Some years ago, I went to a furniture auction at a store that was "going out of business". While I waited to bid on the dresser that I wanted, I watched all the other bidders go through their thought buying processes. There were many different items on sale - but one thing was for sure, at the end of the day, everything would be sold. Most buyers had only certain items they wanted to bid on, like me. Some buyers, which I suspect were dealers or working for the furniture store, bidded on everything. Some were there to give their best bid on what they wanted and left the sale after they lost. Still some were only there to watch to experience the excitement.
Why would I bring this up? Well, the latest real estate market environment is a lot like an auction, especially if you're shopping for a home in the under $500,000 price range. Since many first-time home buyers are taking the opportunity of the $8000 tax credit, it has caused a lot of competition out there.
Yet, there are a couple of other types of buyers out there. Here are the players usually found at an auction or the latest pool of home buyers at the offer table:
1. Vulture funds or well-funded wholesale "dealers", although the interesting thing about the "flipper" is that this type of bidder will reach their maximum price, before backing down and going on to the next deal. Dealers have profit percentages before the "deal" is worth their effort.
2. Individual investors that have cash, but are willing to hold on for awhile because they want cash flow, which is higher than investing in certificates at their bank.
3. Primary homebuyers that have substantial cash that are happy that the prices are finally where they find the payments are comfortable for them and they are ready to reside in a home of their own instead of renting any longer.
4. Primary homebuyer with less than 20% down using conventional financing and buyers using VA or FHA, loans.
Somewhere along the bidding process, there will be a price point when the dealers will walk away because the deal isn't worth their time or trouble. At another point in the bidding process, the investor with cash won't be willing to go higher as well, as they do have their cash flow to think of...
Still at some other point, the primary homebuyer with cash will also find what they're looking for or just not be willing to increase their bid and remove themselves from the competition, also.
After all these buyers are done, then the rest of the market (the number 4's) can compete.
Can you see the bidding ratio between the different buyers yet?
What it comes down to is that 80% of the market (those number 4's) that are investing less than 20% cash down, in order to have a fighting chance at getting the home they want, either have to wait for the other bidders to run out of money OR they need to bid higher than buyer types 1, 2, and 3 just to win out at the offer table.
This is why we're seeing many homes get sold over listed price... with these kind of dynamics, no wonder we are seeing stabilization in the market and rising prices beginning to take hold.
Are you ready to play the game now?
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