How to buy a house in D.C.’s sellers’ market

May 12, 2012

In January, Hillary and Nicholas Fredrick’s plan to relocate from Tennessee to the District seemed to be materializing. On a whirlwind trip here, they looked at 35 houses, made an offer on the one they liked and signed a contract with the sellers.

That deal fell through when the sellers’ financing hit a snag. But when they moved here in March to begin their search anew for a house in the $500,000 to $550,000 price range, they discovered that the market had changed considerably.

Almost overnight, there were competitors on every house they bid on. “We’ve seen about 60 homes so far” and tried to buy three of them without success, said Hillary Fredrick.

If you’ve dipped a toe into the Washington-area real estate market these days, you know it’s returned to an era of multiple offers, escalation clauses and competitive bidding. According to RealEstate Business Intelligence, the active inventory of homes in March was down more than 25 percent from March 2011. Increased demand, driven by such factors as a stable local economy and low interest rates, has created a seller’s dream and a buyer’s nightmare.

Sellers are in heaven; buyers are feeling the stress. These days you can go to any open house of a home in good condition in a desirable neighborhood, and you’ll find you’re one of a steady stream of potential buyers. Sleep on it before making an offer? Too late; houses that are in good condition and well-located (especially walking distance to Metro or major bus routes) are under contract in one to two days.

What’s a buyer to do? “You have to make buying a house your number one priority,” said McEnearney Associates realty agent Coral Gundlach. That means having your financing in order, knowing exactly what neighborhoods you’re interested in and the realistic range of inventory and pricing in those areas, looking at houses as soon as they’re listed, and being flexible on contingencies and pricing.

Plan for a larger down payment

First, get your financing in order. A simple lender’s preapproval letter based on a phone conversation used to be plenty to get started. Now, to qualify for quick closings, you’ll need to have already supplied the paperwork showing your assets and income. After your initial conversation, meet with your lender and supply this documentation as soon as possible.

If you already own a home and you need to sell it to buy a new one, sell it. Do the necessary work to make it show well, but be realistic about your time frame. In this market, you can’t expect to win a contract on a new house if your financing is contingent on selling your current home.

If you’ve saved well and plan to temporarily cover two mortgages so that you can buy a house before selling your current one, check this plan thoroughly with your lender. Regarding purchasing while retaining an existing home vs. selling first and then purchasing a new home: “We run the numbers both ways up front for pretty much anyone,” said Nick Pakulla, loan officer with First Place Bank in Rockville. In the current hot real estate market, “there’s no magic bullet anymore,” he added. “The most important thing any good lender would do is make sure you can qualify for the new mortgage non-contingent.”

One financing option that First Place Bank has found increasingly popular for buyers who qualify is to temporarily secure a second mortgage on the new home that they can then pay off when they sell the first home. “We’ve had a number of borrowers who don’t even make a first payment and most keep it for only a couple of months,” said Pakulla. However, even this solution has what amounts to a major hurdle for many: “You have to have at least 10 percent down on the new home and there are more strict qualification requirements with regards to income and reserves,” said Pakulla.

As for presenting a signed lease as proof of rental income on an existing property as part of the loan process, said Pakulla, “It used to be easier to count rental income. However, that’s where a lot of the fraud happened in the past.”

Buyers can still make this work as long as they have 30 percent equity in the property, as documented by an appraisal, a copy of the lease, a check for the security deposit and a bank statement showing the deposited security funds, according to Pakulla. “However, this complicates the underwriting process,” he added, which makes for a longer loan process. That can kill a home sale in this market, when buyers are agreeing to shorter and shorter closing dates to make their bids more attractive.

Cash is king

Another factor in successfully securing financing is the efficiency of the lender. So much of the lending process is invisible to buyers that it’s very hard to know whether your lender is going to complete the loan in time when initially locking in the rate. A smooth buying process hinges on the lender, so if you’re getting a bad feeling about how long it takes a lender to return phone calls or answer e-mails, don’t be afraid to start over with a different lender, experts say. In the absence of a reliable lender ranking or rating system, word of mouth makes all the difference.

