In real estate, the basic concept is to buy the lowest priced house in the best possible neighborhood. This is called the “principle of progression” and it is the soundest way to protect your investment.

As we experience the fourth year of a sizzling seller’s market, this paradigm has been increasingly turned on its head. Despite rising interest rates and a choppy stock market, buyers far outnumber homes for sale. In our area, it is the best time ever to be a seller and the most difficult to be a buyer. 

Today, we are in uncharted territory. As a buyer, not understanding the implications of current conditions could cost you.

The frenzy of multiple offers

Local home prices have risen dramatically, particularly in the past six months. Even secondary areas are commanding unheard of attention. Last fall, I was surprised to receive 15 offers on a “fixer” in a less popular part of town. 

Within the past week, I know of a $150,000, two-bedroom condo that received 16 offers and a $399,000, three-bedroom home in a desirable location that had 25. When demand far outstrips supply, this is the result.

Both buyers and their agents are frustrated, tired of writing contracts in competition and not getting their offer accepted. There are many buyers in the market who have failed to consummate a sale after 10 or more attempts. 

Out of panic, disgust or desperation, some buyers are determined not to lose again. Before you race to beat the crowd and end your house-hunting ordeal, it is essential to see the big picture.

Know the comps

Be familiar with recent comparable sales, especially the highest ones in the neighborhood. Unless money is no object, it is preferable not to be the one who establishes the new high price for the area.

Comparing the top prices paid in various neighborhoods will give you a sense of their relative desirability. The most expensive locations, even if you can qualify, may not necessarily be the only ones for you. An experienced, local Realtor is invaluable in helping you make this determination and in explaining the nuances of property valuation.

The maximum price paid in one Oakland neighborhood recently exceeded the previous high by 42 percent, i.e., almost $200,000. This was 38percent higher than the asking price.  Subsequent nearby listings quickly factored in the record sale and sold much higher. Having this kind of information is critical to you in deciding how much to offer, particularly in competition.

Avoid a big mistake

Buying below the summit for the neighborhood may mean it was a reasonably good value for this market. Conversely, it could be a major, expensive blunder. It all depends on the exact location, size, style, and condition of the home.

For example, if the most expensive house is unusual or architecturally significant, this could add substantial value. Perhaps it has a fabulous Bay view or incredible, park-like grounds. It might be a charming traditional that was remodeled with exceptional quality.

On the other hand, the home you are considering may be pleasant and spacious, but tired, and with no especially redeeming qualities. In this scenario, you could end up paying less than, but close to, the amount of the special house. If so, you will have paid a premium for a property that is not really comparable. 

Even in the latter case, as long as prices keep spiraling up, you could come out all right. Nevertheless, when the market starts falling, your property might be worth a lot less than the special house. Remember, the most interesting, attractive homes in the best condition and location always sell for a premium, given the market at the time. In comparison, all others sell for substantially less.

Final thoughts

We do not know when, but there is no doubt that once we have passed the peak, prices will level and, eventually, fall. Previous low home prices will probably never return, but current high prices may not either. Bear in mind that it is easier to buy the most expensive house on the block in a rising market than it is to sell for the same amount or more in a declining market. 

Being a buyer in a molten market is a challenge. You need patience and perspective. Most importantly, see yourself as a future seller before you buy.

Related Articles: How To Buy Value; Multiple Offers, Part 1 and Part 2