Helping Clients and Agents in a Low Inventory Market

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3 Takeaways:

• Waiving some contingencies such as an inspection can put buyers at financial risk.
• Clients need to be emotionally prepared for the possibility of finding a home they didn’t envision.
• Sometimes putting in an escalation clause or a bigger earnest deposit can help make an offer stand out.

Existing-home inventories have been at record lows since the start of the pandemic. The number of homes for sale nationwide plunged 42.6% year-over-year in January, according to realtor.com®. And 88% of 161 metros tracked by the National Association of REALTORS® posted double-digit annual price increases in the fourth quarter of 2020. Buyers are offering big bucks after getting outbid on other homes they wanted, or just because they’re afraid they won’t find another property they’re interested in for a long time.

So, how can you help your buyers and your agents come out on top without opening up too much risk?

Why Low Inventories Persist

The reasons vary across the country as to why competition for homes is so fierce, but right now, one of the main driving forces continues to be the historical low-interest rates. It has attracted renters wanting to get into their own houses—along with the desire for more space during the COVID-19 pandemic. Also, people who already bought a home a few years ago locked in low enough interest rates, and they don’t want the hassle of selling and trying to find something better. So, they stay put.

For those who want to build a new home, well, good luck. Construction costs have skyrocketed with lumber prices climbing 130%, which increases the price of a single-family home by more than $16,000, according to the National Association of Home Builders. Tariffs on Canadian lumber shipments also held up building materials.

Thiel and his wife, Karen Thiel, work as a team helping clients find the best house at their budget. The Thiels’ area of Seattle faces a lot of complications when it comes to housing. With all the high-tech companies paying big bucks to employees, developers have focused on building high-end luxury homes. That means finding homes for low- to middle-income families is a tough job.

“We see a lot of flippers out here,” Troy says. “They take grandma’s old home, tear it down, and build three more in its place.”

But that hasn’t produced enough homes to fill the need. Now he’s seeing a new trend during the pandemic: People don’t have to go into the office anymore, so they’re finding areas in suburbia and rural communities to call home.

The Best Advice to Your Agents and Clients

First, you don’t want your buyers to overspend, buy a house they later regret, or lose their earnest money because something goes awry.

Lutalo McGee, owner and managing broker of Ani Real Estate, and team leader of The McGee Team in Chicago, says he tries to teach agents how to navigate the system when a buyer has unrealistic expectations. He says clients need to be emotionally prepared for the possibility of finding a home they didn’t envision, or for paying more than they expected.

“And sometimes, you have to let them fall on their own sword,” says McGee. He’s seen clients who wanted a place so bad, that they didn’t listen to advice, offered way too much, and waived contingencies such as inspections, which could have put them in great financial risk or left them with disastrous home repairs later on.

In 2008, when McGee first got into the business, the recession had just started, and buyers could go purchase a house for 20% on the dollar. “They would chase that unicorn,” McGee says. But now, agents have to analyze the market on behalf of their clients and present the data in a persuasive way.

“Once you look at the comps, pricing trends, and average time on the market, you need to be forthright with your client,” he explains. “If they want a property, they will have to do certain things that might be different than what they were used to before.”

Here are few things that can help home buyers win with their offer, McGee says.

• Put in an escalation clause. The buyer must be willing to go a certain amount over the best offer.
• Put a bigger, earnest deposit down.
• Waive contingencies. If the appraisal comes in low, the buyer doesn’t ask for a lower price.
• Make a cash offer.

“If things don’t go well, you might lose money on the appraisal and the earnest money,” McGee says. “But your clients should know those risks throughout the process.”

McGee says cash buyers aren’t common in the Chicago area right now. But offers higher than the listing price continue to be prominent. So, how much is too much for your clients? It all has to do with their budget and their ability to take risks.

He says that agents should tell their clients to take advantage of all the information that’s out there, including local agents’ newsletters, real estate blogs, listing tools, real estate reports, and the expertise of local real estate professionals, so they’re fully educated before and throughout their home search.