To be a prospective first-time homebuyer in the Twin Cities right now is to be a glutton for punishment. Rejections, each with varying levels of politeness, wash in like waves at the beach — regular and seemingly without end.
"It’s not uncommon for buyers to put in offers on a half-dozen or more homes before a seller accepts their offer," President of the Minneapolis Area Realtors Todd Walker told Bring Me The News.
Why is the market in the Twin Cities so aggressive this spring? And how are those that submit winning offers getting ahead? We asked Walker and Tracy Baglio, president of the St. Paul Area Association of Realtors, to explain what's going on. Here are five of the biggest factors making it hard for house hunting first-time homebuyers.
1. Lots of buyers, few sellers
The underlying problem is one of supply and demand, and there are a few reasons for this. That includes record-low interest rates, single-family homes being converted to rentals, and the high costs builders face at the moment Walker explained. But there's a generational shift as well.
"Millenials are entering the market while older generations are either holding onto their homes and aging in place or are downsizing," Baglio said, noting new construction isn't keeping pace with demand.
Walker said there's currently a "less than one month’s supply of homes available in the 16-county Twin Cities metro," which is crunching millenials with growing families, or those in that age bracket looking for more space.
2. Asking price, shmasking price
Buyers, feeling the pressure from this tight market, are responding with aggressive offers. Baglio said they're seeing offers "far over the list price." Sellers can then select the most giving contract from a suite of flattering options.
This has made the entry-level price range particularly competitive. Walker said those looking under $300,000 will have the most trouble, while Baglio put the most challenging range at $200,000-$450,000.
Median home prices have gone up, lessening the number of homes in the price range of most first-time homebuyers, explained Walker. They simply "may be challenged in coming up with enough money to outbid other offers," he said.
3. The cash advantage
Most first-time homebuyers will rely on a mortgage loan as they take the leap into ownership. It can be hard to compete when someone else is offering cash. Baglio noted a lot of the older Americans looking to downsize have this type of cash.
These cash buyers, in many cases, are simply more appealing to sellers, as it reduces the chance of financing falling through.
4. No inspection required
One increasingly prevalent tactic buyers are using to get an edge: Waiving the inspection. This is hugely appealing to a seller, who won't face the prospect of the sale being called off by the buyer due to an unexpected discovery.
But it's incredibly risky (and frankly, probably not a good idea) for a buyer, as they might end up purchasing a property with expensive, dangerous issues.
The double whammy of a buyer with lots of cash plus a waived inspection is simply "a lot to ask of first-time homebuyers," Baglio said.
"My advice to buyers is — don't be discouraged — your home is out there and persistence pays off," she added.
5. The appraisal vs. the offer price
Buyers who push their budget in order to make an aggressive offer need to be cautious. A mortgage lender generally won't authorize a loan that is more than the value of the house. If the appraisal comes in significantly lower than the offer, it can put the buyer and seller in a touch position.
Some buyers are writing clauses into their offers stating outright they will pay any discrepancy between the appraisal value and the offer amount. But again, this is risky.
"Some buyers believe offering to pay the difference between the appraisal and offer price will give them a competitive advantage and will assure the seller that the deal with go through," Walker said. While they don't track this specifically, he noted it's been happening more often of late. And, as more home sales go through, the rising prices should help lift appraisals closer to the going rates, Walker added.
This story includes reporting from Melissa Turtinen.