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If you listen to real estate podcasts, read investor blogs, or just listen to the news in general, you’ve likely heard people talk about different sorts of markets. What is the difference between a buyer’s market and a seller’s market, and why should a real estate investor care?
It comes down to who has the advantage. In a buyer’s market, plenty of supply exists, so buyers have negotiating power over sellers, leading to low prices. In a seller’s market, little supply exists, so sellers can command the highest prices. I employ different investment strategies for each market.
In the following article, I’ll expand on buyer’s and seller’s markets and the different considerations for investing in each. Specifically, I’ll cover each of the following topics:
- What’s a Seller’s Market?
- What’s a Buyer’s Market?
- What are We in Now?
- Investing Strategies for a Seller’s Market
- Investing Strategies for a Buyer’s Market
- Pricing Considerations
- Final Thoughts
What’s a Seller’s Market?
As stated, a buyer’s versus seller’s market depends on which party has the advantage. In a seller’s market, the seller has the advantage.
It comes down to supply and demand. In a seller’s market, there are few homes on the market, and, therefore, sellers can command high prices and make additional demands from buyers. From an economic perspective, when demand remains the same (or increases) and supply decreases, prices increase. This reality provides sellers a pricing and negotiating advantage over buyers.
Put simply, in these markets, buyers don’t have a lot of options, so sellers can price their homes higher than they normally would.
Here’s a personal example. My wife’s a real estate broker, and she recently placed a home on the market. On the first day, she had 15 showings. On the second day, she had an additional 10 showings. In many markets, sellers would be lucky to have 25 showings in two months, let alone two days.
And, she received four offers from these showings! Of these, two of the buyers included offers that, if the property didn’t appraise, they’d pay out of pocket up to a certain amount to cover the difference. In other words, if they agreed on a price of $200,000, and the property only appraised at $190,000, the sellers would pay the down payment and the extra $10,000 to close on the deal.
Bottom line, in a seller’s market, buyers will do almost anything to make a successful bid on a property, a reality that lets savvy sellers play competing bids against each other to drive up the contract price on a sale.
What’s a Buyer’s Market?
With a buyer’s market, the opposite environment exists, that is, the buyer holds the negotiating advantage over the seller.
Once again looking at this in terms of supply and demand, a buyer’s market means plenty of supply exists on the market while general demand for housing remains the same (or decreases). When supply increases and demand stays the same, prices fall, and buyers can become more picky looking at potential properties.
In basic terms, a buyer’s market means that, if you don’t get a good deal on a property, you can just go look at another one for sale. This removes the negotiating power from the seller and places it in the buyer’s hands. Instead of needing to jump at the first home they see, buyers can go out shopping, as the homes on the market just aren’t getting tons of showings or offers.
In this advantageous position, buyers can typically negotiate for significant concessions from buyers, to include some of the below common ones:
If a seller lists a home for $250,000 and it sits on the market for six months without offers, potential buyers can make a strong argument that the asking price exceeds the market—and therefore warrants a reduction. Many motivated sellers will jump at the opportunity to sell their homes for a little below the asking price rather than continue paying the holding costs of a vacant property for sale.
Seller Covers Closing Costs
While a seller may not be willing to reduce asking price, they may cover the buyer’s closing costs as a concession—which has the same effect. This benefit means that, as the buyer, you need to pay less out-of-pocket for the deal.
Most contracts include an inspection clause. This way, if a home inspection uncovers major problems, the buyer can back out of the deal—or ask the seller to fix the issues. In a seller’s market, a seller may employ a take-it-or-leave-it approach, refusing to fix these issues. In a buyer’s market, buyers often have the leverage to demand that sellers fix all issues uncovered in an inspection.
For example, the ultimate buyer’s market arose out of the Great Recession and associated housing foreclosure crisis. As homeowners foreclosed at record rates—and house values dropped precipitously in many markets—buyers with access to capital could basically pick and choose whatever they wanted, making any demands they wanted. If a bank auction of a foreclosed property didn’t make sense, these buyers could just wait for the next one—or make bottom-dollar offers to sellers desperate to avoid foreclosure.
