling, use it to buy yourself some time. One aspect of considering offers on your home may be which one has the ability to delay their move-in to allow you to lease back. Most lenders will allow a buyer to lease back the home for up to 60 days before they have to move in. With a lease-back, the sale of your house is final, you have your sale proceeds, and you are free to contract for your next house without having any contingencies.