Robust growth in and around DC coupled with sustained low interest rates over the past several years have created what many buyers have come to see as a miserable market to be in. Imagine finally reaching the point in your life when you feel ready to make the leap into home ownership only to come to find out that what you envisioned you could buy with hundreds of thousands of dollars won’t get you even half of what you wanted.
Sticker shock and high prices are a fact of life in the DC metro area. Unless you’re coming from New York or San Francisco, many of my buyer clients are in disbelief over how daunting the challenge of finding a suitable home is with prices seemingly increasing every month.
Here are some of the challenges first time home buyers in the DC market face today:
A popular trend among sellers today is strategically under pricing homes to instigate bidding wars. Most new listings in our market come online every Wednesday and Thursday to make sure there’s enough time for weekend open house goers to include that home on their list. With tight inventory, buyers who have worked with their agents to narrow their criteria to exactly what they want at a price they can afford look out for email updates telling them a new option has hit the market and a deceptively low price will trigger a rush of interested buyers to look at the home and plan their next moves.
Listing agents and sellers know very well that they don’t actually expect the home to sell for what they’ve listed it for. They often don’t respond to inquiries from buyer’s agents and when they do, they tend to be tight lipped about any information that can help inform a buyer’s offer strategy. Buyers and their agents are then left to put their best foot forward knowing that the chances of receiving a counter offer are low since some of the most popular listings can generate 10,15, or even as many as 25 offers in the first weekend of the listing period.
Buyers not able to pay cash or who have hit their affordability limit are forced to then sweeten their offers with waiving contingencies and protections, exposing them to increased vulnerability and risk. It should be said that there are instances in which the first weekend of a listing period won’t generate many offers at all, leaving an interested buyer with more leverage than they thought. The central issue is that without reliable information from the listing agent and the expectation of competition, it’s difficult to know if what you’re offering is more than necessary or not enough to win the bid.
Opposite of deliberately under pricing a listing, there are plenty of situations where a seller will either unwittingly or very intentionally overprices a home. One of your agent’s main responsibilities is to make sure they inform you of their best estimate of market value of a home that you’re looking to purchase. Even if you can afford mortgage payments on a $400,000 home, paying that much for a unit only worth $350,000 will leave you immediately underwater in your investment and make it very difficult to recoup your losses.
Bold listing agents will often take chances and aggressively price a unit betting that a hot market will produce buyers who are willing to pay, thus setting a new market price. However, that only works until it doesn’t. After a certain number of days on market, a seller and their agent will have to decide if they will “adjust” or “improve” the price or if they will hold steady, hoping that a buyer will come along to pay what they want.
Similarly, investor sellers are often in a position where they cannot feasibly sell a home under a certain amount depending on how much money they invested in the project and whether or not they can afford to take a loss.
Approaching these listings can be difficult. There is somewhat of an anti-intellectualism and lack of business savvy present among a good amount of DC real estate agents who simply believe that market value is more subjective than it is guided by evidence and data. Trying to negotiate with sellers in this camp can be frustrating and difficult as no amount of information will sway them and they will simply put up a wall stating things like “the price is the price” or “the seller is in no rush to sell and will wait”. Your agent should try their best to reason with sellers in this category but in a market where homes can be listed and put under contract within 1-2 days, it may be better to cut losses and move on when it is apparent that the seller is out of touch with the reality of the situation.
Only Being Able to Afford a Low Down Payment
There’s no way around it, life in DC is very expensive. Dynamic and exciting industries centered around the federal government can be dreams come true for many but often not lucrative and many first time home buyers face the challenge of not being able to save as much money as they would like for things like retirement savings and important to this discussion, down payments.
For many years, a 20% down payment was standard and necessary to enter the market. Fortunately, many banks and mortgage brokers offer a wide variety of products with attractive interest rates and low down payment requirements, sometimes as low as 3%. With access to those products, the opportunity to buy a home becomes within reach allowing those with moderate incomes the chance to build real and lasting wealth through home ownership.
Though, qualifying for a loan is only step 1. The issue becomes that while many here struggle to save as much as they would like to, there are plenty of high income earners and those lucky enough to have come into substantial savings through gifts and inheritances who won’t see a 20% down payment as an issue at all. In fact, even more complicating than those who can put down a significant amount of money are those who can pay for homes outright in all cash deals.
Whether I put 3%, 5%, or 20% down, why would a seller care as long as they still net the same amount of money at the end of the day?
Sellers have good reason to worry about those buyers putting a lower down payment when writing an offer on their property. All other things equal, if two sellers offered the same sales price and the same terms in their offers but the difference came down to down payment, conventional wisdom would indicate that the person with a higher down payment has a sturdier financial foundation and is less likely to experience difficulty in securing their loan in the contract phase of the home purchase process. Remember, while you can be pre-qualified for a loan before you write your first offer, you only complete your actual loan application and lock in your loan interest rate after you have an executed contract. If a contract falls through because of any reason including lack of ability to secure the loan, putting the house back on the market often means less leverage for the seller and oftentimes, less money due to them at closing.
Buyers with limited amounts of money down need to know that purchasing a home in a competitive market is still very possible but should strive to manage their expectations knowing there is often very little that can be done when competing against cash buyers and buyers with high down payments. Your agent should sit down with you and help you formulate a game plan specific to each listing you encounter. A one size fits all strategy will not put you closer to winning a contract in our market.
These situations leave buyers exhausted and demoralized. Persistence is the key and with enough of it along with realistic expectations, you can win in a competitive market. It’s critical to spend enough time at the beginning of the home sale purchase to discuss with your real estate agent what your needs are and what you’re willing to sacrifice so that you can purchase the home that’s the best fit for you within your price range.
It is not unreasonable to expect to be searching for a home for 5-8 months and some buyers write several dozen offers before they finally win. Some buyers are tremendously lucky and find a great home at a great price their first or second weekend searching. Really understanding what it is you are truly looking for in this process at the beginning of your search will save you a lot of valuable time, time that can be used to get you closer to finding the perfect home.
Assuming you don’t have an unlimited amount of money at your disposal, the best thing you can do to expedite the home purchase process is to make sure you’re prepared. Here are some of the best ways to do that:
I’d love the opportunity to talk to you about how to navigate the extremely competitive DC housing market, all while finding the perfect home for you as well as making a smart and informed financial investment. Feel free to contact me using the form on the right hand site of this page or at [email protected]