Regardless of what the real estate market is encountering at any given
time, the question I am most often asked would be, “Is it a good time to
buy a home?” The qualified answer is one that could fundamentally
change based on numerous variables and driven by a multitude of
factors. In this blog, I will lay out some of those factors in order to paint
a clear picture of what circumstances may make it a great time to
purchase a home for some and those that may not make it such a good
time for others.
Over the last few years, many first-time homebuyers have gotten the
‘short end of the stick’ so to speak. Competition, cash offers, no
contingencies, and extreme interest rate volatility all played a major
role in relegating many first-time homebuyers (which reached an all-
time high average age of 36 years old) out of the market. Additionally,
according to the National Association of Realtors (NAR) only 26% of
those homebuyers who purchased a primary residence between July
2021 and June of 2022 where first-time buyers. This was down from
34% in 2021. As you can see from these stats, the first-time buyer has
had rough go of it in the past few years. But now, let’s take a look at
what advantages are in store for the first-time homebuyer in 2023.
First, there is a reduction in competition. You must keep in mind that
real estate is a hyper-local animal that features different markets and
asset types which constantly ebb and flow. Broadly speaking, a first-
time buyer should expect less competition in 2023 than in the recent
past. With less competition and a more “buyer friendly” market, we are
seeing contingencies and negotiations alive and well. In an initial offer
for a first-time homebuyer in 2021, I would happily include any and all
contingencies the buyer had wanted.
But, given the then current real estate environment, I also made it clear
that because of the multiple offer situation, it was unlikely they would
have a successful outcome.
After seeing 15 other offers, all with waived financing, appraisal, and
home inspection contingencies, my buyers quickly understood that
contingencies were not an option in nearly all situations. So, now that
the current market has moved away from an extreme sellers market,
there should be an opportunity for buyers to make more traditional,
During the low interest rate environment in recent years, BPG
encouraged our first-time buyers to look at a strategy that included
3.5% down FHA financing and ‘house hack’ the property. Buyers could
put very little down (sometime even asking the seller to pay some if not
all closing costs), to purchase a 2 or 3 bedroom condo in a sought-after
area. The next step then would be to rent out the remaining rooms to
help offset the mortgage. Given the recent rise in interest rates, this
strategy is no longer viable in most situations.
In 2023, if the buyer is able to find a larger home with 4+ bedrooms
along a 10% down payment, then the ‘house hack’ strategy becomes
viable in 2023. This strategy is good option for a young professional
buyer who is comfortable with roommates. In addition, if a young
professional and first time buyer is fortunate enough to receive a
substantial gift from a relative for the down payment they will need to
show a lender the details of the gift. This is a great opportunity to
position a young person with a great long-term investment and start
building a strong real estate portfolio. Keep in mind there should be an
opportunity to refinance at a lower rate in the future.
Another buyer subset to address is the “life event” buyer. Throughout
one’s life there are certain events (cohabitation, new job, children,
divorce, etc.) that can and likely influence major real estate decisions.
For these buyers, current market conditions may be more
advantageous than in the last handful of years. Quite simply, because
competition is down, buyers have more leverage. A major change is
that buyers can now have contingencies in place. Home inspection,
financing, appraisal, all of these were off the table in many real estate
transactions during the past few years, especially in the highly sought-
after single family home asset. Along with contingencies, a
knowledgeable and educated agent will ultimately prove to the buyer
the importance of working with someone that has their interests at
heart as well as being skilled at the art of negotiation.
And the last subset I would like to cover is the Investor. One type of
investor that may see pros and cons in the current environment is the
fix and flip investor. Fix and flip investors traditionally purchase (in
cash) a distressed property (often off-market) for under market rate.
They will then get to work, updating kitchens and baths, ripping out
carpeting, restoring/replacing the roof, and even knocking down walls
in some cases. A skilled investor/contractor team should be able to get
the property from settlement to listed in 4-5 months, depending on the
size and scope of the home. The most important things for the investor
to know are how will the acquisition, rehab, and closing costs effect the
net profit on the out sale. They should have a understanding of all this
before putting an offer on the distressed property. In previous years
the cost of materials has been elevated as well as the competition but
the out sale was pretty much guaranteed. Today, these investors need
to consider that the finished product may stay on the market for
longer, which in turn ties up the investors monies, not allowing them to
roll the proceeds into the next flip.
The BRRRR Investor. BRRRR is an acronym for buy, rehab, rent,
refinance, repeat. There are some similarities with the fix and flip
investor but these investors tend to take on less extreme
rehab/construction projects and are more focused on what the finished
product can rent for rather than sell for. Once the property is rented
the investors will complete a “cash out” refinance and take the
proceeds and repeat the process. This method can be a great way to
build a substantial real estate portfolio in a somewhat short time
frame. If rates fall, and the timing is right, it can make the refinancing
portion even better for the landlord.
In conclusion, are we in a challenging real estate market for many, yes.
Are there opportunities, yes. I challenge you not to listen to all the fear
mongering on the major news channels, but rather reach out to a
trusted Realtor to discuss your individual circumstance. A great deal of
wealth will be created in this “recession,” shhhhhh.