Find More Starter Homes for First-Time Buyers

Inventory shortages are particularly critical in entry-level price points. Use these strategies to help expand housing options for your clients.

Every price point in the real estate market is experiencing the effects of an extreme inventory shortage, but perhaps none worse than the entry-level segment. Many homeowners are choosing to stay put longer rather than trade up, and rising construction costs are prompting builders to largely abandon the low-end market. In fact, homes valued at $200,000 or less made up only 13 percent of new construction nationwide in 2017.

“Almost all builders have abandoned the entry market, with the exception of a few that have really specialized in it,” says Tim Costello, CEO of Builder Homesite Inc., a consortium of 25 of the country’s largest home builders. “When you have select companies that optimize their entire business operation around building the lowest-cost homes, it’s very hard for other companies to successfully enter that market.”

So how can you help first-time buyers find a decent property at an affordable price? Well, you’re going to have to brace them for prices higher than they may expect. In Portland, Ore., for example, starting prices for homes hover around $350,000, says Drew Coleman, ABR, CRS, principal broker of The Drew Coleman Team at Hasson Company, REALTORS®, and president of the Portland Metropolitan Association of REALTORS®. “There’s no point looking for a home under $300,000 in downtown Portland because it doesn’t exist,” he says.

Still, in other areas of the country, entry-level housing prices are more reasonable. In Memphis, Tenn., a starter home can be found for around $100,000, says Leon Dickson, CRS, GRI, president of Tennessee REALTORS® and principal broker of BenchMark at Southwind, REALTORS®. But stiff competition makes it hard to score a deal. “Our entry-level homes typically sell within one or two days of being listed,” Dickson says.

There’s no doubt the challenging starter-home market is having an effect on first-time buyers’ ability to achieve homeownership. The share of first-time buyers last year—34 percent—was the fourth-lowest since 1981, as the median price of all housing types crept up to $247,000, according to the National Association of REALTORS®’ 2017 Home Buyer and Seller Generational Trends Report. However, you and your clients can clear these hurdles with careful and strategic planning. Here are some points of guidance you can use to help expand entry-level housing options for first-time buyers.

Rethink Deal Breakers

The typical profile of a starter home is a 1,500-square-foot property with two or three bedrooms and one or two bathrooms. But price points for these properties have not remained consistent, so buyers will have to adjust their expectations. “It’s a real challenge to make sure we have enough inventory for the first-time home buyer,” says Steve Thayer, chair of the Denver Metro Association of REALTORS® and broker-owner of The Thayer Group at Keller Williams Action Realty in Castle Rock, Colo. “We don’t want to price those people entirely out of the market.”

Similar to Portland, typical starting prices for single-family homes in the Denver area range between $300,000 and $350,000, Thayer says. To help combat sticker shock, Thayer helps his budget-conscious clients distill their home wish lists into wants versus needs. “Sometimes, they realize that that the items on their wish list—perhaps it’s a basement or a guest bedroom or a remodeled kitchen—are really just wants and not deal breakers,” he says.

Location is perhaps the biggest price determiner, so the quickest way to make cheaper housing options available to first-time buyers is to widen the geographic scope of their search. Be prepared to argue why your clients should look further out from the city center or why they should consider a different type of home, such as a multifamily townhome or condo rather than a single-family house. Fixer-uppers instead of move-in–ready properties, too, can expand options for your clients. “First-time buyers who come in with an aggressive wish list tend to reset their expectations and expand their geographic parameters as they see what’s available through the search process,” says Michael Barbaro, broker-associate at Hunstman, Meade & Partners Compass Realty in New Haven, Conn., and president of Connecticut REALTORS®.

Dredge Up the Inventory Yourself

As a real estate professional, you also need to be proactive about finding entry-level inventory, even before you begin working with a first-time buyer. “We have agents knocking on doors, sending letters, and posting on social media, asking people if they want to sell,” Thayer says.

This approach worked for Thayer’s colleague, Dave Umphress, a sales associate with the Keller Williams Action Realty office in Littleton, Colo. After reaching out to his followers on social media, Umphress learned that an insurance agent in his network was looking to sell his father-in-law’s property. “The house was in rough shape, and they just wanted to sell as-is,” Umphress recalls. He had buyers who were willing to take on the repairs, and they purchased the home for $260,000—a lucky find in his market, where properties below $300,000 are rare. “The buyers were a young couple with their first baby, and they thought they were doomed to rent forever.”

For first-time buyers who are considering fixer-uppers, it’s smart to seek financing for anticipated home improvements. That way, they can build renovation funds directly into their mortgage loan, Barbaro says. “The FHA 203K loan allows buyers to purchase a home that, while it doesn’t quite meet their current standards, can be made into their dream home with a little sweat equity,” he says.

Jessica Tindell, GRI, SRS, principal broker at Tindell & Company Real Estate and Property Management in Portland, Ore., makes a habit of reaching out to expired listings and FSBOs to gauge their determination to sell. If it’s been six months since the last time a home was on the market, the home may have appreciated “and it may be enough time to get the homeowners the selling price they were originally looking for,” Tindell says.

Find Creative Financing Solutions

Getting your clients pre-approved for a mortgage before taking them out on showings is always a wise idea. But it’s even more necessary for first-time buyers who may need extra financing to afford homes in higher-priced markets. Do some research to identify the financing package or government assistance program that will benefit your clients the most, Dickson says.

You’ll get a leg up if you have strong relationships with local lenders. Tindell recently had a buyer with a $232,000 USDA loan, which fell short of the $300,000 threshold for a starter home in Portland, Ore. Through her partnerships with local lenders, Tindell was able to help the buyer secure additional financing through an FHA grant fund. “At their original price point, there were only three homes in all of Oregon that fit my client’s budget,” Tindell says. “So we went back to the lender and said, ‘This isn’t going to work. Please find us something else.’ In the current market, you have to work a lot harder to get people approved and to get them funding they can afford.”

Sealing the Deal

Due to low inventory, entry-level homes are often competitive, drawing multiple offers. To compete with higher bids, Dickson encourages his first-time buyers to offer terms in the sale contract that favor the seller, including waiving closing cost assistance, accepting a quick closing timeline, and taking on larger home repairs. “In this market, you have to be a strong negotiator,” Dickson says.

In a tight market, creative thinking stands out and could be the thing that gets your clients into their first home. Sometimes, going way outside the box is necessary. Coleman recently had a seller who accepted an offer from buyers who agreed to deliver cookies and bagels to the seller’s office after closing. And deliver they did. “Their offer was successful, and the creative gesture made a good impression on my seller,” Coleman says.

Will Future Starter Homes Feed the Airbnb Trend?

As more millennials enter the housing market, some builders are focusing on catering to the 35-and-younger demographic, according to NAR’s 2017 Home Buyer and Seller Generational Trends Report. Earlier this year, luxury home builder Toll Brothers launched its more affordable line of homes called T Select, with starting prices in the mid-$300,000s, in suburban Houston and Philadelphia. These homes come with streamlined customization packages and faster build times.

And while millennial buyers desire the same amenities in starter homes as previous generations, they also have a few different requests. Millennials expect more integrated technology and smart-home features, and they view their home as more of an income generator, Costello says.

“Many millennials are used to cohabitating, either with their parents or a roommate,” Costello says. “So when they buy a home, they continue to want to cohabitate—either with a roommate or as an Airbnb. In the future, I can see an Airbnb-style starter home becoming a standard thing. It would be a home with a room that can be locked off from the rest of the house, where people can come and go, and you can collect money from those guests.”