One of the mental traps I see that can foul up real estate expectations across Silicon Valley is the over emphasis placed on “price per square foot“. Here’s where the internet can seriously mislead people into thinking they understand home values more than they do, resulting in botched negotiations, frustration and disappointment. So let’s talk about it.

As one factor among many, it’s completely fair to include the price per SF when trying to determine what a home’s probable market value ought to be. (Remember, too, that a house, condo or townhouse isn’t worth one exact number, but a range – because the terms involved also impact the sales price.)  Although price per square foot is one way of finding approximate value, often is not the best, especially if you use it alone, because there are other factors besides the square footage of the house.  Here are some of the other factors that can mess up that valuation based on price per SF alone:

• precise location (view, proximity to something undesireable)
• lot size
• lot shape & access (flag lots may sell for less than homes directly on the street)
• whether the house is below or above grade/street level (most people don’t prefer being down from the street)
• back yard size
• amount of remodeling (and how recently it happened, whether with permits/finals)
• care for the home
• additons vs original square footage
• whether the street is a good one or full of parked cars & RVs
• sale type – regular vs distressed
• landscaping (especially “hardscaping” – patios, pools, summer kitchens etc.)
• amount of down payment
• whether it’s all cash, conventional financing or if the seller carries a note
• whether there were multiple offers soon after it hit the market or if it was one offer after languishing for weeks or months

The variance from “all original” to “all remodeled” alone can swing value 10% – 20% in the San Jose area.  Add to that other factors and the divergence in value can be much, much greater.

Additionally, smaller homes tend to sell for more on a per square footage basis than larger houses. The reason why is that kitchens and bathrooms are the most expensive rooms, but often there is just 1 kitchen and a similar number of baths with smaller vs larger homes.  Even if the properties are comparable in many ways, a 10% difference in square footage can make the price per SF very wrong.

What about new construction?

In a tract neighborhood of NEW HOMES, if the locations are similar and finishes are similar (no upgrades), there’s a better shot of the price per SF being useful information. Many new homes, though, offer a completed home with basic finishes, and the buyer must opt for upgrades such as adding a fireplace with custom mantle to the family room or master bedroom, better appliances or counter tops to kitchen and baths, etc.  Further, some new homes have basements and it’s possible that they may not be included in the square footage – and yet, of course, they may have immense value!

So even with tract homes, there are lots of caveats.  Additionally, the older a home gets, the less likely this approach is to be accurate because some owners will remodel their home every 10-15 years and others won’t do a thing, not even basic maintenance, and the home will be “tired”( at best) very soon.

Online and automatic valuations

Often when home buyers look at Silicon Valley properties for sale they compare the list prices via online valuations.    The difficulty is that the “auto-comp” figures are often wrong because they are based primarily, if not exclusively, on the “price per square foot” of the house’s listing. The online valuations often pick the middle of the viable range between “total fixer, probably needs to be demo’d” to “completely remodeled or brand new home”.  Most of the time, the “range” is about 10 – 15% from fixer to fixed, so most of the time, the online valuation will be right in the middle with a 5% swing either way. But some of these sites (if you read their disclaimers) say that they are within 80% of market value most of the time.  That’s not too accurate.

Let’s use round numbers to make this easy.  Let’s say that the online real estate pricing says that a home is probably worth $1 million dollars.  It might be that the actual pricing range goes anywhere from $900,000 to $1,100,000, but the virtual pricing tools don’t know if the home is next to high voltage lines, a busy road, is in the lesser school district, is remodeled or what.  Or, conversely, if it’s a short sale, has been a rental property that got totally trashed, or has terrible terrible neighbors in the immediate vicinity who have garage sales on a weekly basis and need safari gear to get through their front yard.  The true market value could be 5-10% higher or lower. It just depends.

