Afraid to sell in a seller’s market? It may make sense to buy your next home first

8/4/2017 10:00:00 AM
It’s a circular problem that is frustrating potential buyers, real estate agents, and everyone else who benefits from home sales:  Many would-be sellers are unwilling to list their homes for fear of becoming buyers in a seller’s market.

With the number of homes on the market at the lowest point in decades, these fence-sitters foresee a quick sale of their current home followed by a fruitless search for a new one. If you’re in this quandary, at least a few local Realtors® say it’s time to take advantage of the seller’s market by dropping the idea that you need to sell before you buy. And bankers are helping by once again offering bridge loans to cover any gap between closing dates.

“People who already own a home typically have no incentive to move unless they’re confident they’ll be moving into something better,” said Patty Sykes, a Realtor with Century 21 Affiliated. “If they’re selling the first or second home they’ve owned, they’re generally looking to move into their dream home. But you can’t count on finding that dream home right away. It usually takes time and, when you do find it, you’ve got to nab it.”

While conventional wisdom says it’s a mistake to buy a new home before selling the old one, Sykes and other Realtors® say the risk of getting stuck for long with two mortgage payments is low right now if your current home is in reasonably good shape, is in a low to moderate price range, and is listed by a capable agent.

“As long as you’ve got a good Realtor® who agrees your house is easily marketable and you have a pre-inspection to make sure everything’s basically fine, it makes sense to go ahead and nail down the house of your dreams and then hit the ground running with your own listing,” Sykes said.

Doug Sprague, owner of Firefly Realty, specializes in the super-hot Wauwatosa market, where multiple offers are common. People who bought their starter home in Wauwatosa often want to stay there when the time comes to move, making tight inventory an even bigger challenge. Buying before listing can make sense for some sellers, he agreed, adding “Bridge loans are far more common than they used to be. I’ve seen more interim loans in the last six months than I’ve seen in the past three years.”

The market for downtown condominiums is brisk as well, said Chris Corley, broker/owner at Corley Real Estate, which specializes in that market. “For low-price-point condos – under $300,000 – there’s a bidding war 40% or 50% of the time,” he said. “Above that price, it’s maybe 20% of the time and, as you go higher, you’ll see multiple bids less and less. Some units do sell within 24 hours but that would be one out of a couple dozen.

Potential buyers who want to live downtown may be less frenzied due to a surge of appealing new rental units that have hit the market recently. “In the past year, there’s been an explosion of apartment buildings,” Corley noted. “People are willing to go and rent something and wait for their ideal property.”

In contrast, younger, first-time home shoppers are looking to stop paying rent and start building equity while they can still lock in a low interest rate. And although rates may have ticked up a bit, on a long-term mortgage they are still “incredibly attractive,” said North Shore Bank Senior Vice President Michael Kellman, who oversees the bank’s robust mortgage loan business. “The short-term rate is moving up, but the long-term rate is still near historic lows. You can get 4% or a little less on your mortgage now, which translates to significantly less than that after taxes.”

Low rates, low inventory and high demand continue to drive prices higher, especially for entry-level homes. The latest North Shore Bank/GMAR Home Payment Report showed startling price increases in some market segments between the first and second quarters of 2017. A few examples:
  • Waukesha
    • Lowest-third median sale price: Up 23% from $122,000 to $149,900
    • Middle-third: Up 14% from $193,000 to $220,000
    • Highest-third: Up 23% from $288,450 to $327,975
  • West Allis
    • Lowest-third median: Up 51% from $69,000 to $104,500
    • Middle-third: Up 21% from $115,000 to $139,550
    • Highest-third: Up 7% from $159,250 to $169,900
  • Oak Creek
    • Lowest-third: Up 42% from $112,500 to $159,950
    • Middle-third:  Up 17% from $198,000 to $231,250
    • Highest-third: Up 6% from $290,500 to $307,825
Mark Kivley, broker/owner of RE/MAX Lakeside, noted that bidding wars often lead to offers that exceed the asking price. That may sound like a dream come true for a seller, but it doesn’t always turn out that way, Kivley said, since such offers may not “appraise out.” Appraisers can only look at completed transactions when searching for recent sale prices on comparable homes. That means they are always a few months behind the market. In a fast-paced market like this, that lag can be a real problem, since mortgage lenders will only provide financing based on the appraised value.

“If a seller receives multiple offers and the highest one has a mortgage involved and one that’s $5,000 less is an all-cash offer, I would advise a seller to seriously consider taking the second offer. Otherwise you run the risk of an appraisal coming in at $15,000 under and now you’re two or three weeks off the market.”

Rather than put the home back on the market, Kivley said sellers almost always accept the appraisal price in his experience.

Firefly’s Sprague said aggressive buyers in the hottest markets are writing “extremely clean” offers. “A typical offer for a first-time buyer is going to have inspection, appraisal and financing contingencies,” he noted. “Nowadays, there are buyers who, when they realize they’re competing against five or six other parties, are removing the appraisal and financing contingencies. In rare occasions, people are writing offers without an inspection contingency though, as a buyer’s agent, I’d never recommend that.”

Of course, most buyers need a mortgage loan to buy a home. To stand a chance of winning in a multiple-bid situation, said North Shore’s Kellman, “You need to have a pre-approval letter from a reputable lender in hand. If you don’t, the seller will take someone else’s offer.”

Sykes warns sellers that the current no-holds-barred frenzy can lead to buyer’s remorse. “You have to be really careful about whose offer you take because knee-jerk buyers can change their minds. They’re running into the house, taking a quick look, and then after they cool off, some minor thing comes up in the inspection and they use it to get out of the contract.

“Some buyers are just running to the finish line too quickly,” she concluded.

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