Key takeaways

  1. Don’t let emotions affect your decisions—you may regret them later
  2. What’s important to you? Establish your “must haves” and areas of compromise in advance
  3. Talk to a lender and get pre-approved before you buy
  4. Don’t let a lender talk you into more loan than you can comfortably afford

Many would-be homebuyers wonder if buying a home in a hot market is wise. They often wonder: Will rising real estate prices cool off? Will mortgage rates remain relatively low or go up in the future? Will they ever find the perfect home? Should they try to win a bidding war? 

Of course, these are all valid questions to consider, but one critical thing to remember is that if buying a home is part of your plan, you should consider moving forward—as long as you have a plan.

What does a "hot real estate" market mean?

Put simply, a "hot" real estate market means many homes are being bought and sold, and the prices of those homes are rising faster than the historical averages. 

A hot market is also called a sellers' market. This is because sellers tend to have the upper hand when negotiating prices and other aspects of the home buying process. 

For homebuyers, a hot real estate market means they should be prepared for a competitive marketplace where they may see multiple competing offers, have to offer over the asking price or make other concessions to get a home.

What causes a hot real estate market?

The causes of a hot market can vary by location, but in most areas, several factors can cause a market to heat up:

  • A desirable area to live
  • A flourishing job market or a new, large employer
  • An influx of homebuyers
  • A shortage of inventory (fewer sellers than buyers)
  • Low interest rates on mortgages can mean homebuyers can afford to pay more for a house

Homebuyers typically have little control over when the housing market gets hot. But if you're in the market for a new home, here are some tips to help you prepare, give you a leg up on your competition, and help you get your dream home.

8 tips on how to buy a home in a hot market

1. Get crystal clear on what you want to buy

In a competitive market, emotions can run high. It can be easy to sacrifice important aspects of a home just to enjoy the relief of closing a deal. Almost all homebuyers will experience this at some point, but it's essential to avoid the urge to give up what matters most. Compromising too much can be a path to regrets later.

A vital key is to create a list of the most important things you want in a home. To that end, it's essential to pinpoint the non-negotiables.

Finding the perfect home is rare, so try to identify what compromises you're willing to accept. Of course, that doesn't mean you should buy any house on the market, but knowing your "must haves" might help to narrow your list. This way, when you finally buy a home (that you may live in for a long time), you'll be happy knowing you didn't give up the things that matter most to you and your family.

Some examples of non-negotiables may include:

  • An open concept living area
  • Updated kitchen/baths
  • The number of bedrooms 
  • A home office (or two)
  • Outdoor space
  • Walkability
  • A good school district

2. Build your dream team

Navigating the home buying process on your own, even in a "normal" real estate market, will likely be confusing, complicated, and, more often than not, stressful and frustrating. 

Therefore, when looking to buy a home, make sure you have the right team of people on your side. The right team will help you understand the financial implications of buying a home, what type of mortgage makes the most sense, and how to navigate the entire real estate process from offer to negotiations to closing. 

The three key players you need for your team are often:

  • A Realtor®/real estate agent to help you navigate your local market, understand home prices, and structure an offer.
  • A loan officer (or broker) to help you understand your mortgage options (e.g., 15-year, 30-year, or an adjustable rate mortgage), your down payment options (do you need to put 20% down or is there flexibility?), and your all-in costs to close on the house.
  • A financial planner to help you prepare and save for your home purchase and understand how this big decision fits into your broader financial picture.

3. Know what you can really afford

How much home can you afford? The answer may vary.

A bank might approve you for a monthly mortgage payment of as much as 43% of your gross income (that's your income before accounting for taxes). Of course, if you have other outstanding debt, that figure might be lower, but a mortgage payment that consumes 43% of your income is usually not where you want to be.

The rule of thumb, and generally a good guideline to follow, is that your monthly mortgage payment should be no more than 28% of your gross monthly income. Ideally, this number should also include maintenance costs, not just your mortgage payments. (Mortgage payments typically include mortgage interest, principal payments, taxes, and insurance.)

Doing the work upfront can help you stay realistic when making an offer, allowing you to better keep your emotions out of the equation. 

4. Get pre-approved

Pre-approval is when a mortgage lender approves you for a maximum loan amount (how much you actually borrow). This amount is typically based on a monthly payment amount (remember the 43% gross income figure from above?). Knowing the maximum loan you qualify for can help put you in a position of strength in a competitive market. Remember, it's not a formal loan application, and you are not obligated to borrow that amount (or any amount) from that lender.

Pre-approval might even make your offer stronger. The seller knows that the purchase isn't contingent upon getting approved after they accept your offer, making the deal less risky for them. In fact, many sellers will not take an offer if there is no proof of available funds or a pre-approval letter from a lender (both of these can strengthen your offer).

