As always, real estate markets can be volatile. And 2022 hasn’t been any different. We entered the year with a red-hot market, maybe the hottest in US History. Most homes were sold within just a few days on the market. Moreover, virtually every home sold brought the asking price or more for cash or with an appraisal guarantee. In my fifteen years as an investor, I had never seen anything close to this.
That all changed in March when the Fed started to hike interest rates. A 30-year mortgage rate in March 2022 was roughly 3.5%. Today it sits at 7.5%. The increased rate on a $250.000 home results in a payment increase of $626 a month, or $7512 per year in interest. Think about that for a second. With the rising cost of energy, food, automobiles, labor, and everything else, in 6 months, you have more than doubled your interest payment. Suppose you keep that mortgage for 30 years. That $250,000 home will cost you $379,000 in interest, compared to the $154,000 you would have paid in interest in March 2022; that’s an additional $225,000 in interest over the life of this loan. WOW
Sellers still need to figure this out. A lot of sellers think and hope things will get back to normal. Remember, March wasn’t a typical real estate market; it was an anomaly. The market has started to shift from a Seller’s Market to a Buyer’s Market.
If you are buying, you must educate your sellers
- Show them the Math: Explain how things have changed. That last year was not a normal real estate market. Show them the comps on housing selling now or the number of homes that are listed and not selling. The amount of active homes is growing by the day. And with rates on the rise, who knows where prices will be in 6 months? It’s a good bet that they won’t be higher.
- Give them a deadline: Let them know that your offer is only valid for a specific period of time, say seven days. If they call you back in 30 or 45 days, you might be at a lower number or no longer interested.
- Try and negotiate on something other than price. Provide them with free occupancy if needed. Show them you’ll close in cash. Release your inspection contingency. Instead of taking the house as-is, have them replace something or have the home provided to you in broom-swept condition; that way, you won’t need to clean it out.
If you are Selling
- You must offer more. The days of poor quality and quick clean-up are fading fast. You must provide more to buyers who will have many choices now. Make your property stand out. Offer full appliances, even a washer, and dryer. Offer things like a home warranty, higher-end fixtures, and finishes. Give your buyer a reason to say yes, not no.
- Price your house to sell from day one. You are always better off listing a property at an accurate price for your market. Your first offer is usually your best; if it’s worth more, you’ll get multiple offers pushing up the price. There is nothing worse than a house that sits. When you start lowering the listing price by $5,000 at a time, it shows weakness and gives your buyer leverage.
- Get a private inspection before you list your house. I used to do this all the time for two reasons:
- I kept my rehab guys on point and had items fixed while they were on the job instead of bringing them from another project to fix a few small things.
- It took the leverage away from the buyer. When a buyer gets a clean private inspection, it builds confidence in you and keeps deals together and on a path to close. When they get a private inspection with a massive repair list, your workmanship comes into question. They may want everything done on that list, or they want a significant concession so that they can have the work done by their contractors. Or worse, they will walk. The cost of doing an inspection and the time and money it saves you, in the long run, is totally worth it.
There are opportunities in every real estate market. Make sure you look for them and think out of the box of ways to make money in this market.
Happy Investing!
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