For starters, you can employ the same techniques that have worked for many who live by the creed: Buy low and sell high. The first step is to determine the type of real estate market that exists in your town.
Types of Real Estate Markets
Although there are many variations and twists, basically real estate markets fall into three categories:
- Buyer's markets
Buyer's markets exist when there is more inventory, meaning houses for sale, than buyers. Because buyers have many homes to choose from, not every home for sale will sell. Most experts agree that if six months or more of inventory is on the market, it is a buyer's market. Also note that in buyer's markets, fewer numbers of buyers will result in fewer sales, which can skew median prices.
- Seller's markets
Conversely, in seller's markets, there are more buyers than available inventory. Because there are fewer homes for buyers to choose among, almost every home will sell. Typically, there is much less than six months of inventory in a seller's market. In extreme seller's markets, there is less than two months of inventory in reserve.
- Neutral markets
Neutral markets are balanced. Typically, interest rates are affordable and the number of buyers and sellers in the marketplace are equalized. The scales don't tip in either direction, meaning the market is normal without experiencing volatile swings. Inventory is generally around four months, give or take.
Note that good buys exist in neutral markets, but there are no overall indications that favor buyers over sellers or vice versa.
Buying in a Buyer's Market
- Lower sales price
Sellers are more willing to wheel and deal because they know if they refuse to accept your purchase offer, they might not receive another. When fewer homes are selling, prices typically fall.
- Buyers can command concessions
Buyers can ask sellers to pay their closing costs, providing their lender will allow the credit. Buyers can also expect sellers will pay for special reports such as pest inspections or roof certifications and a home warranty.
- Contingent offers are more acceptable
Sellers are generally more agreeable to accepting a contingent offer that is dependent on the buyer selling the buyer's existing home. An offer in the hand is better than no offer at all.
- Request for repairs easily negotiated
If the home is in need of repairs or updating its systems, sellers will often credit the buyer for the repairs or fix the problem(s) noted by a home inspector.
- Buyers control the transaction
Buyers can ask for longer inspection periods, extend closing deadlines and ask for early possession -- terms that would be automatically rejected in a seller's market.
Buying in a Seller's Market
If a buyer has no urgency to buy a home, it's not a good idea to buy in a seller's market. Here are a few disadvantages to buying a home in a seller's market:
- Top price
Multiple offers are common. Sellers command list price and get it.
- No concessions
Sellers are reluctant to pay any of the buyer's closing costs or pay for inspections.
- Contingent offers rarely happen
Seller don't want to wait for a buyer's home to sell.
- Request for repairs are not honored
Sellers will typically tell buyers to purchase the home "as is."
- Sellers control the transaction
Most sellers will not bend from the original contract, regardless of circumstances, because there are three more buyers around the corner.
Selling in a Buyer's Market
If a seller does not need to sell, there is no logical reason to put a home on the market in a buyer's market. Here are disadvantages to selling in a buyer's market:
- Lowball offers
Sellers in soft markets lose equity. Little demand for homes puts pressure on sales prices, causing buyers to make lowball offers.
- Buyers expect concessions
Buyers will ask sellers to pay for closing costs, thereby lowering the seller's net proceeds.
- Contingent offers are riskier
If a buyer's home does not sell, neither will the seller's, and by that time, the number of buyers typically dwindle even more.
- Buyers demand repairs
All those little things sellers have put off repairing will pop up in the home inspection, and buyers expect sellers to fix them.
- Sellers do not control the transaction
Buyers tend to ask for "out" clauses that would let them walk away from the deal all the way to closing.
Selling in a Seller's Market
This is the best time to be a home seller. Here are a few advantages to selling in a seller's market:
- Higher sales price
The list-to-sales-price ratios are lower in seller's markets, meaning sellers command higher prices, sometimes over list.
- Concession refusals
Sellers refuse to pay buyer's closing costs, and they often reject offers asking for seller-paid inspections.
- Contingent offers are rare
Buyers find it easier to sell their homes and realize sellers will not agree to a contingent offer with 10 buyers in the wings.
- Buyers rarely request repairs
Buyers still obtain home inspections but forego a request for repairs, accepting the property "as is."
- Sellers control the transaction
It's common for sellers to negotiate shorter inspection periods and to demand buyers waive certain contingencies such as appraisal or loan contingencies.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.