But buyer beware. As mentioned above, lenders can approve you for a loan where your total debt payments are up to 43% of your gross monthly income. Know this one rule: approval does not mean affordable. Just because you can qualify for a loan doesn't necessarily mean it's the right one.

5. Have cash for the down payment and closing costs

When it comes to buying a house, cash is seen as king. You will need cash, and likely plenty of it, for your down payment and your closing costs.

When it comes to the down payment, saving enough so you can put down 20% can be a smart move. Anything less could mean you'll have to pay mortgage insurance, which is an added cost. Remember that a 20% down payment isn't a requirement, but putting less down might mean you are buying too much house.

Some down payment programs allow you to put less money down to get into your home. For example, Federal Housing Administration (FHA) loans potentially only require 3.5% of the purchase price, and Veterans Affairs (VA) loans may require 0% down. In addition, some states and cities have programs that can help buyers, especially first-timers, buy a home as well.

As for closing costs, they can catch some homebuyers off guard. Depending on state and local laws, you might pay anywhere from 2-5% of the home purchase price in closing costs, including taxes and fees. So buying a $500,000 home could mean as much as $25,000 in closing costs.

You'll also frequently need cash for many initial expenses, such as moving, furnishings, renovations, improvements, and repairs.

6. Make a strong but smart offer

In a hot real estate market, you'll likely face competing offers, which means you may have to offer more than the listing price. Remember that the listing price may not indicate the home's true value. The seller's real estate agent will generally help the seller find a competitive price that will elicit a lot of interest in the property (and, ideally, a bidding war). Always consult your own agent for how to make a competitive yet fair and affordable offer.

Make sure you know your limit on the purchase price. Offering too much money can leave you overextended on the down payment and the closing costs. You also risk that the lender will appraise (decide the home's value) at less than you're paying---which means you'll need more cash to make up the difference and complete the purchase. Your real estate agent should be able to help you calculate what that means for you financially.

In competitive markets, some people may waive their right to an inspection. This may feel like a good idea, but be careful if you take this step. Homeownership can be expensive, even for a well-maintained home. Walking into a new home and inheriting someone else's problems (because you didn't have the home inspected) could leave you facing a steep bill or higher costs over time.

7. Go with a fixer-upper

In a competitive market, newer and newly renovated homes can go for top dollar. Why? 

Because home buyers tend to like a move-in-ready home, they frequently appeal to more buyers. This is because most homebuyers don't want to deal with the hassle of renovations or home improvements, nor do they want to "use their imagination" when looking at a house with outdated kitchens, bathrooms, or floor plans.

While turnkey homes can make the transition from your old home, condo, or apartment much easier, you can potentially find homes with great value if you are willing to look for the ones that need some work. 

First of all, you will likely have fewer competing offers. Second, you can (often) purchase the home cheaper and renovate it over time. Third, you can customize the home to your needs and style preferences. 

But remember that this takes patience, planning, and extra money. You may not be able to take out a second mortgage or a construction loan for some renovation projects, so you may need to have cash available for these projects.

When all is said and done, buying a fixer-upper can create tremendous value, but it isn't for the faint of heart.

8. Be patient and know when to walk away

Hot real estate markets can test your patience and emotions. Chances are you'll feel frustrated and disappointed at some point in your journey to find a home. That may push you to make an ill-informed or hasty decision to buy the wrong house or make you want to throw in the towel altogether.

Always focus on what you can control and try to ignore or (at least) discount the things you can't. You can't control what other homebuyers offer. You can't control if they are willing to waive an inspection. You can't control if they can pay all cash and close in 14 days. Just because other people do these things doesn't mean they are the right things for you.

Be patient and stick to the strategy you establish with your team of professionals.

 Here are some big DON'TS:

  • Waiving an appraisal (especially if you have a mortgage). A home that doesn't appraise could mean you have to bring more money to the table at closing.
  • Waiving a home inspection. This can lead to large home-related expenses soon after you move in.
  • Taking out a more significant loan can be harmful. If you can't put down 20% because you have to pay a higher price, you may want to think twice before just going with a higher mortgage. You'll lock in a higher monthly payment and possibly have to pay mortgage insurance.

DO work with your team of professionals and follow the process. Make smart, informed decisions and remain disciplined. And leave the rest up to the real estate gods.

Final word

You can find the right home. And just think, after your 50th home viewing, you may become a real estate expert and decide you are finally ready to launch that Airbnb rental empire.

Buying a home is one of the largest financial decisions most people will make. A CFP® Professional at Facet can help you create a plan to buy your next home, help you avoid the most common homebuyer mistakes, and get you into the home of your dreams---all while working to keep the rest of your financial goals on track. 

Want a professional opinion on whether you should purchase a home?