So please take these things with a grain of salt.  If you look at the online pricing and decide it’s correct but the house you’re buying is in a lesser location or in worse condition, you’ll overpay.  And if it’s better, you’ll be too low and will wreck your odds of succeeding.  Don’t forget to include market heat when trying to determine the likely selling price of the home you want. If similar homes are getting multiple offers and selling 5% or more over list, then the sale from 3 months ago is only old news, not today’s prices. In those cases, if you only rely on comps, you will find that you miss the mark every time.  Home buyers who lowball their offers in a rapidly appreciating market will find that an expensive mistake to make, with the biggest risk being that they could even price themselves out of the market entirely.

My suggestion is to hire a good Realtor who can assist you with pinpointing the pricing, whether you are buying or selling, so that you can negotiate competitively and get the best deal you can for your home.   I don’t mean buyers hiring the listing agent, either.  When you do that, the agent also represents the seller and may be inclined to fight just for the other side – or for the highest price. Get your own real estate sales person who’s in your corner, helping you to evaluate properties and market value, and who will provide you good counsel all the way through the shopping, contract writing, negotiations, inspections, closing and beyond. There’s no reason to go it alone, and in fact doing so could cost you more in the long run.

For more reading on the same topic:

Assessed Property Value vs. Market Value of Silicon Valley Real Estate

Sometimes the List Price Isn’t the Expected Sales Price, So Run Comps!

What’s my home worth? Home owners may request an online evaluation by me by filling out this form. (The more info you provide, the more accurate the results will be

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: Bank of America, Wells Fargo, and sometimes others, too.  If the listing agent has had a bad experience with the buyer’s lender, there’s a very good chance that the offer in question will have much lower chances of success in multiple offers.

What’s a buyer to do?  Should you work with a direct lender (bank or credit union) or a mortgage broker?   Yes.  Sorry, lender friends, but maybe the answer is both.  At least if you’re shopping all sale types (regular and distressed properties) in Santa Clara County.  For purchasing short sales or bank owned homes, you’ll pretty much be forced to use a direct lender.  For regular sales, much of the time it’s not a huge plus to be with direct lenders in some cases because they have been extremely difficult for real estate professionals to deal with in the last year or two when it comes to funding loans. 

Last fall, for instance, I had buyers who were using B of A on a great sale where they were putting 2/3 down and had only a small conforming loan. It was to be a 30 day close of escrow, but it morphed into a 45 day transaction due to repeated mistakes and ommissions by the bank. (Luckily the lender did pick up the tab for those damages, but it was very stressful and upsetting for all.) 

I have never been a fan of “double apping” for a loan but in these days, it might be the best course of action for San Jose area home buyers who are bidding on both regular and distressed properties.  At the same time, there are some mortgage brokers who ALSO work as mortgage bankers, funding their own loans so that they can close faster.  That might do the trick for the short sales and REOs, though most of the time the listing agent demands a “major bank”.  Alternatively, you might try working with a smaller, local bank (coming to mind: Bank of the West) that doesn’t have the nightmarish reputation of the giants.

If you’ve ever had the experience of selling your car, perhaps you’ve also had someone phone you who’s never even looked at your vehicle and ask you “what’s the lowest price you’ll take?”  Most of the time, auto sellers aren’t too happy with that question: the caller is low balling without even looking at what’s for sale.

That happens in real estate sometimes, too.

Today I got a phone call from a Silicon Valley condo buyer who asked me, without having seen my listing, “will the seller take less?”

Not a great question, for a whole lot of reasons.

First of all, part of a real estate agent’s duty is to protect the seller – and that means not telling consumers the lowest amount that a seller would take, or even if a seller would take less at all (unless, of course, the seller gave express directions to do so, which is very rare indeed).

Secondly, it is a little insulting to call on a property you’ve never viewed and start to verbally bargain down the price, or fish for the lowest possible price. What that does is make the listing agent feel “on guard” from the very beginning. Guess how that impacts your position if there are multiple offers?  You will have made an impression – but not a good one!

