Buyers who are getting slammed out of the Silicon Valley real estate market due to low inventory and multiple offers are extremely frustrated. In many cases, they write offer after offer, and each time not only are their bids rejected, but they never even get a counter offer.

You should not depend on getting a 2nd chance, of course.  Just because you write a contract on a San Jose area home does not mean that the seller needs to give you a counter offer.  Some agents and sellers don’t respond at all – not nice, but if you get dozens of offers, sometimes that does happen.  Sometimes they just take the best offer and run. Othertimes they only counter the best offer and forget the rest.

The question arises all the time: why isn’t my 20% down offer just as good as the 50% down or the All Cash offer? Isn’t 20% down good enough?

Cash is better because there’s less risk

Twenty percent down is “good enough” if there are no other offers. If it’s multiple offers, though, it’s probably not sufficient for most sellers provided that the all cash offers are written with realistic pricing. Right now, 25% of all sales in Santa Clara County are all cash, and sellers would far rather deal with an offer that includes no finance or appraisal contingencies.  For sellers, the fewer contingencies the better and no contingencies is ideal.  Particularly now, when we are seeing a very sudden and dramatic upswing in pricing, appraisal contingencies can kill an offer’s chances of success. With all cash, there is no appraisal at all – it’s a slam dunk on that front. (more…)

What is a real estate bidding war, and why is it back in Silicon Valley?

It is a supply and demand issue.  When there’s not enough supply for the demand, prices get pushed up.  The way that this happens is often through bidding wars.

When a lot of home buyers want the same property and write purchase offers for it, we have multiple offers.  In some markets, multiple offers come in at or under list price (I have seen this in cooler markets). But when the realty market is an overheated sellers market, inventory is too low for the demand, prices rise with those multiple bids.  Then you have bidding wars.

This can happen intentionally, as when home sellers knowingly under price the property to attract multiple buyers, or it can happen unintentionally, when the owner and agent priced the home in line with the comps and the market, but there’s an unexpected avalanche of interest. (The latter just happened to me when I priced a listing to be exactly in line with the market, but got 20 offers and a lot of overbidding.)   Either way, the result is similar.  Buyers up their price and sweeten their terms to win the deal.  Here’s what can happen:

• offers come in over list price
• usually the escrow period is short, to assure the seller it’s a “done deal”
• if owner occupied, often there’s a free rent back of a month or two
• some buyers may offer to pay costs that customarily are paid by the seller, such as an owner’s policy of title insurance, the escrow fee, transfer taxes, and in some cases, even the commission
• most of the time, “cash is king”, and the all cash offers will win the deal (or large down payments) – very hard for 20% down or less to compete against cash offers because they usually include an appraisal contingency (with prices escalating, many homes won’t appraise)
• many offers with no contingencies for inspections, loan, and appraisal – non-contingent offers can be dangerous, most of all if there are no presale disclosures or inspections
• most offers will come with proof of funds
• some will have the disclosures already signed too
• some will include a letter from the Realtor, the buyer or both – buyers may also include a photo

But let’s focus on the bidding part in particular for a moment.  How is all of this a bidding war? Is it just that offers come in over the asking price?  Yes, but sometimes even more is going on too. Let’s look at that now. (more…)

It’s a red hot seller’s market in Silicon Valley right now, meaning that there are more buyers hunting for just the right property than there are listings available.  The end result is multiple offers, bidding wars, pre-emptive offers and rapidly escalating real estate prices in many areas and segments of the market.

When there are lots and lots of bids on a San Jose area home for sale, what do home sellers do?  Most of the time, sellers begin with an “elimination list”.  That is, they start by deciding what they do not want to deal with. The more offers there are, the more critical this becomes since sellers normally don’t love the idea of reading 10 or more stacks of offers.  (Remember, the confused mind says no!) 

Sellers need to simplify their choices, and one of them is by eliminating the worst offers first.  A question for you to consider, if you’re a home buyer in Los Gatos, Saratoga, Campbell or anywhere in Silicon Valley is this: is your lender keeping your offer from getting accepted?  Does your lender make your offer worse to the seller? Sometimes that is exactly the case.

In some cases, certain banks or even credit unions are falling into the “elimination” list for some sellers as their agents may have advised them those lending institutions are slow or difficult.  Most of the time, these are the big banks – the ones that REO or short sale listing agents are demanding that consumers use for a pre-approval for submitting offers: (more…)

How common are “all cash” transactions for Silicon Valley real estate right now?  Throughout Santa Clara County, they were 25% of all sales, up from 20% in October 2011,  among houses, duet homes, condominiums and townhouses (class 1 and class 2, does not include mobile homes, 2-4plex or apartment buildings or raw land).   What’s trending? Lots, including more cash offers.

Some areas and some types of sales are more frequently all cash than others.  Here are a few quick stats for the last month (last 30 days from today – numbers from MLSListings, crunched by me – disclaimer on good intentions but no guarantee). Also, please note that this is for CLOSED SALES. As of this writing, we are seeing a huge uptick in multiple offers in all price ranges in many parts of the valley, and it seems that many are all cash or very large cash downpayments.

• Santa Clara County: 25% all cash
• San Jose (entire city): 27% all cash
• San Jose short sales: 27% all cash (down from 33% in Oct 2011)
• San Jose bank owned or REO sales: 39% all cash (38% Oct 2011)
• Short sales & REOs were 52% of all sales in San Jose in last 30 days (was 48% Oct 2011)
• Of SJ homes listed at $300,000 or less: 44% all cash (was 48% Oct 2011)
• Of SJ homes listed at/under $500,000: 33% were all cash (didn’t track in October 2011)
• Los Gatos: 9% all cash
• Saratoga: 8% all cash
• Almaden Valley area of San Jose: 10% all cash

Some of these sales will have no financing and the new owners will occupy the home.  Particularly in lower priced homes, though, these are investor buyers who will be renting out the property.  This is often the case with the lower price distressed properties in particular.  In higher priced homes, some new owners will put financing on the property after close of escrow.

