5 Tips for First-Time Home Buyers in This Housing Market

Certified Mortgage Advisor
NMLS 1701021
Published 
August 16, 2022

What to do with this changing market

Now that the housing market is changing. What should you do? I wanna walk you through some advice from a Sacramento appraiser, and this is on the Sacramento Appraisal Blog by Ryan Lundquist, which is a fantastic, blog that you should check out, and subscribe to. He has really great insights about specifically the Sacramento market, but it does apply to a lot of markets across the US.

The market has shifted and it's difficulties

What I think a lot of home buyers are facing right now is they're recognizing that the market has shifted. That's not super big news to most people, but what's difficult is some of the advice that was given when the market was really a heavy seller's market. Isn't as applicable as things start to shift into a little bit more.

Of where we're at now, which isn't quite a buyer's market. But, and isn't quite out of a seller's market. We're moving into a little bit of some more neutral territory in different markets. And of course, there are some markets that are hotter than others. And so he walks through some advice here that I think would be really helpful if you are looking to buy a home soon, or maybe you're looking at buying in a few months from now and wanna get a better gauge on what this market is like.

Sacramento Appraisal Blog

You can also check the article. This article is geared towards advice for buyers and then near the bottom. It also has advice for sellers as well. If you want to check those out, just wanna talk about the buyer's advice at the moment.

Don't low ball!

So first he brings up don't low ball like it's 2008. It's not a name, your price market. So you still have to make reasonable offers instead of way below market value. I find some buyers think it's 2008. That's not the vibe right now. For instance, a property was priced well at 450,000 and a buyer offered 320 and it closed at 455, $5,000 above the asking price. So if you get lucky at a low level, great, I'm just saying being reasonable rather than lowballing is likely a better strategy.

And really, I think this sentiment really applies. It's not just realtors pushing the narrative of like, Hey, you should buy to make some commission. Maybe some realtors are like that. Actually, there's probably a good amount of realtors that are like that.

Love it, but it!

But it's often this thing where it's if you want to buy a home and you see a home that you like, it's okay to pay money, to get the house, right? I know everybody wants a deal on a home. I totally get it. I absolutely understand, not wanting to overpay for a home and get yourself in a bad financial situation, but that is completely different than paying a fair market value for a home. So just keep that in mind. It's amazing the number of times I've talked with buyers and they say, I love this house so much. And then they go in lowballing, right? Make your offer actually back up how you feel about, the home that you're looking to buy.

Don't say you love it but don't want to buy it

Another example, I was talking with my aunt the other day, who is also a real estate agent, and it happens that seems like everybody in my family is becoming a real estate agent at this point. She was talking about, how she was working with a buyer who really wanted this house. They were like, this is our dream house. We really wanna move in here. And through putting in offers and they had these little back and forth, this kind of like little tiff about these little tiny things. Like one of them was if someone was gonna move the washer and dryer, like things that can definitely be done after you buy the home. And they got to the point where they were like, well, if they're gonna be that way, then we don't wanna buy them.

Then we're not gonna buy it from them. You just said this was like your ideal home, but you're not gonna buy it because you got a little annoyed with the seller that shouldn't matter in the grand scheme of things.

Low balling can be a little tricky

So ultimately this market is completely different than in 2008. And 2008, we had an incredibly unsafe credit system where mortgages were given out kind of a little bit like candy. And they're really not like that anymore. This is a vastly different market than 2008. So, although I do think that the market is shifting in your favor, where you can begin having more aggressive offers in your favor, like lower prices or better terms for you. Don't just come in and super low ball it, and then be upset that you didn't get the house.

If you are gonna low ball, that's okay. And there's nothing morally wrong with that. You have every right to do that. Just understand that the market isn't really conducive to you. Just being able to throw out whatever price you want and being able to get it.

Be patient

He also says to be patient instead of selling in hours or days, properties are spending weeks or longer on the market. This is a real advantage for buyers because what that ends up happening to a seller is they're like, oh my gosh, my home. Isn't selling in two hours, what's going on? And they start to realize that they don't have as much control anymore, and that's where you get to come in with a little bit more of an aggressive offer. So he says, you can take more time to shop yet, if you find something perfect, be swift since properties that check, all the boxes are going quickly with multiple bids.

Stay in the right path

It's important to keep in mind that even though the market is shifting, it doesn't mean that it's this huge overcorrection on the other side where there's nobody still competing. There are still people like he mentions if the home checks all the boxes if it's the right price. There likely is still going to be multiple offers on it, meaning you're gonna be competing against other home buyers. So that's why you don't wanna come in and just put you know, your best foot forward, and then being upset if you don't get the home.

So if you are in that spot where you're like, I want to buy the home that meets most of the things that I want. Be patient, but make your offer, align with your intention about the house that you're buying as well.

