Navigating a Hot Real Estate Market

Buying a home in a hot real estate market takes patience and perseverance. Having a savvy buyer's agent doesn't hurt, either.
Kate WoodJun 25, 2021

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In a hot real estate market, home inventory is low, competition is high and as a buyer, you may feel like you're on an emotional rollercoaster. Although buying a home in a strong seller’s market presents added challenges, it’s still possible to get an offer accepted on a place you’ll love.

To figure out whether a housing market is hot, experts look at how many months of unsold inventory are currently on the market. This measure tells you how long it would take to sell all of the properties for sale if no other homes were built or put up for sale — not a scenario that would really happen, but a helpful gauge of the availability of homes to buy.

Generally speaking, an inventory level of six months is considered balanced between buyers and sellers. Less is a ; more favors buyers.

A shortage of homes for sale and inadequate levels of new construction has kept much of America in a seller's market for the past few years. The COVID-19 pandemic has exacerbated these trends, with myriad buyers entering the market as fewer sellers are putting homes up for sale and new construction continues to fail to meet demand.

According to the National Association of Realtors, in March 2021 the country had just a 2.1 month supply of existing housing (down year-over-year from an already-low 3.3 month supply in March 2020).

Analysis of Realtor.com data in the likewise shows that last year, home inventory was below previous years' levels and is on a downward trend.

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Spend some time looking at what’s available before you get serious. Walk around potential on the weekend, and scan your favorite real estate website for new listings. Take note of how long homes are listed before a contract is pending. (In an especially hot market, it won't be long.) You might also want to look at recently sold listings online to get a sense of how much homes are really going for compared to their listing prices.

The idea is to get a sense of how hot the local market is without the pressure of feeling like you need to make an offer. You’ll also learn more about the kinds of homes and neighborhoods you like (or don’t), and which features matter to you.

But don’t fall in love with a house at first sight — doing so may lead you to overlook problems and, if you make an offer that’s declined, suffer heartache. In a hot market, "it's more like dating than getting engaged," says agent Brent Landels of Re/Max Key Properties in Bend, Oregon. "Don't get emotionally involved in anything you're looking at until you're further down the road."

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Having a good is particularly important in a hot market. You want someone who’ll alert you to listings as soon as they hit the market, if not before. Also, a good agent will know how to make your offer stand out.

"I was a brand new agent at one time in my career, too," Landels says, "but in a market like this, there is no margin for error." If you're thinking about hiring a newer agent, he recommends choosing someone who works closely with a more established broker.

Interview more than one agent, and don't hesitate to ask for (and actually check out) references from recent clients.

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Holding out for 'the one' may not be an option in a hot market. It may be smarter to approach home shopping by thinking about ways you could make a work.

Flexible expectations can give you more options in a hot real estate market. "People say 'Oh, I want to be in this neighborhood,' and we have to say that's great, but we have two weeks' worth of supply," Landels explains. If there aren't many properties available that fit your criteria, you may need to find aspects where you can compromise.

Think about what's most important to you now, and if you see this as your potential , your plans for the future. Maybe a third bedroom can be a home office for now, and a nursery later when you've got a little one (and can work in an office again!).

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Compare mortgage interest rates from several lenders, and get a from two or three lenders. Official will help you compare interest rates and costs to find the best deal for you.

In any hot market, a preapproval shows sellers that you're serious. But during the pandemic, your agent may have to confirm that you're preapproved in order for you to view a property in person, either because sellers are anticipating many offers or they simply want fewer strangers in their homes.

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Especially if you're competing with , you'll want to show sellers that you can definitely close the deal. A preapproval gives you a leg up here, because it demonstrates that lenders find you creditworthy. Making a larger down payment can also be enticing to sellers.

Mike Ferrante, an agent with Century 21 HomeStar in the Cleveland area, notes that even in a hot market, the best offer isn't always the highest offer. "When we sit down with sellers, we talk about possession terms," Ferrante explains. "I'm seeing more rent backs than I've ever seen. If you're a seller, what's your biggest fear — where am I going to go? Having a rent back gives the seller flexibility to house hunt or find a rental or otherwise figure out their temporary solution."

Your agent can communicate with the to get behind-the-scenes info like whether the sellers are anxious about finding new digs or ready to move out and looking for a fast closing.

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In a hot market, it may be tempting to . But if the home inspection turns up a worst-case scenario (like dry rot or structural damage), you want to be able to back out of the deal.

Ferrante recommends limiting yourself to just a standard and stipulating that it's informational only. In other words, if the inspector finds minor issues with the home, you'll move forward with the deal without asking for repairs.

Landels has seen buyers use a similar strategy: Only asking for post-inspection fixes if the cost per repair is above a certain level (his suggested threshold is $500). Sellers appreciate that they "aren't going to get nickel and dimed" with minor issues, Landels says.

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Aside from waiving , there are other ways you can make your offer more enticing to sellers. Introducing the possibility of a rent-back agreement or setting out a closing timeline that will work well for the sellers can help.

In a multiple offer situation, you might consider an escalation clause. That means you'll automatically outbid any offer by a given amount (say $1,000) up to a certain point. Ferrante cautions, however, that these can backfire. "An escalation clause is like playing poker with your cards face up on the table," he comments. Seeing the total amount you're willing to pay can make sellers wonder why you aren't offering that amount in the first place.

Some buyers write "" to sellers, saying something about themselves, why they love the home and how they plan to live in it. But these are problematic, as they can perpetuate housing inequality and introduce the possibility of Fair Housing Act violations.

Landels says he doesn't show letters, or even buyers' names, to his sellers. "Sometimes you can tell a lot from people's surnames, or if it's two men's names," he says. "We eliminate all of that so we present offers just as the things that are specifically impacting what's going on with the offer." That includes the offer amount, the closing date and the down payment amount.

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In 2020, homebuyers typically searched for eight weeks and looked at nine homes, according to the National Association of Realtors. Already, 2021 seems to be an even tougher year for buyers. According to survey data from the National Association of Home Builders, 64% of active homebuyers in the first quarter of 2021 had been searching for more than three months — and 45% of those buyers say being outbid has kept them from buying a home.

After losing out on several homes, you might feel tempted to make a desperation bid or give up. Don’t do either.

Bidding too much or making an offer on a home you don’t really like could leave you resentful and . Meanwhile, giving up may leave you, well, renting. But it can also give you more time to set aside down payment funds, work on your credit score and fine-tune your homebuying wish list.

If you're feeling frustrated, you're not alone. But since you can't control how hot your real estate market is, Landels advises focusing on what you can control. Knowing what's a reasonable offer in your market, limiting your contingencies to what's vital and having your financing ready to go will have you primed and ready when the right house comes along — and your offer's the right offer.

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