How to Buy a House in a Hot Housing Market
Denver real estate continues to reach new highs. In February 2022, the median listing price for homes in Denver was $529,900, up 10.4% year over year. For many first-time home buyers, it seems inconceivable that it can keep growing at this pace. But here is the sobering reality: supply and demand fundamentals point to a continued increase in home prices for the foreseeable future. There aren’t enough homes. You have to get in the game if you’re a buyer. Besides bemoaning the baby boomers for never selling their homes and moving somewhere warm, here’s what can be done.
Understand the Numbers.
How much money do you need to save to buy a house in the Denver area? $50,000 is a good rough number. If you buy a home at $500,000, you’ll need $15,000 for a 3% minimum down payment and $25,000 for an appraisal gap if you bid 5% above listing. (They go 10% or higher in some cases.) Closing costs will be about $10,000. (You can save on closing costs with the right real estate agent and lender.) So getting prequalified to buy a home means bringing more than a qualification letter from the lender; it means having money to win the offer, pay for the down payment, and pay for closing costs.
Stop looking at homes in excellent condition.
Forget turn key properties. Only the herd goes after them, and you’ll be paying a big premium to go under contract. Assume that any house you buy is going to be a project. Part of the money you saved for a down payment will go towards fixing up the house. Many people don’t want to put in the work on their new house, but it beats handing the seller piles of cash to win your offer. Your new home projects could include redoing the kitchen, landscaping, drywall, interior paint, and carpets. Avoid issues with the foundation or the roof unless the seller is willing to cover part of the cost. These items are too costly and could interfere with your ability to get a loan on the house. Look for homes in the right location, with an ideal layout, to fix up and make your own.
The appraisal gap is everything.
An appraisal gap is money you are bringing to the table to pay the current market value for a house, more money than the bank will lend you at the time of the purchase. Banks will only lend you on appraised value, not current market value. If you don’t have an appraisal gap in this ludicrous market, you can’t compete with other offers. So besides the obvious solution of finding more money, what can you do? Find homes that don’t have lots of competition, which means adjusting what you had in mind.
Stay within your price range.
If you are looking at homes at the top of your price range, you have no chance because you can’t bid up to beat the competition. Think of it like boxing; moving up to another weight class means heavier hitters. It’s better to look at homes in the middle or bottom of your price range.
Broaden your search.
You may need to look further away from where you initially thought you wanted to live. If it’s anywhere near the city and cool hot neighborhoods, there will be a lot of offers. Early explorers discovered the desirable neighborhood before you. Be the explorer. Try to find a place that isn’t as sought after today but you think could be hot in the future.
Only look at homes that have been on the market a week or longer.
The hot new property draws all the eyeballs and offers. Narrow your search to listings that have been around a little bit longer. There could be missed opportunities in those homes.
Don’t look at houses on Monday.
Listings are cyclical. Houses go on the market on Thursday, showings go through the weekend, and offers are accepted on Monday or Tuesday. Don’t torture yourself by looking at homes that already have a bunch of offers.
Look at Townhomes and Condos.
You may not be able to buy a home yet. The highest bidders are gobbling up single-family residences. Start looking at townhomes and condos. Getting into real estate, any real estate, and watching it appreciate is a smarter way of working your way up to the home you want.
