When you read articles on the real estate market, you’ll often see phrases like “buyer’s market,” “seller’s market,” or “buyer’s market for investing”. This is because in the real estate industry, knowing whether current market conditions favor the buyer or the seller is paramount to identifying the right investing strategy.
For example, a buyer’s market indicates that current real estate market conditions favor buyers. Perhaps the inventory of listed properties are exceeding current demand, and sellers are forced to lower their listing prices. This provides the opportunity for buyers to purchase property at a better price than typical market value. For a real estate investor, this information signals to them that they should continue holding on to their buy and hold property until the market swings back over to conditions that favor the seller. This is just one example.
If you’re just getting your start in real estate investing, one of the first concepts you should teach yourself is the difference between a buyer and a seller market, how to identify whether a market is currently a buyer or seller’s market, and how to negotiate in each condition.
How to Negotiate in a Buyer’s Market
Earlier, we touched on how a buyer’s market is one that favors the buyer in a real estate transaction. Keep in mind that in this type of market, the purchaser has the advantage when neighborhood comps, and get a rough idea of the property’s condition, before approaching the seller. You’ll want to be equipped with facts to back up your negotiations. You can then use this information in order to get the seller to lower their price for fear that they wouldn’t get another offer.
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What is a Seller’s Market?
Contrary to a buyer’s market, a seller’s market occurs when market conditions favor those who are selling properties. This often occurs when there is a higher demand than available supply. Perhaps you are just one of the few owners who are selling their property in a highly coveted neighborhood with a good school system.
How to Negotiate in a Seller’s Market
Your negotiation tactics will change entirely when it’s a seller’s market. If you’re the buyer, you’ll have to enter negotiations knowing that the seller will have the upper hand. It would not be unusual for the seller to receive multiple bids for their property, and of course, the seller is expected to go with the highest bid. In this case, you’ll want to define in advance how much you are willing to purchase a property for, knowing that multiple bids will likely drive up the purchase price. It is up to you to perform a cost-benefit analysis and determine the highest possible bid that will still make the investment financially worthwhile. However, never go in with your highest bid out the gate (although you won’t want to lowball and insult the seller either.) Go in with a low but fairly reasonable bid, and then work your way up as other bidders name their prices. You might even provide the seller with non-monetary reasons why they should select your offer, such as explaining your plans to improve the property or preserve some of its original charm.
How to Tell When It’s a Buyer’s Market
It’s quite simple to be able to tell when it’s a buyer’s market. Explained earlier, the real estate market is a simple economic function of supply and demand. When supply exceeds demand, it is a buyer’s market. Because there are more listings available than the number of interested buyers, sellers will be forced to lower their listing prices in order to attract buyers. One way to check if this is occurring in a certain neighborhood is by looking at listings online, and determine how long listings have sat on the market, and whether properties are being sold below market value.
How to Tell When It’s a Seller’s Market
Being able to when it’s a seller’s market is easy as well. You simply take the logic you learned for calculating the buyer’s market and invert it. Simply put, you’ll know it’s a seller’s market when demand exceeds supply. Again, sellers benefit in this case because when there’s not enough inventory, there are more buyers bidding on a smaller number of listings, thus driving up prices. A very simple way of checking to see if it’s a seller’s market is to look up local neighborhood listings; if properties are being sold quickly and above market value, then most likely you’re looking at a seller’s market.
The next time a buyers market for investing swings around, you’ll be able to see it coming and jump on some deals before your competitors do. You can do so by keeping a pulse on the available inventory of properties in a certain market, the average length properties are sitting on the market before being sold, and then the fluctuations in listing and sale prices. The moment sale prices start to dip below fair market value, you can take it as a signal that the next buyers market may be coming.
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