Ask for credits

Also, ask for credits, if you can. So he said we're tending to see more buyers asking for credits to help with closing costs or repairs. So talk with your agent about whether asking for credits is something the market will allow. And this is gonna be all in your local market, and remember this isn't going to work in every price range or situation.

So like Sacramento, for instance, a lot more competitive than Dayton, Ohio, where I'm at. So what happens here is when you put in an offer to buy a home, you can say, Hey, I'd like to buy your home for, let's say $450,000. And I would like a credit back at closing towards my closing costs.

So with those or repairs, for instance, so with those, you can do things like buying down the rate, which he talks about in the next section or just use it to pay for things like your appraisal your recording fees, title insurance, homeowner's insurance, things like that.

Buy down the rate if possible

Buy down the rate if possible, and talk to your loan officer about what it would take to buy down the mortgage rate. This means you can pay more to get a lower rate, or better yet. If you're in a situation where the seller is going to offer a credit consider using that credit to buy down the rate, getting your monthly payment lower can be a massive financial win. And he is absolutely right about this. This is something that I don't think a lot of people really realize as much.

But you can use the credit that you get from the seller when you negotiate. If you do get one to actually buy down your interest rate, and when you talk with a lender, You can say, Hey, can you show me options of if I paid points upfront to lower the interest rate?

Be mindful of this!

Now, something I want you to be careful of is in this market right now. There are a lot of people advertising, temporary buy downs, things like two, one buy downs. Basically what this does is it only temporarily lowers your rate for the first couple years. But your mortgage payment is going to go up over time. I personally don't think these are great options because it really is kind of stereotypical, like get you in with a low rate, but then your rate is going to increase.

It's gonna, you know, it will go up. It's not like an if it will. Absolutely. I'm not a huge fan of them. I think they can be. They can put buyers in bad financial situations because the expectation is your income will increase. That's really the only reason you would get that temporary buy-down. I'm not a huge fan.

However, you can get just a regular buy-down where you pay money up front and the lender gives you a lower interest rate over the term of your loan.

The Loan Clarity Advisor

So for instance, I have here I built the software called The Loan Clarity Advisor. I think it's awesome. Helps you compare loans side by side.

Scenario

So what I did is I put in a quick scenario to show you three different options. Now, I have to put them on two different calculators, because one is a price reduction. So lemme walk you through these scenarios.

So let's say we're buying a $400,000 home, or that's what the seller's asking for. Great. So three options, let's say we have $10,000 that we're gonna play with. So what we could do is we can ask the seller for a $10,000 credit. What that would allow us to do is we could look at that, you know, it has to offset our closing costs in the right way. So talk to a loan officer about this, but if we offset our closing costs, instead we could increase our down payment, right? So the seller can't directly pay for our down payment, but if it offsets our closing costs, we can use that additional money to go towards the down payment.

Hope that makes sense. Just let me know if I need to clarify. So we can increase the down payment by $10,000 extra. So instead of doing 3% down, we can do 5.5%. All right. 5% interest rate, zero points. For the sake of the example, no lender fees here. Option two, we can buy down the rate instead of using that extra $10,000 to increase our down payment, which in reality is offsetting our closing costs.

What we can do instead is we can have a 3% down payment, which is available for first-time home buyers on conventional loans. We can pay $10,000 in points, an upfront cost. And get a 3.99% interest rate. Now the mortgage insurance is higher monthly because we have a larger loan size. And our third option here, um, I'm gonna cover this over a little bit is instead, what if we reduce the price by 10,000?

Right? So through all these options, the seller is giving us a credit of $10,000. So it's either to offset or closing costs so we can increase our down payment or we use it to buy down our rate. So it gets lower, or we just say, you know what, just knock $10,000 off the top. These are all things that can be negotiated.

So in this instance, 3% down, 390 purchase price, which is why I need to have it on a separate calculator 5.25% interest rate. Zero points, zero fees, mortgage insurance. About the same as this second option here. And just a quick side note, you can get this calculator The Loan Clarity Advisor if you want to use it for your situation.

Checking the Total Cost

So what we would do is I want to take a look at what the total cost is. What I wanna look at is let's just look at a 10-year average. That's the average time somebody is in a home. So what we wanna consider is all the costs of financing to see which one of these is a better loan option for us.

So that's the way we actually figure out these numbers. It's not just the interest. We need to look at mortgage insurance interest, and any points included.

So when we look at this over 10 years, the increased down. Has a total financing cost of $190,000 over 10 years buying down the rate is172, so $17,000 cheaper. And then the reducing price option is $208,000.

So the better option here is if we choose to get a credit to buy down the interest rate, it allows us to save about $17,000 over increasing the down payment, and about, $25,000 over reducing the price. The same thing with the monthly payment here, it'd be about 180 bucks cheaper per month when we buy down the rate and the monthly payment here is $2,740 on reducing the price. So that definitely is an option to buy down the rate. If you'd like.

