Buyer’s tricks in a runaway seller’s market

3 min read

Buyer’s tricks in a runaway seller’s market

Dear Steve,
You know that phrase, “You’re not in Kansas anymore”? Boy, did that ring true when I moved from Kansas to San Jose, Calif. Sticker shock doesn’t begin to describe how amazingly high the home prices are here. Instead of negotiating from the asking price downward, it’s common here to use the asking price as the starting point, and buyers have to bid the price up. And you have to do it lightning fast or you’ll lose the house. I could use a few hundred thousand more dollars, but I could also use some advice: How do you deal with buying in a superheated real estate market?

Dunno The Way

Dear Dunno,
You could try clicking your heels together, but that might raise a few eyebrows at a crowded open house. Even offering ruby slippers as part of your earnest-money deposit still may not get you a leg up on the competition in San Jose, which was referred in one local publication recently as a “screaming hot” sales market.

“I recently handled what was considered a fixer-upper in a nice area of San Jose and I got eight offers on it,” says Thomas McEvoy, a broker associate of Coldwell Banker’s Mili Realty Group in San Jose. “And that’s just a fixer-upper!”

But don’t despair (at least too deeply). There are a few strategies you can employ in such a sellers’ market to secure the property you want at around list price:

Mortgage pre-approval: One that sets you apart immediately is getting pre-approved, not just pre-qualified, for a loan in your price range before you even make an offer on a home. This tactic sends an immediate signal to the buyer that you are willing and able to deal.

Auctions: Especially rare in a market like yours, but it’s till possible you may find a handful of opportunities to pick up foreclosed homes at auction in your area. “But a lot of people don’t realize that these require 100 percent cash almost immediately, and you have to have a bank credit line and show the money to an auctioneer to even bid on one,” warns McEvoy. “Obviously, not everybody has that ability.”

If you go that route, get a contractor to estimate repair costs on the auction home if you can. You may find you’re better served by building the cost of repairs into a larger purchase price to get a home in excellent condition.

Pre-foreclosures: Then there are pre-foreclosures, in which highly motivated sellers attempt to exit their homes — often at or below market value — before the worst happens. But they’re pretty tough to find in a market such as San Jose. “To get a tip on one of those, you almost have to know somebody who’s getting into a major financial problem,” says McEvoy.

Extra incentives: Some of the more desperate home buyers in your area have offered sellers free rental for several months after the sale. “Sell your house to me and live there free!” Others have taken to plunking down far more earnest money deposits than the standard 3 percent, in an effort to convey their seriousness and possibly thwart a bidding war.

Take a look at noncash assets you may have that you’d be willing to give up and which the seller may take as partial payment. Getting credited with, say, $20,000 for the appraised value of a family heirloom diamond ring is like selling it at its full retail value. Antiques, collectibles, artwork, jewelry, vehicles and time share units are among the many possibilities you may be able to offer the seller.

Financing alternatives: Another approach would be to use various alternative financing methods to lower your monthly payment and give you the ability to go somewhat higher on the purchase price. Think about getting a short-term adjustable rate mortgage (ARM) at a very low rate. Even if rates rise in an ARM, your equity in a super-hot market is going to rise faster, giving you the option in the future to refinance. Also talk with potential lenders about buying down the rate so that you can qualify for a higher purchase amount or perhaps getting a short-term balloon mortgage at an especially low rate.

Avoid PMI: By putting less than 20 percent down you almost always force yourself into paying a monthly premium for PMI — private mortgage insurance. Whatever amount you pay for this is wasted money because it doesn’t go toward either the principal or the interest. Try your best to make the 20 percent figure so all the money you can apply to monthly payments goes toward the purchase price.

As a buyer, you’re definitely in a tough spot in such a hot market. McEvoy says the median price locally in February 2004 was $566,200, up 1.3 percent over the previous few months and up 5.8 percent from the same month a year ago. Sellers are receiving 98.9 percent of list price on average.

One thing you’ve obviously learned on the way to San Jose is that the longer you wait, the more you’ll pay. So it may be a good idea for you to buy something to get in on the equity buildup. You’re in a market with higher risks and higher rewards.

The old saying, “There’s no time like the present,” is especially germane in your market. Happy hunting.