We have all seen the news accounts of the gyrations in the real estate market. It seems that the market seems to spike, then drop, then spike again changing the price of any given property by many thousands of dollars from one year to the next. The reason for that roller coaster ride is that the real estate market is keyed in to a dizzying number of social and economic factors, including inflation, the prime interest rate, the percentage of unemployed workers in an area, and overall consumer confidence about where the economy is heading.
What many people do not fully appreciate is that these real estate market gyrations are not necessarily national or even provincial, but strictly local. A major factory closing in one suburb of a large city can seriously depress the property values in the surrounding neighbourhoods, while the other suburbs can continue to thrive.
The current state of a real estate market in any one area is generally referred to by three different terms:
A Seller's Market
When there are more buyers than properties available so prices rise, homes sell fast, and competition is fierce.
A Balanced Market
When there is an approximate balance between buyers and available properties so homes tend to sell for reasonable prices and in statistically average times.
A Buyer's Market
When there are more homes on the market than buyers interested to purchase them, so prices drop, properties languish on the market, and sellers are motivated to make deals for a sale.
When determining on how to price your offer, there are various aspects to consider. First of all, you have to look at the asking price. In the vast majority of cases, the initial asking price of a residential property is quite close to the actual real market value at the time of listing. However, this is not always the case. In some instances, sellers are so convinced that their home is "special" that they will overrule the best instincts of their real estate agents and force them to list the property well above what could remotely be considered a reasonable market price. If they are lucky enough to be in a Seller's Market, there very well may be a buyer who steps up to the plate and makes an offer that high, but in most cases that does not happen. Therefore, the asking price is a good overall guideline to the actual current value, but not an absolute.
It is also important to be finely attuned to the dynamics of the market in your area. Your real estate agent can assist you with a determination of exactly where the market is heading. If you are in a Seller's Market you may have to move fast on a property you want, as there are likely several other buyers writing offers right now. That means that you need to not only raise your preferred offer price, but also have to be ready to confront the dropping of contingencies and providing as much flexibility as possible in the closing date. It is not at all unusual for multiple offers to be presented in a Seller's Market all exceeding the asking price by several percentage points. If you are buying in that sort of dynamic, you have to be ready to confront the significantly higher price of admission.
In a Balanced Market, your offer should be just about one percent or less below the asking price. This communicates to the seller that you are interested in the property, but are not a pushover. You should also be ready to get involved in some negotiations as in some cases counter-offers can go back and forth turning on as little as a thousand dollars on a half million dollar home.
In a Buyer's Market, you're in the captain's chair. Properties tend to stay on the market for uncomfortable periods of time and sellers can become motivated to the point of anxiety. This is when your offer price can be truly low-balled and it is not unusual to see offers accepted that are 5 percent or even more below asking price. You can also begin to specify vendor take back mortgages and other forms of creative financing in a Buyer's Market that would never be entertained in a Balanced or Seller's Market. If the seller is truly serious in selling their property, then they will likely consider your offer of unconventional financing which can make it much easier for you to qualify for a more expensive home.
It is obvious that no one has a crystal ball that can predict the real estate future, so the best you can do is react to whatever market you are in and utilize these guidelines to obtain the home of your dreams.