Target overpriced listings

Then he also says target overpriced listings. Overpriced homes represent opportunities for buyers. So go after them. Of course, some sellers are stubborn about accepting offers below their unrealistic list price. So here, one of the best ways to do this is to talk with your real estate agent.

And asking them, Hey, can you help me spot some of these properties, a really good way to identify these is going to be through looking at how long the home has been listed and the average days on market. Right now from a national perspective, the median days on market, um, is sitting in July about 35 days.

And you can see this has a kind of cyclical nature to it. So talk to your agent about what's average for you in your specific market that can help you spot some of these properties where you might see some of those sellers who are still feeling like it's the market is what it was maybe six months to a year ago.

And they're feeling really confident about being able to list maybe over what it's worth. And you can come in that's an opportunity to look at it. 

Don't overpay

On one hand, it's unwise to lowball as a strategy, but still try to get the price lower if possible local stats show, that even when properties get multiple offers today, they aren't tending to get bid up to the crazy levels we saw last year.

Generally speaking, you probably don't need an offer as aggressively high as you might have two quarters ago in Sacramento last month we saw buyers on average pay about 2% below the original list price, which comes out to $12,000. This is the average though. So it would be a colossal mistake to automatically offer $12,000 below whatever the asking price is.

Remember, there are many examples of offers still going above the list price. So don't impose an average on every escrow. So basically this is a really good reminder to understand real estate is all about these local neighborhoods and the averages might come down to 2% below the list price, but different markets are gonna be different.

This is where a real estate agent can help you look at what's happening in different local markets. And when you're looking at, should I offer a home? A real estate agent is gonna be really helpful in helping you understand how to look at comparable homes and what those homes sold for.

Maybe within the past few months, past six months, past year, and looking at what is going to be a fair price for the home that you're looking to purchase.

Realize there is still competition

Also, realize there's still competition in about 37% of homes last month, and the Sacramento region sold above the original list price. So not everything is selling below like some are talking about. Remember selling above or below the list price. Isn't just about the market. It's about how the property was priced, right? Because a seller can come in with. A certain list price kind of a strategy to entice buyers to come in, right?

This House Was Swarmed By Home Buyers

This happened, I made a video about a home where it was like swarmed by home buyers. And there was a video of somebody showing just, I can't even tell you, it was at least 50 buyers, just kind of sitting in line, waiting to see the property. And if you look at why was this home so attracted? Why was this one home gathering so much attention? It was because in the height of a seller's market, those sellers came in and listed for a super low price. And so you have all these buyers saying, oh my gosh, we have got to go see that home and write an offer. And then when you get this huge influx of competition.

It's going to sell above because all those people are competing and they see all the competition. And so it's not always a good indication if a home's being fairly priced or not. Just based on the list price.

What is list price?

The list price is more about the strategy of the seller, trying to get buyers interested in the home rather than what the fair price of the home is.

Don't string sellers long

Finally, don't string sellers long. An agent friend told me about a situation where the buyer was in contract for 40 days and then backed out. Look, it happens and buyers should back out as needed. So I'm not saying to state do what you need to do. All I'm saying is if you're on the fence, find a way to be decisive so you can give the seller more space to find another buyer in a market with quick change. Idling buyers can cost the seller money.

What is a good negotiation?

Now I know a lot of buyers aren't in a super empathetic position at the moment. Totally get it, but usually in the long run, and as you're in the home shopping world for maybe, you know, hopefully not super long, but a lot of people have been in that home shopping phase for quite a bit of time.

Try to be nice to people

It's usually better if we try to treat people like we would wanna be treated and ultimately you can still get a great deal and negotiate well while being considerate of somebody else. I think sometimes people feel like real estate's a zero-sum game where the only way to feel good about the home that you bought is to make sure that somebody else got screwed over. And it's like, well, if I'm not taking advantage of somebody or I'm not screwing somebody over, if I don't feel like they got the short end of the stick, then it wasn't a good deal for me.

Be human and learn to compromise

When real negotiations are actually about two parties getting pretty close to what they want usually a good negotiation involves compromise on both sides and both people being pretty content walking away with the deal that they had. Your deal does not have to include somebody getting the short end of the stick to feel better about where you're going.

Make your offer realistic

So ultimately, this is really great news for buyers also. You're getting more options, more leverage. Just keep in mind that things haven't completely flipped the other direction. Keep in mind why you wanna buy. And if you're in that spot where you're like, I really want this home. Make your offer reflect your intention with the home.

If you don't really care about it that much and you're like, you know what? It's moving right now. Isn't, it's more of a want than a need. Great. Your offer can reflect that. But if you're saying I really need a home, I really want this home. This is perfect for us. And your offer doesn't reflect your intention. You can't get upset that you didn't get the house. So just keep that in mind.

You're getting more leverage to be able to put in better other types of loans, not just conventional, not just cash things like FHA, VA, USDA, and more favorable terms. Where you don't have to wave inspections and wave appraisal contingencies, just to be able to have a seller entertain your offer.

Talk with a loan officer
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