In any real estate market, one side of the market is in a power position while the other is not. Understanding the flow of power in a transitioning market can help you and your clients set the stage for success.
In a market skewed in the direction of buyers or sellers, power belongs to the group benefitting the most. As an example, in the recent seller’s market, homeowners held all the keys. Buyers wishing to purchase a home had to play by the rules set by the sellers which resulted in multiple offers, record-high prices, as-is sales, free rentbacks and a host of other seller-oriented benefits.
In contrast, in a buyer’s market, buyers have the power to set the rules and consequently have the ability to negotiate prices, dictate terms, ask for repairs and so on.
As a market enters a shift, the power position in the market begins to transition from one group to the other. This transfer is never smooth and is typically evidenced by a significant amount of confusion from both sides of the market as each side struggles to learn the emerging rules of engagement, which translates to a corresponding change in behaviors.
The irony in any shift is the fact that behavioral changes are never unilateral. Most frequently, the group benefitting the most from the shift figures it out right away and begins to act accordingly.
Unfortunately, in contrast, the disadvantaged group frequently seems to take forever to get the memo. Using the current market as an example, buyers have already figured out that the market is shifting and have changed their tactics — literally overnight.
Many potential sellers, on the other hand, are still anticipating multiple offers, prices higher than previous sales and amazing terms. This sets the stage for confusion and frustration by all parties involved.
As the current market shifts from a superheated seller’s market to one that is more neutral, sellers, losing their ability to make unfettered demands, will need to begin negotiating with buyers. The response from sellers in our market, especially those who began prepping their homes while the market was still hot, has been extreme frustration and even anger as their expectations of an immediate sale way over asking price are going unrealized.
While some of their angst is directed at buyers, agents are taking the brunt of their frustrations as sellers are looking for someplace to park the blame for their unrealized expectations.
Agents need to be able to effectively handle client expectations in a shifting market or lose credibility. Those agents who have only had their licenses a few short years will be at a tremendous disadvantage because the only market they have seen has been the extreme seller’s market.
Those of us who have been licensed over 20 years have seen a number of shifts and will have an easier time adapting to the new reality.
Here are my recommendations:
1. Educate your clients
Whether buyers or sellers, the rules have changed. Your clients need to understand the new realities. Buyers fall into two categories: those who have been trying for some time to land a home and those who are just entering the market now.
Seasoned buyers: Many of these may have opted out of the market due to discouragement from countless rejections, high interest rates, lowered down payments due to stock market fluctuations — whatever the cause, it is time to reengage with them and explain the current opportunity.
Interest rates will not be going back to previous lows, prices are not going to be falling out of the sky, the current stock market is not going to magically climb back to previous highs in the next few weeks, and most sellers are currently not getting multiple offers. Their best chance of landing a home before a ton of other buyers figure this out is now.
We are also entering the time of year I refer to as the June Doldrums, which begin in the middle of June and go until the end of the first week of July.
Schools wrap up their year, graduation ceremonies happen, people prepare for the launch of summer with Fourth of July festivities and so on. It is a unique time of the year for buyers because many of their counterparts will be focusing on events instead of buying a home.
Rookie buyers: Interest rates are only going to go up in the near future as the events that led to the extreme lows are fading in the rearview mirror of life. More homes will be coming on the market as sellers, realizing they have missed the peak, will push their homes on the market as soon as possible to avoid any significant long-term losses.
Many established buyers have opted out, thinking the sky is falling and anticipating future windfalls (which will not be realized), paving the way for new buyers to enter the fray.
The key to buying now is the ability to afford the monthly payment. Although prices may go down over the next few months, rates will increase, so any advantage of buying later will be lost. Best to jump in now while there are not a lot of other buyers out there and capitalize on the newfound ability to negotiate with sellers.
For sellers, extensive data is going to be the key. As their agent, you need to provide objective data that separates the new market reality from you as their agent. Fail to do this, and they will assume their home is not selling because of you.
It will also be helpful for them to realize that this is a national market shift, not just a local adjustment. Arm yourself with information you can share, from national news posts on market conditions to local MLS data showing the current market trends.
Further, preparation will be critical as more homes emerge; you want your client’s homes to be better prepared than comparables so they end up with a sale while others remain on the market. Lastly, consider buyer incentives, such as buying down their rate.
2. Price effectively
Sellers: Work with them to set their prices ahead of the market. Whereas a few short months ago this would have meant pricing higher than recent sales, now it means pricing lower. Sellers need to understand that as their compatriots begin figuring out the new realities, many will rush to get their homes on the market sooner than later.
If a home going on the market now is priced too high, it will remain on the market and get lost in the shuffle as more homes begin to emerge and inventory swells.
Buyers have become very picky, so homes are remaining on the market longer; this fact along with higher levels of inventory coming into the pipeline means buyers will soon have a lot of homes to choose from.
Buyers: This is not the time to get aggressive with lowball offers. Although you may have the ability to negotiate, as long as the list price is realistic, stay as close to it as possible, and focus instead on negotiating the terms.
There is no longer any need to write non-contingent offers, so offers with normal contingencies and requests for repairs have a better chance of being accepted. We are also seeing sellers willing to pay a per diem for rentback whereas the previous norm in many markets has been rentback for free.
3. Be realistic
As the market shifts, things get very confusing. Anyone who rushes in trying to use the confusion to gain an advantage may find themselves on the outside looking in. As confusion reigns and everyone tries to figure out the new realities, it’s best to be patient with everyone, especially those with whom you are hoping to establish a contract.
It’s a whole new world, and it will be for the foreseeable future as the power is shifting from one group to another. It’s time to get your clients on the phone, explain the shift in power and get them engaged now; they will thank you for it.