As I write this, I am surrounded with this week’s newspaper real estate sections. The headlines call out the fact that home sales are up, home prices are up, and home inventories are down. Why just this morning I showed a home to some buyers who early in the week had found 5 homes they wanted to see, but by this morning, two of the five were under agreement and so not able to be seen. Property is moving again!
Buyers are discovering, to their dismay that homes they wanted to see or possibly buy have already been snatched up before they even get a chance to see or make an offer on the property. Our area’s unprecedented low inventory levels are slowly driving up home prices and making sellers reluctant to cede little if any concessions to buyers.
There’s no better gauge of the onset of a seller’s market than the demise of concessions that were once considered essential to attract buyer interest just a few months ago. But with inventories down and prices up, sellers are ending the costly incentives they have been forced to offer buyers during the six-year long buyers’ market. The market has steadily moved towards a seller’s market with buyers more willing to bear closing costs, in some cases paying for half or more of the closing costs. Tight inventories of homes for sale are making markets increasingly competitive.
Last year sales were so slow that 60 percent of all sellers offered an incentive of some kind to attract buyers. The most popular was a free home warranty policy, which costs about $500, according to NAR this was offered by 22 percent of sellers, but 17 percent upped the ante by paying a portion of buyers’ closing costs and 7 percent contributed to remodeling or repairs.
Concessions linger where inventories are still adequate and sales slow, but in tight markets the times when buyers can expect concessions are already over. And where the supply is dwindling and sales are moving to a more balanced market, buyers can expect sellers to offer even fewer concessions and sales prices will be close to list price.
Not only are most concessions a thing of the past, but also some desperate buyers are even resorting to writing “love letters” to win over sellers in competitive situations. When buyers know they are in a competitive market and there will likely be multiple offers, it makes sense to write a letter introducing themselves to the seller and explaining why they liked (and wanted to buy) the home so much. The idea here is to get the seller to choose the letter-writer’s offer from the multiple offers they have to sort through.
New regulations enacted last year by the Federal Housing Administration to limit its exposure to risk forced many sellers to cut back on the amount of assistance on buyers’ closing costs. Sellers are now limited to no more than six percent of the loan amount at 90 percent loan-to-value or lower, and then usually 3 percent for 90 to 100 percent loan-to-value.
Some sellers bump up the home sales price to pay for concessions. But when this happens, and the buyer is getting a mortgage, then he will need to borrow the increased amount, (and he will need the property to appraise for the higher amount). So it will make sense to focus on concessions that will actually increase the value of the home, because the buyer will have to meet increased debt-to-income ratio in order to close his loan.
Making concessions or simply lowering the price are both powerful incentives to attract a buyer. As the market ebbs and flows, sometimes it’s a buyers market and sometimes a sellers market, but the recent limiting of concessions will make buying and selling a little simpler and more rational for all parties. From my standpoint it will make writing a contract a little simpler. As one observed asked, “In this market, why would anyone selling a home pay the buyer to buy it?”
Dane Hahn is a real estate professional. You can reach him at 941-681-0312 or by email at email@example.com. See him on the web at www.danesellsflorida.com