If you want to buy or sell a home in the near future, you may be tasked with completing the transaction under market conditions that aren’t favorable to you. The real estate market can be a buyer’s market, a seller’s market, or a balanced market. If market conditions are balanced, this indicates that the market doesn’t tilt towards buyers or sellers.
A buyer’s market is one where the current economic conditions involving the supply and demand of homes are advantageous for buyers. In most cases, buyers will have the advantage when there’s an ample amount of housing inventory or when the number of buyers in the market is relatively low.
As for a seller’s market, this occurs when the economic conditions favor the seller. For instance, let’s say that interest rates are lowered across the board by the Federal Reserve. In this scenario, buyers will likely flood the market to take advantage of the reduced interest rates, which provides sellers with the opportunity to demand a higher price as a result of the increased competition.
A seller’s market can also occur if there’s a low inventory of homes on the market. We are currently in a seller’s market as of 2022. In fact, market conditions began to favor the seller when the Federal Reserve lowered interest rates in 2020. Whether you’re thinking of buying or selling a home at the moment, you may encounter some problems if the home is comprised of unpermitted work.
When you want to renovate a home or complete extensive repairs, a building permit is likely needed to ensure that the work you do adheres to the local building codes. If you perform extensive renovations without having a permit, it can be difficult to determine if the completed renovations are up to code.
If a home is placed on the market with unpermitted work, it may prove challenging for the property to be sold. For instance, lenders are wary about providing mortgages on homes with unpermitted work. In this article, you’ll learn more about the difference between a seller’s market and a buyer’s market as well as the issues that might arise from unpermitted work.
What is a Buyer’s Market?
A buyer’s market is one that occurs when the market conditions favor buyers as opposed to sellers. When something takes place that causes sellers to have more urgency to sell their homes, this would constitute a buyer’s market. It’s possible to use supply and demand to determine what the market is like.
Even if high buyer demand exists, it’s possible for the market to be shifted towards buyers if there is also a large number of homes on the market. A decrease in buyer demand can also cause prices to decrease for homes in the area. Some of the factors that may lead to an increase in home supply include:
- More sellers in the market
- Technological improvements that cause production costs to decrease
- Lower demand of other goods
A drop in demand for new homes can occur if buyers exit the market, customer preferences change, or there’s more availability of other goods. In the event that the real estate market favors buyers, it’s likely that buyers will find it easier to negotiate for a lower sale price when making an offer on a home.
During a buyer’s market, homes typically sell for less than they would if there was high demand among buyers. It’s also possible that less appealing homes will remain on the market for a lengthy period of time before being purchased. If there are currently a large number of homes on the market, this indicates that there’s more competition among sellers.
High seller competition typically results in the seller being pushed towards reducing their prices or providing additional incentives during negotiations. For instance, the seller could choose to pay the buyer’s closing costs instead of reducing the home’s sale price.
What is a Seller’s Market?
A seller’s market occurs when demand among buyers exceeds existing supply. To understand how this works, let’s say that 10 homes are being sold in a community. If there are 30-40 buyers that are looking to buy a new home in that community, buyer competition will be high. In this scenario, buyers strive to make their offers more appealing to the current homeowners, which means that the sale price of a home could increase before the sale is finalized.
When there are less homes available on the market, sellers have the advantage. During a seller’s market, it’s common for homes to sell at a quick rate. Buyers will also need to engage in competition to land the home of their dreams. Since there’s a high interest among buyers in purchasing homes during a seller’s market, the buyer won’t have much power during negotiations.
Bidding wars might also take place, which occur when numerous buyers make offers on a single home. In this situation, prices will go up until potential buyers back out or the seller accepts one of the offers.
What Type of Real Estate Market Are We In?
The real estate market is definitely a seller’s market at the moment. Since the onset of the COVID-19 pandemic, there has been a low supply of homes on the market since many homeowners enjoy the security that a home provides. The Federal Reserve also lowered interest rates substantially in the months following the pandemic to ensure that the economy wouldn’t crash.
