The last thing potential buyers want to hear is that we are currently in the midst of a seller’s market. However, I’d argue that there’s no cause for concern. There is absolutely a viable exit strategy in any market, regardless of whether or not it favors homeowners. The key is to maintain a level head and analyze the data in front of you. If for nothing else, it’s entirely possible to run a lucrative real estate investing career in a market that appears to favor only sellers; you just need to know how to work with what you are given.
A seller’s market is the direct result of economic indicators that benefit homeowners more than the buyers they intend to work with. In its simplest form, however, a seller’s market is exactly what it sounds like: a real estate market whose scales are tipped in favor of those who currently own property. Perhaps even more specifically, a seller’s market is nothing less than a best case scenario for homeowners, which begs the question: Outside of the actual condition of a marketplace, what are the specific characteristics of a seller’s market? What factors actually give the edge to homeowners? Better yet, what’s it all mean for the whole of the real estate landscape?
The vast majority of people understand the concept of a seller’s market (it’s relatively simple), but fewer have an intimate knowledge of why a particular market would benefit sellers over buyers. Fortunately, the fundamental concept behind a seller’s market isn’t all that difficult to grasp either; it can be broken down into one important principle: supply and demand. If for nothing else, a seller’s market is “a market condition characterized by a shortage of goods available for sale, resulting in pricing power for the seller. A seller’s market is a term commonly applied to the property market when low supply meets high demand,” according to Investopedia.
When demand meets a shortage of inventory, the homes that are available for sale become inherently more valuable. In other words, when more buyers are competing over fewer properties, it’s likely that the homeowners are at a distinct advantage. The competition simultaneously allows owners to increase asking prices without risking the loss of interest. Therefore, it’s safe to assume a seller’s market coincides with everything buyers would rather avoid: higher prices, more competition and a much faster pace.
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Anytime supply can’t keep up with demand, sellers will reap the rewards, inevitably resulting in a seller’s market. The more inventory levels are depleted, the more buyers will be willing to pay when they find a house that meets their criteria. Consequently, a buyer’s market occurs when there are more than enough homes to satiate demand. The ratio of buyers to available inventory will actually work in favor of buyers in a buyer’s market. When inventory levels are comparatively high to the amount of people looking to purchase a house, history suggests sellers will compete over shoppers that are awarded several options. Therein lies the single most important differences between a buyer’s and seller’s market: supply and demand.
It is worth noting, however, that the housing market is nothing, if not self-aware. The same pendulum that can swing in favor of sellers will eventually course correct to offset the resulting imbalance and, in turn, overcorrect to the point in which a buyer’s market is eventually realized. The housing market is, after all cyclical. Each seller’s market will eventually be replaced by a buyer’s market (and vice versa), with the middle ground representing the balance a healthy market covets. As a real estate investor, you would be wise to remember that. For every buyer’s market, there is a sellers market; for every seller’s market, there’s a buyer’s market. The two have become synonymous with each other, and those that can tell the differences between the two stand to gain an edge over the competition.
We are currently in the midst of a seller’s market, but I digress. The fundamental indicators supporting today’s housing market are anything but normal. It is true: everything suggests 2018 is a seller’s market. Inventory levels can’t keep up with demand. As a result, we have seen home prices increase almost exponentially. It is important to note, however, that we haven’t seen as many homeowners participate in the market as we would like. Despite being a seller’s market, owners don’t appear ready to sell for one simple reason: the moment they sell, they will be forced to join the ranks of buyers competing over the little inventory that has made itself available. As it turns out, most homeowners are content living with their equity for the time being. It is, therefore, safe to assume we will continue to see a seller’s market until more inventory makes its way to the market.
I maintain there is no market that can’t be taken advantage of by savvy real estate investors. More importantly, there’s an exit strategy for just about every scenario, no matter how expensive or cheap the market finds itself. That said, there’s no reason to be discouraged by a seller’s market if you are looking to acquire your next deal, but rather invigorated. Take solace in the fact that it is still possible to invest in a seller’s market if you exercise the right exit strategies.
