Home Buyer Success Tips in the Silicon Valley
Buying a home is challenging anywhere because it’s such a large purchase, but that’s especially true in the Silicon Valley since the competition is so intense. Here are 10 straightforward tips to guide you through the journey to a successful purchase.
- The epitome of a seller’s market
- Tip #1 — Use a local lender who comes highly recommended.
- Tip #2 — Don’t shop for a home until you have your loan pre-approval letter in hand.
- Tip #3 — You will need to show proof of your down payment funds in your offer package.
- Tip #4 — Go through the contract and the disclosures with your Realtor before you need to make an offer. This may take several hours.
- Tip #5 — Shop for homes priced 10-20% BELOW what you ultimately expect to pay.
- Tip #6 — Know that you WILL end up paying more than you think you should pay for your home.
- Tip #7 — If you are beaten out by another offer, learn from it. You will have to offer more than is logical in order to get the deal.
- Tip #8 — Expect up-front disclosure. This means for each offer you make, you will have to read over 100 pages of disclosures prior to making your offer. Read them at a time you can concentrate, as they will reveal most of the “warts” in the home you want to purchase.
- Tip #9 — Recognize that purchasing a home will probably involve more effort and time than you would have expected. It can be very discouraging to make offers that are rejected.
- Tip #10 — Work with a Realtor you respect and trust. When they tell you to offer more than you think you should, find out why they recommend that offer price.
The epitome of a seller’s market:
Ever since the beginning of the dot-com boom (about 1995 forward), there has been a chronic shortage of housing in the Silicon Valley. In fact, even during the Great Recession, most properties had multiple offers — albeit only 1-3 rather than the current 6-20 that we regularly see. (Why we have this shortage is well documented in an article by Chris Trappani entitled, “Why is Housing Inventory so Low?”)
This housing shortage is especially acute in the cities within 10 miles of Palo Alto, CA. Part of the reason is a concentration of four very large employers: Google, Facebook, Apple, and Stanford University. Additionally, these communities are visually enticing, with tree lined streets; interesting businesses and people; good commutes to major employers; vibrant downtown areas; and outstanding Public Schools.
There is another major factor at play as well: Palo Alto and the vicinity is perceived by many international buyers as an excellent place to purchase a home in the event they want to emigrate to the US, or as a means of putting their cash into a safe haven. Most foreign multi-millionaires appreciate features of the area that are related to its concentration of wealth, in particular the premium educational system mentioned above. Most people who are affluent and coming from outside the United States value excellent schools and are willing to pay for access to them.
The presence of these international buyers is great for those who are selling (no one complains about more offers on their home, of course), but it creates a particular challenge for those who are buying. Typically, foreign buyers have large down payments, or they might even want to pay full-cash and close in a minimal time-frame. It is very difficult for someone with a loan to compete against a full-cash buyer, as listing agents and sellers don’t want to take on the risk of a low appraisal in an appreciating Real Estate Market.
So the question for people who aren’t in that buying category is this: How does a “normal” Silicon Valley buyer with a 20% down payment for a home find success in their home-buying journey?
1. Use a local lender who comes highly recommended.
Many out of area lenders try to retain their clients by promising them a “deal” on the loan. An out-of-area lender if often a Red Flag to a listing agent, whose biggest concern is that in the final days, the loan will be turned down. Use a local lender that has an actual underwriter do the pre-approval. Most so-called pre-approvals are not worth the paper they are written on.
In this competitive market, most buyers must waive all contingencies when making an offer, including their loan approval contingency, in order to be considered in the counter-offer round. You want to have a local lender whom you can hold accountable if something goes awry in the lending process as a waived loan contingency means that the seller could keep your 3% deposit if you cannot perform. If you use an internet lender, it will be hard to hold them accountable if they do not perform.