With the crazy new demands that keep coming at us from banks and new requirements being imposed on appraisers, now more than ever, cash is king.  That doesn’t mean that the cash buyer will get a deep discount, but there will be a slight one in most cases and certainly preferential treatment that will create a great advantage in multiple offer situations.

Learn more about buying and selling Silicon Valley real estate with cash offers:

Cash offers: what do you need to know if buying “all cash”?

Q & A: Making an Offer

What’s My Silicon Valley Home Worth? Estimating the Probable Buyer’s Value  (financing impacts market value)

Many Silicon Valley home buyers rely on PMI, or Private Mortgage Insurance, to purchase a house or condo. But what is it and who needs it?

Private mortgage insurance is usually required with loans in which the buyer has less than a 20% down payment.

PMI does not protect you, the residential real estate consumer. It protects your lender in case you default!

FHA loans don’t have PMI but instead there is a “government guarantee” and for that you pay a premium – so not called PMI but it works similarly. The cost may range from 1 – 2.5%.

FHA or Conventional with PMI?

If you have less than 5% down, FHA will be your only option. But between 5 and 20% down, you may choose.

If you are trying to decide between FHA and conventional loan products with PMI, talk to you mortgage broker or banker to see which one really costs more in the long run, factoring in the total package of interest rates, premium rate etc. (FHA loans may come at a lower interest rate but with other added costs – so don’t just compare interest rates.)  The result may depend on the loan to value of the property, your credit score, and other factors. There don’t seem to be any “easy answers” as to which one is necessarily better.  This decision will require a little research!

If you expect to be bidding in multiple offers, this is another consideration too – it can be very hard for home buyers in the South Bay to win out in multiples if they are using FHA financing (as opposed to conventional).

Finally, like HOA dues, PMI is not something you can usually deduct from your income taxes (unless the PMI cost was simply rolled into your interest rate).  Please talk to your lender and tax professional for more information on PMI and the tax ramifications.

Related reading:

Is your lender pushing you into an FHA loan?

The challenge of being an FHA home buyer in a seller’s market

First Time Home Buyer with FHA Financing? Make Sure That Your Offer is Well Drafted!

For several years, we’ve seen declining residential real estate prices in much of Silicon Valley.  In many areas, though, prices are now either flat or bouncing up and down within a small range such that the probable buyer’s value or market value is very close to where it was a year or two ago.  Today’s San Jose Mercury News reports

“In a report to be released Monday, Clear Capital, a real estate valuations company in Truckee, predicts that prices will remain almost flat this year — compared with a 4.7 percent drop in 2011 — in the San Francisco-Oakland-Fremont metropolitan area, including Contra Costa County. Silicon Valley should see a 1.6 percent increase in home prices, compared with a 2.5 percent drop last year, the company said.” (Bolding mine.)

A small, modest increase in pricing is usually healthy for home sales as it gives buyers the confidence needed to finally take the plunge. It’s immensely challenging for people to buy when they believe any product – cards, home appliances or houses – will be cheaper in a day, a week or a month.

Home sellers who have wanted to move up from a starter home to the one they hope to spend decades in have felt somewhat trapped by lack of equity in many cases.  In others, the idea of selling for less than at the peak was so upsetting that they felt terrible about moving ahead prior to a full recovery.  Most now understand that getting back to prices at the peak of the realty market in San Jose and Santa Clara County will take many years.

Some of them are tired of waiting and are electing to forget about the profit they could have had if they’d sold at the peak.  These folks have decided to make the jump now to get on with their lives, despite less equity than hoped for initially, while at least interest rates are so favorable.  (It should be added that the move-up home will now cost less also!)  This can be a very wise decision since buying a house, townhouse or condo is usually not one purchase but two: you’re buying the loan product also and the total cost of home ownership should factor in both the costs over the lifetime of the loan as well as the purchase price. (more…)

Recently I was speaking with a neighbor of mine in Los Gatos who’s a high powered lender with decades of experience all over Santa Clara County.  In the last year or two she’s been doing many more FHA backed loans, rather than conventional ones, as smart home buyers, especially first time home buyers, try to get into a house while both home prices and interest rates are at record lows.  This makes a lot of sense as it can take a long time to save 20% or more and in that time, both interest rates and real estate prices in Silicon Valley could go through the roof.  (If my kids were out of college and working, I’d be encouraging them to buy a home using FHA backed financing too.)

FHA backed mortgages do require a lot more work, though, so I extended my sympathy that she’s having to jump through so many hoops and that they are for much smaller sales prices (many areas of San Jose have dropped 35 – 40% since the market collapse).  Mortgage brokers often make about 1% of the value of the loan as their compensation, so I imagined this great loan officer spending twice as much time with FHA paperwork as on a normal loan, on a smaller priced property, resulting in “half the pay for twice the work”.

Apparently that’s not the case with FHA loans!

“It’s better for me when the buyer uses FHA”, she assured me.  Really?  “Instead of getting 1 point, we are often paid 2.5 points when we close an FHA loan.”   That didn’t seem unfair to me since there’s a lot more paperwork involved.  But consumers probably don’t realize that their banker or mortgage broker will be paid much more if the loan is FHA backed rather than conventional.

If you have saved enough money for a conventional loan product but your lender is pushing FHA, be doubly careful before deciding what to do. There are pros and cons to each loan product you buy (you are “buying” or “paying for” a loan).  Make sure that you aren’t getting FHA financing only because it is more profitable for your lender.