Colleen Bennett - Sotheby's International Realty

THE REAL DIRTT: The Burning Truth About Buying or Selling in a Hot Market!!!

April 9, 2017
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Real estate in Los Angeles isn’t just hot, it’s on fire!

This is an article about what you, as either a buyer or a seller, can expect to happen in a hot market.

But first, let’s define what a hot market is. As a rule, that’s any real estate area that’s seeing marked year-over-year price increases.

In Southern California communities like Highland Park, Glassell Park, Elysian Valley, Cypress Park, Mt. Washington, Lincoln Heights, Montecito Heights and West Adams – all a short drive to an increasingly vibrant city center —  it hasn’t been unusual to see yearly price increases of 10 percent, 20 percent or even 30 percent.

If you can imagine receiving those kinds of rates of return on your certificates of deposit at your local bank, then you can begin to imagine what that kind of appreciation is doing to local housing prices.

Feeding the frenzy have been numerous factors, not the last of which have been low interest rates for borrowers, low unemployment, limited housing inventory, the renaissance of downtown Los Angeles, the revitalization of the Los Angeles River, an ascending Silicon Beach tech industry (Snapchat IPO), the improving transportation infrastructure, surging media and entertainment production and a flood of international buyers who see the United States and L.A., in particular, as a safe harbor for their money.

Sellers Turn up the Heat!

So in pockets of LA, “hot” might be a gross understatement; perhaps “sizzling” might better capture the temperature of the torrid LA market.

As a seller, you’ll welcome all this extra heat.

In fact, as a seller in this environment, you’ll get to turn up the heat on the buyers to almost any degree and draw nary a complaint.

Indeed, instead of getting complaints, you’ll attract love letters from buyers swearing on St. Nicholas how much they adore your house and why they alone should be the steward to own and care for your house going forward.

In a hot market, your agent won’t be calling you on short notice and sending you in a panic to tell you to tidy up the house for a private showing. No, no, no, that’s not the way business is handled in a hot market with sellers calling the shots.

Instead, your agent will invite all interested parties to view your property over a limited period — say, an extended two- or three-day open house — after which all offers will be assessed.

This controlled and condensed time frame in effect eliminates the old days of the early bird getting the worm (an alert buyer or buyer’s agent daily combing the MLS to see when a new property hits the market).

This one-time extended showing also eliminates the “insider” or pocket listing — perhaps a well-intentioned neighbor (I want the home for a relative or a friend), a savvy contractor, a serial house flipper or investor with knowledge of the home – from trying to scoop up the home on the cheap before the property is exposed to the full market.

By conducting a one-time viewing window, with a firm deadline, the seller creates not only a fairer market in which all interested buyers have the same opportunity to make a purchase offer, but the highly organized and orchestrated exposure creates an almost certain buying frenzy.

In this super-heated market scenario, when one would-be homebuyer sees a stampede of other possible buyers streaming through a Saturday or Sunday open house, it tends to create an ego-driven buying competition, where prices can easily soar $50,000, $100,000 or even $200,000 over asking price.

Buyers Feel the Burn

In such a market, buyers and their agents have to arm themselves with lots of dry powder in the form of not only extra cash, but also the courage and flexibility to remove all or nearly all contingencies, which is the real estate equivalent of the nuclear option.

In other words, in order to get the house, you, as the buyer, agree to waive roof, electrical, plumbing, sewer, chimney, pool and a host of other inspections, leaving you hoping and praying the house you can’t live without — because you’ve been outbid on the last three houses — isn’t going to be a money pit.

Even if the seller plays nice and agrees to a few limited inspections, don’t think that you have somehow negotiated an even playing field for yourself. That’s because, should the inspection turn up some problem areas, the seller will typically play their “backup offers” card, casually mentioning that they have two or three backup offers from buyers who really want the property, implying that you better not call out too many repairs, especially costly ones, if you want the property.

Right now, if you’re seller in L.A.’s hot market, you hold all the cards. Conversely, if you are a buyer and your offer is accepted, you’ll likely pay over the asking price and hold your breath that the inspections you waived won’t break the bank. But if the market keeps rising for all or many of the reasons we mentioned at the outset, your short-term pain will eventually ease and you might even begin building equity

But if the housing market’s run finally cools off, you could feel the burn for years to come.

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