Due, in large part, to the absence of significant profit margins in a seller’s market, markets like the one we are seeing today tend to favor long-term strategies. Of course, it’s entirely possible to find a deal to rehab and flip in a matter of months, but the data suggests now may be a good time to look at acquiring rental properties.
Rental property acquisitions won’t come with a smaller price tag, but they will award investors the opportunity to offset the higher costs with a few years of rental income. In other words, it could potentially pay off to buy a rental property in a seller’s market. You will certainly pay more upfront, but the passive income potential could easily make up for the initial cost. In some cases, it may only take a few years to make up for the added costs. At that point, investors may choose to continue collecting rental income or, if the market is right and the numbers work, rehab the property and sell it at a later date. The returns may not be immediate, but the idea of buying a rental property could pay off in the long run.
Now, as for the process of buying a property in a seller’s market, there are a few things that could ease the high acquisition costs:
Harness Leverage: I can’t stress this enough, especially when investors depend so much on attractive profit margins. The best thing investors in a seller’s market can do is to harness any leverage they can. Find out exactly what the seller wants, and determine whether or not you can give it to them. You’d be surprised at how often they covet something else other than money. For example, a homeowner facing foreclosure may covet a speedy sale over a few thousand more dollars. If that’s the case, you could negotiate a better deal by offering a quicker closing date. More often than not, owners facing foreclosures are working on borrowed time, and would rather sell for less if it means guaranteeing a faster closing. Remember, it literally pays to learn what’s most important to the owner. Find out for yourself what they really want, and formulate a plan from there.
Use Cash: When the time comes to make an official offer, I recommend using cash. At the very least, an all cash offer will place you at the top of a seller’s list of viable candidates in a competitive market. Perhaps even more importantly, there are some sellers that are willing to cut their prices and strike a better deal for those that pay in cash because it’s better than working with a bank. You see, cash allows you to cut out the middleman, which significantly reduces the amount of time it’ll take to close on a property and the risk of a deal falling apart in the eleventh hour. You’d be surprised at how much that’s worth to many sellers.
Offer More: While it may sound counterintuitive to those looking for better spreads, sometimes it helps to add a little more to your initial offer. Doing so could edge out the competition just enough to avoid a bidding war. In other words, it may benefit you to pad your offer if it ultimately eliminates competition. The last thing you want is to enter into a bidding war in a market like the one we are currently in.
Despite a seller’s market inherently favoring homeowners, there’s still a few things you can do to maximize your profits, not the least of which include:
Price It Right: While it may seem reasonable to price your home for as much as possible, you may want to reconsider. The most important thing sellers can do is to drum up interest. Of course, a high starting price may seem like a great idea, but consider this: more buyers will be attracted a smaller price. You may want to consider pricing your home slightly under where many would expect to see it. Doing so will certainly catch more buyers’ attention and, in doing so, increase its perceived value. And therein lies the benefit of a slightly lower price point: more competition. If you can attract more people to your home with a lower price, it’s reasonable to assume the competition will spark a bidding war.
Stage The Home To Sell: I highly recommend hiring a professional stager to present your home in the best possible light. More importantly data suggests properly staged homes can actually sell faster and for more money. At the very least, a staged home will attract more prospective buyers, contributing to my first point on this list.
Spread The Word: Selling a home is more of a numbers game than anything else. The more interested buyers you can come up with, the better. Therefore, it’s in your best interest to market to the best of your ability. Do everything you can to tell everyone you can. Don’t assume the seller’s market will do all the work for you; you could be losing out on your most valuable buyer.
We are currently in the midst of a seller’s market, but the doesn’t mean homeowners can sit back and rest on their laurels. Complacency could significantly reduce your opportunity to maximize profits. Instead, take the time to learn the ins-and-outs of a seller’s market, and what it takes to work in one. Only those comfortable working in any condition will find success easier to come by.