While this change helped keep the economy afloat until businesses were able to reopen, it also provided borrowers with the opportunity to obtain a mortgage with a very low interest rate. Since that time, buyers have entered the market at a rapid rate. When combined with low inventory, the increased buyer demand has resulted in higher home prices and the market being a seller’s market.
While interest rates have increased by a significant amount in 2022, buyers still remain very interested in purchasing homes. Even though the higher interest rates should cause demand to drop slightly in the months to come, it likely won’t be enough for a buyer’s market to occur.
Got Unpermitted Work at Home?
Whether you’re currently buying or selling a home, the property shouldn’t consist of unpermitted work. The presence of unpermitted work in a home can put you at risk as a buyer or seller. Unpermitted work is any work that has yet to be approved by the city the structure is situated in. If the city didn’t approve of the work or aren’t aware of it, problems might arise in the event that a home with unpermitted work is placed on the market.
It’s common for homeowners to perform unpermitted work when adding a new feature or system to their home under the belief that doing so is perfectly fine since they own the property. However, most renovations on a home must be done with a building permit. While it’s possible for a home to be sold if it consists of unpermitted work, this scenario can be challenging for every party involved in the transaction.
Buying a House with Unpermitted Work
Purchasing a home that’s comprised of unpermitted work isn’t a great idea for most buyers. The main issue in this scenario is that you can’t be confident that the home is safe to live in. If the unpermitted work involved structural components within the property, you and anyone else who lives in the home might be in danger. Any unpermitted electrical work could make a fire more likely to occur.
You’ll also be tasked with paying to obtain permitted repairs if the unpermitted areas are damaged. Repairing unpermitted work can cost you thousands of dollars. You should know that insuring and financing a home that consists of unpermitted work is practically impossible. For one, insurers don’t provide coverage for unpermitted work and may refuse to cover any aspect of the property. Lenders also don’t provide loans for properties with unpermitted work.
You might be tasked with getting rid of the unpermitted work by the city itself, which is a relatively rare occurrence. Whether you need to demolish an addition or get rid of a garage, removing this work will invariably cause your home to drop in value. Because of these risks, it’s likely not worth it to purchase an unpermitted home.
Selling a House with Unpermitted Work
If your existing home has some unpermitted work, there are several options available to you, some of which can be costly. One option is that you could place your home on the market and hope that it sells even with unpermitted work. The issue with this option is that you may need to accept a much lower price to sell your home.
You could also attempt to retroactively obtain the necessary building permits. The city may need to perform an inspection to determine if the work you performed is up to local code. They might also request that you demolish the existing structure before rebuilding it to suit the required specifications. If this work was done before you moved into the home, the city may be more lenient.
Another option you have is to sell the property in “as-is” condition while also disclosing every piece of unpermitted work that was performed over the years. Keep in mind that you’re legally required to provide this information before selling your property.
If the unpermitted work is relatively minor, you may be able to sell the home without much issue. For instance, a small electrical project that occurred without a permit might not cause buyers to back out of a deal. Disclosing the work that you’ve done could also allow the sale of the home to go through faster than it otherwise would have.
Whether you want to enter the market as a buyer or seller, current conditions indicate that the market is considerably more favorable to sellers. However, market conditions have eased somewhat over the past few months, which means that it isn’t as difficult to purchase a home at a reasonable price as it was in 2021. If you want to buy a home, try to avoid unpermitted properties. When selling an unpermitted home, there are several options you can use to make sure the deal goes through without delay.
Jason Somers, President & Founder of Crest Real Estate
With over 15 years of professional experience in the Los Angeles luxury real estate market, Jason Somers has the background, judgement and track record to provide an unparalleled level of real estate services. His widespread knowledge helps clients identify and acquire income producing properties and value-ad development opportunities.