Those who don’t have to sell a current home to buy a new one have a simpler process, but they still need to be ready to close quickly. Buyers who have the flexibility to close within a week or two are much more attractive to sellers who are trying to close financing on another property.

Most sellers still think cash is king, said Young. “For some reason, sellers think cash is better. Sometimes the cash offer is even less than the competing loan offer and the sellers will accept the cash,” he said. However, even investors with cash are feeling the heat. “Inventory is so low that any time a good investment property becomes available there are multiple offers within days.”

Because it’s a seller’s market, don’t worry that you’ll be homeless between the time you sell your current property and buy your new one, experts said. Make sure you include a “home of choice” contingency on the sale of your current home. This contingency stipulates to your prospective buyer that you need to find a home of your choice before you can close on the sale of your current home. While as a buyer, you may have little leverage in this market, as a seller you have quite a bit.

Depending on the location and condition of your house, you will probably have multiple offers to choose from, from prospective buyers who are willing to accept such clauses.

Second, do your homework. “Look at a few houses to get familiar with your desired market while you’re prepping your home,” said Gundlach. Don’t wait until you’ve got an offer on your current home to get familiar with the inventory in areas in which you’d like to live. Go to open houses and ask your agent to show you listings even if you can’t yet put an offer on one. That way when the timing is right and the right house comes up, you’ll be more than ready to act fast.

Stand out from other house hunters

Third, be first. “Be ready to see houses right when they are listed,” said Gundlach. In this competitive market, that means the day they’re listed. That means relying not only on your agent to send you listings but scouring your preferred neighborhoods for listings yourself. Drive the streets of your desired areas, set up an account on one of the popular real estate sites such as Listbook, Redfin or Zillow, ask friends to let you know if they see any “for sale” signs posted. Monitor the online listings daily, changing your parameters if necessary. At this point in the spring season, you should be seeing numerous properties that suit your criteria. If not, you may have the wrong price for the neighborhoods in which you’re looking.

One thing the Fredricks have learned is to act fast, looking at homes within a day or two of their listing. “We know we have to be prepared to make an offer — above asking. If we wait, we know we’ll have to fight with other offers on the table,” said Hillary Fredrick.

Fourth, be flexible where you can on contingencies. Negotiate shorter contingencies, including the home inspection, home appraisal and financing. Have a clear conversation with your lender about exactly how long it will take to secure financing and talk to your realty agent to determine potential closing dates. The lender’s cooperation is crucial.

“Legally we can close in eight days,” said Pakulla. In this competitive market, offering to close in a hurry can make buyers more attractive. “That’s definitely a good strategy people can use,” he said. The shortest closing Pakulla has done recently was just 10 days. If you can close in under a month or less than two weeks, make sure your agent includes a cover letter with your offer letting the seller know this.

“I have recently seen potential buyers doing home inspections before making an offer. Just recently I was in an ‘active’ listing [no offers pending] and we walked in as a home inspector was in the middle of an inspection for a potential buyer,” said Young. Having home inspection results, or an inspection underway, can make a bid look more attractive because the buyers are clearly serious about going through closing as quickly as possible. The only thing the buyer potentially has to lose is the few hundred dollars for the inspection.

Finally, stand apart. Gundlach recommends to her buyers that they include a hefty earnest money deposit with their bids “to indicate to the seller how serious they are.” While this isn’t necessary, it certainly makes your bid stand out from the others. The Fredricks are using this strategy as well. “We’re trying to make the earnest money check as substantial as we can to make sure they know we’re serious buyers,” said Hillary Fredrick.

The cover letter can also make your offer stand apart and sway sellers in your favor. “Sometimes sellers will make an emotional decision if all offers are similar. They go with the buyers they like,” said Gundlach.

Susan Straight is a freelance writer.

Next week: Strategies for sellers

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