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With the Federal Reserve’s first interest rate cut in a while, mortgage interest rates are starting to settle down. Although this appears to be starting to free up the housing market, there is a phenomenon known as the “lock-in effect” that could keep the housing market tight for some time.
Essentially, people who bought a home at a low mortgage rate may be reluctant to sell, knowing that they are unlikely to get a home at such a low rate again.
However, while inventory may be lower than usual, this does not mean you are not looking to purchase a home. Real estate experts suggest some workarounds.
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get creative
When inventory is low, get creative, says Michael Kucik, real estate developer and owner of One Stop ADU. “Consider a fixer-upper or construction land.”
He told how he developed small housing communities on vacant land during the last housing crisis. “We offered affordable custom homes, and despite market conditions, the community sold out within 18 months.”
See more: 5 Southern cities where you can buy a home for under $100,000
build an ADU
Another option is to build an ADU on your property, Kootchick recommended. He noted that some states are making this easier.
“California passed a new ADU law in 2020 that makes adding a second unit much easier. It can go up to 35%,” he said.
You can then rent out your ADU to generate income, do a cash-out refinance, and use the increased equity to make a larger down payment on your new primary residence. The income from your ADU can also help you qualify for a new mortgage.
Do a cash-out refinance
If homeowners are looking to go even further, Kutchik says, opt for a cash-out refinance to leverage your equity and use it as a down payment on your next home. This won’t solve the problem of inventory shortages, but it may allow you to consider properties that are more thoughtfully considered from an economic standpoint.
If you have good credit, you’ll likely be able to borrow up to 80% of the current home value, he said. “Once we build a new house, we’ll sell our current one.”
Find a home that needs cosmetic upgrades
REAL real estate agent Scott Waters says one of the biggest secrets in a tight market is to focus on homes that need minor cosmetic upgrades.
“Most buyers want a move-in ready home, but properties that need repainting, new flooring or updated fixtures are often cheaper and have less competition,” he says. .
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These homes may require a little more “sweat equity,” but buyers can build equity instantly without major renovations.
Check out your employer’s relocation program
If current homeowners are planning to sell and relocate, don’t forget to ask if the company offers relocation assistance, says Waters.
“Many large employers have programs in place to help you sell your current home and provide financial incentives and assistance to buy in a new area,” he explained.
These programs are often underutilized, but they relieve much of the stress associated with managing two properties and provide valuable connections with local real estate agents and movers.
Explore distressed properties and foreclosures
For first-time buyers and current homeowners alike, distressed properties and foreclosures represent an untapped opportunity in a low-inventory market.
“These homes typically require more work, but banks and willing sellers are often willing to negotiate significantly lower prices,” Waters said. “Although unattractive, buying foreclosures allows you to acquire properties well below market value in areas where prices might otherwise fall.”
There are always options in a tight market. You just need to think outside the box. With the right financing and creative strategy, you can achieve your goals despite limited inventory.
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This article originally appeared on GOBankingRates.com: 6 ways to avoid the real estate “lock-in effect” and buy a home