Are We in a Buyer’s Market or Seller’s Market?
So, what sort of market are we in now—buyer’s or seller’s?
Surprisingly, despite COVID’s impact on the economy, the latter half of 2020 has turned out to be an extremely strong seller’s market. According to the National Association of Realtors, home sales increased by 27%, year-over-year, this October—and that shows no sign of slowing. Low mortgage rates, which increase buyer purchasing power, have combined with low inventory to drive home values through the roof.
When new properties come on the market, it’s not uncommon to see the level of activity outlined above with my wife’s story. And the competition between buyers for limited supply has even reached the point that, in some markets, buyers requiring financing are being outbid by all-cash offers.
In this environment, bidding wars often lead to sellers accepting contracts well above asking price, with buyers willing to pay anything above appraised value out-of-pocket. Quite clearly, sellers have the advantage in the current market.
Investing Strategies for a Seller’s Market
Despite the strong seller’s market we see today, real estate performs cyclically. For investors, this means that while it may be a seller’s market today, the future will certainly transition to favoring buyers at some point in time. As a result, intelligent real estate investors prepare strategies for investing in both a seller’s market and a buyer’s market.
As it’s relevant to today’s market, I’ll begin by outlining my strategy for investing in a seller’s market. And, whether you embrace a fix & flip or BRRR approach, this strategy will help you to invest in a seller’s market.
First—and most critically—successful investors cannot shop on the MLS. While convenient, too much competition exists here. Between actual home buyers and other investors, you’ll struggle to find quality deals on the MLS. In this market, it’s easy to sell but hard to find good deals as an investor. Realistically, by the time you spot a solid deal on the MLS, the property’s likely already under contract.
Instead, using an effective database of properties like our Investor’s Edge tool, investors need to actively seek out off-market properties. In other words, you need to find people who A) have equity in their homes, B) are motivated to sell, but C) haven’t actually listed their properties for sale on the MLS.
This sort of marketing strategy just happens—you need to work to implement a strategy that lets you identify these sorts of deals. And, while not an all-inclusive list, here are a few of the strategies I’ve used in the past to find off-market deals:
As the name suggests, these properties have owners that live in another state. Typically, this scenario arises when a parent passes away, leaving a home to a grown child living elsewhere. While some emotional attachment may exist, inherited properties can become a tremendous pain to maintain, especially from another state, making many of these owners motivated sellers.
And recognizing this niche, enterprising people actively compile lists of these sorts of properties, and they sell them online. If interested in pursuing properties with this sort of strategy, you can buy lists of homes in your area owned by out-of-staters.
Direct Mailings (Postcards)
With the internet, “snail mail” doesn’t matter anymore, right? Wrong! Sending direct mailings to potential buyers can be an outstanding strategy for finding off-market properties. I like to combine this approach with the above out-of-state property method. Once I compile a list of out-of-state buyers, I will send them all a postcard stating that “I buy houses” in a given area (and that area just happens to be where they own an out-of-state home).
With this approach, it becomes a simple numbers game. A portion of people who receive post cards will contact me. A portion of those people will actually make an appointment. And, a portion of those will actually sell me their house.
Have you ever been waiting at a stoplight, looked out, and seen a “We Buy Houses!” poster? These are bandit signs, and some of the most successful investors I know use these to pull in motivated sellers. Simply print 25 or so signs with a Google Voice number listed on it, and post them in a five-mile radius around your home at key places (e.g. Walmarts, intersections, pawn shops, etc.). Once in a while, just drive around to make sure your signs are still posted.
You’ve likely seen these around your neighborhood. When someone passes away—especially an older person—their children put a bunch of their stuff up for sale. And, while these sales typically just include personal possessions, you can also offer to purchase the house. Especially if the parent lived on his or her own, the children typically don’t want to deal with the hassle of keeping up the house.
