When real estate sales are slow and there is a glut of homes for sale, buyers have an opportunity to pick up a house on the cheap. The operative word here is “opportunity.” There are times when you should pounce and times when you should show restraint and avoid an impulse buy. Knowing the difference could save you thousands of dollars. In this article, we will give you eight tips to follow if you have the good fortune to be house hunting during a housing market downturn.
Key Takeaways
- Real estate investors looking to purchase homes for cheap can find advantageous opportunities when house hunting in a market downturn.
- The key “first steps” for house hunting during a recession is to do your homework, have financing and resources in line, and learn how to spot motivated sellers.
- Next, house hunters should be prepared to negotiate with realtors and search titles but avoid bidding wars.
- Buyers should not be afraid to walk away from a deal and be sure to know why they’re buying.
1. Do Your Homework
Buyers generally have the advantage in a down market, but this doesn’t mean you should go into a transaction blind. Prospective buyers should search the internet for listings and inquire with a realtor or real estate agent. Realtor.com is a good resource, and many national and local realtors also make their listings available on the internet.
The objective of this research is to get to know the price range for the area. You want to learn what is considered excessive and what is considered low. This research will help you make a reasonable bid and provide insight into the bargaining room for a particular home.
2. Get Your Ducks in a Row
Remember, you are probably not the only bargain hunter out there. You may have an edge on the sellers, but another buyer could snap up your great deal if you delay the buying process.
To make sure that you’re able to pounce on a deal at a moment’s notice, it makes sense to get pre-approved for a mortgage and to have an attorney on retainer to handle the closing paperwork.
It also makes sense to line up a home inspector and an insurance agent. These professionals provide valuable information and let a buyer know early on in the process, during the attorney review period, what items might need repair as well as what the home will cost to insure.
3. Watch for Motivated Sellers
Some homeowners may want to sell their homes in a hurry, which gives you additional bargaining power. In a situation like this, it makes sense to ask if the seller will throw in the lawnmower, furniture, or fixtures that you like. You can also ask them to cover some or all of the closing costs. Of course, the listing price is always negotiable as well.
Here are a couple of signs that the seller is motivated:
- The home has been on the market for several months and has undergone a number of price reductions.
- The home is empty at the showing, which suggests the seller has moved and might be holding two mortgages.
It’s always difficult to determine exactly how much leverage you have since a homeowner can decide to sell for any number of reasons. Your agent can give you a general idea of the seller’s motivation, though. Agents have access to the Multiple Listing Service (MLS) and can track down the original list price versus the selling price for similar homes in the area. They can also find out how long the house has been on the market and determine any price reductions that have occurred.
Many states make deed records and home-sale information available to the general public on the internet. This information will tell you what the seller paid for the home, which, in turn, lets you know how much profit they stand to make for the asking price.
4. Negotiate with the Realtor
When houses are selling at a slow pace, real estate agents are also struggling. In such an environment, both agents and firms may be inclined to knock a percentage point or two off of their commission schedule to get a deal done.
But isn’t it the seller’s job to pay the real estate agent? Why should you care what the commission is?
The commission is important to the buyer because the seller probably listed the home at a high price so they could pay the commission to the agent and still profit. Buyers can get their real estate agents to ask the listing agent to lower his or her commission so that the deal gets done, and both the seller and their agent still walk away happy.
Consumerist.com offers these tips for increasing your leverage when negotiating with a real estate agent:
- You may be able to get a discount by using the same agent to sell your current house and buy a new one.
- Smaller real estate firms may be able to approve lower commission rates more quickly because they have fewer layers of bureaucracy.
- If one agent won’t negotiate, find another who will.
- Consider using the internet instead of a real estate agent. There are services available online that give house hunters direct access to the Multiple Listing Service, allowing them to find potential properties themselves.
Important
In March 2024, the National Association of Realtors settled a class-action lawsuit by homeowners who alleged that the NAR had inflated the commissions paid to its realtors. As part of the $418 million settlement, the NAR also agreed to revise policies that previously required home sellers to determine a commission rate (usually 6%) before listing a home on the Multiple Listing Service. If the deal is finalized by the court, it is likely to lead to substantially smaller commissions in the future.
5. Make Sure the Title Is Clear
In trying times, sellers may want to unload their homes because they are in over their heads. In some cases, the property itself may be encumbered by a lien from a contractor, service provider, bank, or other lending institution.
For this reason, it always makes sense to use a title insurance company and to have a lawyer do a title search to make sure the property can be transferred without risk. The last thing you want is to have to absorb any of those liabilities. Lenders typically require title insurance and a title search if a mortgage is going to be taken out on the home, but cash buyers should make use of these services as well.
For more information about title insurance, you should speak to your insurance representative. The web also contains a wealth of information on the subject, and many states have websites that discuss title insurance policies.
6. Avoid a Bidding War
When shopping in a down market, the last thing you want to do is let your emotions get the best of you. A bidding war is almost always an unnecessary waste of time and, in the end, money. Down markets are all about getting a really good deal, so to fritter away that possibility because of ego is foolish.
The best advice for avoiding a bidding war is to set a price limit and stick to it. There are plenty of other deals out there to be had.
7. Don’t Be Afraid to Walk Away
Real estate prices usually drop as inventory increases. In a down market, there are a variety of choices available. If you are not getting the deal you feel you deserve, walk away and look at the next home on your list.
Remember that a down market is a buyer’s market. Some sellers fail to understand that they are at a disadvantage and refuse to accept anything less than what they feel their home is worth. Stick to the price you decided on at the outset; if you cannot make the deal, try again next time.
8. Know Why You’re Buying
Prospective buyers have an edge in a down market, but that doesn’t mean you’re guaranteed to make money on a given property. Ask yourself some hard questions about why you’re buying the home.
A quick flip may not be possible in a prolonged down market, and so you should be prepared to live in the new home, or at least to hold on to it for an extended period of time. Being prepared and organized and relying on trained professionals for guidance can help you get a great deal in a struggling real estate market.
How Does a Recession Affect Realtors?
Real estate markets tend to suffer during recessions, due to higher interest rates and lower overall spending power. As a result, realtors and other real estate professionals may see fewer transactions during a recession, with lower sale prices.
Is It a Good Idea to Buy a Home During a Recession?
Home prices tend to fall during recessions, both because of lower interest rates and because potential buyers feel more financial pressure. Reduced demand means that houses may stay on the market longer, giving sellers an incentive to lower their expectations. This means that recessions may be a chance to negotiate a lower sale price if you have the means to do so.
What Happens to My Mortgage If the Housing Market Crashes?
The effects of a market downturn will depend on what kind of mortgage you have. Interest rates usually fall during a recession, so if you have an adjustible rate mortgage, the variable component of your monthly payment may fall. If you have a fixed-rate mortgage, your monthly payment won’t change at all—but you may be able to refinance your loan at a lower rate. In either case, this will depend on the exact terms of your mortgage.
The Bottom Line
Recessions can be a good time for housing investments, as there are fewer buyers competing for the available homes. Savvy house hunters can use these downturns to find bargains in the housing market, provided that they are willing to put in the work to find the best deals.
Read the original article on Investopedia.