2. Don’t shop for a home until you have your loan pre-approval letter in hand.
As Realtors, we are often put in the position of urging our clients to get started on their pre-approval when the client is urging us to show them homes. Invariably, the “perfect home” shows up, and everyone has to put a rush on things in order to put in an offer. Most of the time, the pre-approval is weak, and the Listing Agent is able to figure this out when they call the lender. If you have a solid pre-approval, the Lender is much more confident in their attitude.
3. You need proof of your funds.
Whether you are paying full cash for a home, or putting in a down-payment, expect to provide your agent with documentation of funds via bank and brokerage statements. Account numbers should be blocked out with either correction fluid or BOTH a ball-point and Sharpie®-style pen. When documents are scanned, account numbers will show through if only one type of pen is used.
4. Understand the legal arrangement.
Have your Realtor go over the contract documents with you well in advance of making an offer. When you make an offer, read and review the documents with care and diligence. You should have a complete understanding of the Real Estate Purchase contract and typical supporting disclosure documents BEFORE you make your first offer. The use of DocuSign or similar services often makes signing a contract so effortless that many buyers are tempted not to actually read what they are signing.
5. Shop for homes priced 3-10% BELOW what you ultimately expect to pay.
If a home seems like a really good deal, there will simply be many more offers, which will bring the home up to market price. As you can see from the chart below, SP/LP is the ratio of the Sales Price to the List Price. Most homes in the greater Los Altos and Palo Alto area sell for about 5-10% over list price. Essentially, purchasing a home is much more like an auction than it is a Real Estate purchase in any other parts of the country.
6. Know that you WILL end up paying more than you think you should pay for your home.
When you buy in the Silicon Valley, you will feel as if you had to make a crazy/high offer to win the bidding. Why? In an appreciating market, ONLY the offer that exceeds all other offers and exceeds all other previous prices for that neighborhood will be the one successful offer out of many. Generally, looking at past Sales Statistics logically for pricing guidelines will mean that you put yourself in position 3 or 4 in terms of the highest and best offers. To win, you must “pay forward” several months of anticipated home appreciation.
7. If you are beaten out by another offer, learn from it.
After a winning offer has been selected, Listing Agents are now providing an email that tells Buyer’s Agents where their Buyer’s offer stacked up. There are three areas to consider: price, financing, and terms. Price is easy to understand: the highest price is always important to the seller. That said, financing from a respected local lender puts you in a much stronger position. The lender should provide a pre-approval letter and call the Listing Agent on the day of offers, while the buyer should provide documentation for their deposit and down payment in the form of Bank and Stock statements. Terms are the least understood and make people most likely to be unsuccessful. Part of the reason is because the process in the region is novel to many buyers (see next section).
8. Expect up-front disclosure.
The SF Bay Peninsula area invented “up-front disclosure.” This is a system designed to facilitate a multiple offer-swarm. All disclosure documents are prepared and signed by the seller prior to the home being listed. Buyers are expected to sign all documents, and generally make an “AS IS” offer. This means that buyers must factor the cost for repairs and termite work that will be required in the future, into their offer, as they will ultimately be paying for them.
It’s common in most areas of the country to include contingencies with offers. In the Silicon Valley, though, most offers with either Property Condition Contingencies or Loan Contingencies are unsuccessful. The hazard for the buyer is that if they waive their Loan Contingency and are turned down for their loan (the pre-approval was an estimate and not reviewed by an underwriter), OR the property doesn’t Appraise, then they could lose their 3% deposit.
9. Recognize that purchasing a home will probably involve more effort and time than you would have expected.
Home Buyers should view this journey with their Realtor as akin to a part-time job. They should not give up when they have made several offers and begin to feel discouraged. This is typically a point where buyers land their offers.
10. Work with someone you respect and trust.
As your representative and advisor, your Realtor really is an incredible part of the home-buying process. Make sure that you feel confident in this choice.
According to a Yelp reviews from a Palo Alto buyer, I “[help] you get to the crux of your needs and desires, and [help] support you in making rational intelligent decisions in a field that tends to involve a lot of emotion and stress for buyers and sellers alike.” Learn more about me and the Arjani Group.