In some geographic areas, the investors — professionals who plan to rent out or flip the house rather than live there — are actually the CAUSE of the price increases; in others, they’re just one of the active players in a local area with a rebounding economy. (See CNNMoney‘s Real Estate Guide 2013.)
That’s bad news for ordinary mortals, however, who are just trying to buy a family home. Inventory is at its lowest in decades, as a result of builders having folded up their tents and stopped building and banks having made their way through most of their pending foreclosures.
An investor who comes in to buy a house is likely to literally offer all cash; which, even if it’s not the highest offer, can look very attractive to a seller who knows full well that buyers are still having trouble getting final approvals on mortgages.
How do you compete with these investors? First, know that they’re out there, and plan accordingly. (Double check by asking your real estate agent how active investor-buyers are in the area where you plan to buy.) Other potential strategies include:
- Bid higher. True, that may take the home out of your price range. But now’s a good time to come to terms with the fact that a house’s list price is just a suggested amount with which to open negotiations. Many houses go for more than the list price, and if you’re bidding against other possible buyers, such a result is all but guaranteed. At a certain price level, investors lose interest — they’re only out to make a buck, and have no interest in whether this is the perfect house in the perfect location for their own lifestyle and dreams.
- Pay all cash. Don’t laugh — doing so on a very short-term basis may actually be possible, with the help of your family and friends. Even people who aren’t wealthy may have a nest egg they’d be willing to park in your house temporarily — just until you close the deal and turn around and take out a traditional bank loan. Even if everything goes wrong and you can’t pay it back, they can always foreclose on you and recoup their investment. See Nolo’s article on “Borrowing From Family and Friends to Buy a House” for more information.
- If you can’t pay all cash, do the next-best thing(s). That’s making a large down payment, for starters — higher than the usual 20%. Why does the seller care? Because he or she knows that the less you’ll be borrowing from the bank, the more likely the bank will be to approve the loan, confident that it can sell the house for enough to recoup the amount at stake. And if you can’t manage a large down payment, at least come in with a letter of preapproval from a lender and other forms of proof that your financial situation is strong enough to likely close the deal.
- Strengthen your offer in other ways. Remember, when competing against other bidders, you won’t get a second chance at working out the details. You’ll want to concede everything that can reasonably be conceded in order to woo the seller. That may mean offering the shortest closing period you can manage; accommodating the seller if you know that he or she still needs to find a house to buy (for example by offering a rent-back or home purchase contingency); and even waiving the contingency allowing you to make the sale conditional on your satisfaction with the results of a home inspection (though this is risky; you’d want to at least get a friend in there with contracting skills to tell you what you might be getting into).
Bidding wars aren’t fun, and many buyers react with, “I’m just not going to get into any transaction where I’ve got to play that game.” But as long as you don’t lose your head, a bidding war is in some ways no different than buying a house where you’re the only offeror — your job is to calmly, and with an eye on what comparable houses are selling for, choose a price and terms that balance out both your own needs and market realities.
Buyers who wait until the investors lose interest may still be looking for a house a few years from now, when prices really have gone up.