By offering to purchase the house, you solve this problem for the children while potentially finding a great deal on a property. But as you’re approaching people who’ve just lost a loved one, make sure to use some tact with this technique.
Investing Strategies for a Buyer’s Market
As stated, it may not be a buyer’s market now, but it’ll certainly transition to one eventually. As a result, investors should prepare a strategy for when the pendulum eventually swings this way.
In a buyer’s market, it’s easy for investors to find quality deals, but it’s much harder to sell a fix & flip property after the rehab period. Simply too much supply exists on the market, and you’ll likely need to wait an extended period of time, lower your asking price significantly, or some combination to sell a property.
But all is not lost! Investors still have options to succeed in a buyer’s market. Here are some approaches that I’ve used in the past while navigating the challenges of investing in this sort of market:
While buyer’s markets mean plenty of supply exists, most sellers won’t be willing to extend seller financing to buyers. Regardless of market, some people will just struggle to qualify for conventional financing. Maybe it’s credit score, or maybe they just can’t put together the cash for a down payment. For these buyers, the option to receive seller financing may make your property the most appealing one to them, separating you from the pack of other properties.
However, the associated drawback to seller financing is fairly obvious and directly related to the technique—you need to actually act as the lender. Some investors don’t want to play this loan processing role. But, if you’re comfortable doing it, extending seller financing can be a great way to sell a property in a buyer’s market.
If time is a priority to you, make sure you price your property lower than all comparable properties in the neighborhood. It doesn’t matter how much the market favors buyers, because the best quality at the lowest price will always sell. And if you go into a fix & flip deal planning on embracing this strategy, you can factor this low price into your budget, ensuring that you’ll still profit on the deal.
Adopt a BRRR Strategy
With a fix & flip strategy, investors profit on the sale of the rehabbed property. However, if a buyer’s market prevents you from selling at a profitable price point, simply transition to a BRRR strategy.
BRRR stands for buy, rehab, rent, and refinance. In essence, investors go through the “fix” part of a fix & flip but, rather than sell the property post-rehab, they rent it to a quality tenant, refinance it to take cash out of the deal, and repeat the process with another property.
Even if values don’t allow you to pull as much cash out of a refi as you’d like, putting a tenant in the property means someone will be paying down your mortgage—and thus building your equity in a property. Then, whenever the market transitions back to favoring sellers, you can sell the property for an acceptable price, and you’ll have more equity in it, to boot!
Whether investing in a buyer’s market or seller’s market, investors should always consider FHA financing limits. The Federal Housing Administration, or FHA, provides mortgage insurance to a large number of FHA-approved lenders through the United States. This means that if a borrower defaults on an FHA-insured loan, the FHA will guarantee a certain amount for the lender.
And, FHA lenders tend to be the lenders of choice for many first-time homebuyers, as this FHA backing means that buyers with lower credit scores and less than 20% down payments can still qualify for loans.
What’s this mean to investors?
If you want to widely expand your pool of potential buyers, make sure that you price homes within the FHA-approved limits for your area. These amounts are adjusted by cost-of-living to geographic areas, and they typically increase annually with inflation. If you price a home above your area’s FHA limit, regardless of market, you significantly curtail your pool of potential buyers.
With real estate investing, plenty of people find convenient excuses not to invest:
It’s a seller’s market now, so there’s no way I can buy a home now.
It’s a buyer’s market, so it’s not worth trying to rehab a house that I won’t be able to sell
Sure, you can use these as excuses to not do something, but that’s not what successful investors do! Instead, make sure you understand how seller’s and buyer’s markets work, and then implement strategies to invest into both sorts of environments.
At the end of the day, if you cede the initiative to the environment, you’ll never take the steps necessary to succeed. The most successful investors recognize that markets change and strategies sometimes need to change with them, but the drive to invest never stops.