Most of the time, a home buyer is better served to not call the listing agent directly at all, but instead to have his or her buyer’s agent place the call to get some information.  There are better ways to figure out if the seller is motivated,  how the pricing looks, whether there will be multiple offers etc. – and Realtors and other real estate licensees are usually pretty practiced at getting the information without damaging the buyer’s position for offers or even potential multiple offers later.

Most of us wouldn’t try to represent ourselves in court, but sometimes don’t appreciate that these same principles apply with real estate; that is, the value of having a fiduciary, an agent, helping us not just when the offer is presented but every step of the way.   Let your agent represent you from earlier stages, and you will likely find that you are presented in a better light than you could do yourself.  Think before you pick up that phone and call the listing agent directly!

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)

Both buyers and sellers in Silicon Valley find themselves having to compromise in order to purchase or sell homes in today’s market. In a red hot seller’s market, the buyer usually makes most of the concessions. In a deep buyer’s market, that can be said of the sellers. Right now, though, it is fairly balanced in the sense that homes are selling fast – but only if they are priced aggressively. In some areas, such as the Cambrian Park area of San Jose, prices continue to inch downward.  Sellers often feel as though they are compromising left and right before they even get their property on the market! What kind of compromises might you expect when buying or selling a home in Santa Clara County now?

Silicon Valley Home Seller Compromises

Most sellers want to sell for full price and to not have to do any repairs – that is, they want to sell “As Is”.  Unless they get multiple offers, though, often that’s not the case.  Often sellers must compromise on both price and terms, and may find themselves providing a pest clearance or do other repairs in order for the property to sell.  In some cases, though, the compromises are larger still: they may need to pay points for the buyer’s loan, provide credits, re-roof or do other work to make the transaction work. A suggestion for most sellers is to do pre-sale inspections. One of my clients this last year objected, asking why they needed to spend money (the cost of the inspections) to find out that they needed to spend money (the cost of the repairs)?  But in truth, by doing this, the seller can take care of some items up front, create a more secure feeling for the buyers and then maximize the sales price in most cases. It is a compromise, though, to do these inspections upfront. That said, it’s a worthwhile one because normally it will net the sellers more money in the end! A word to the wise: selling As Is often means not getting top dollar for the property (most sellers want Top Dollar with NO WORK – it doesn’t work that way).  To get the most money out of the sale, usually a hoe owner will need to make the property worry proof: do repairs upfront, before a buyer ever even sees it.

Silicon Valley Home Buyer Compromises

Most San Jose area home buyers want to purchase a home for 10-20% less than what the sellers think it’s worth.  The main compromise is on price!  It’s sticker shock every time, but especially for real estate purchasers who are coming from out of the area. Additionally, buyers tend to want homes in turnkey, perfect condition.  That is, they don’t want issues with permits, repairs, health and safety hazards, termites, and so on. They want to move in and “not have to worry” for a few years. So moving from this position to a purchase where they take on some responsibility for repairs or updating is a major concession or compromise right there. A word to the wise for buyers: demanding every little repair and home perfection will not usually work UNLESS you pay “top dollar” for a property. If you want the best price, be prepared to take on some of the responsibility upfront. For buyers and sellers to agree on price and terms it’s going to involve compromises on both sides. With proper planning, though, these compromises will result in a win-win for all.

Many of us cheered to hear that some of the large banks (who have not been wonderful to deal with regarding loan modifications, short sales and foreclosures or bank owned property sales) were getting sued by federal regulators for various types of malfeasance.

Most recently, the Federal Housing Finance Agency, which is in charge of Fannie Mae and Freddie Mac, filed a lawsuit against 17 major banks, including Bank of America, Citibank, Morgan Stanley, and several others (see a complete list here).

So how does this impact you, the Silicon Valley real estate home buyer or seller?

Imagine you’re on the board of any of these institutions.  What do you do to protect your shareholders when something like this happens?  Perhaps first of all, you make sure that whatever you’re accused of doing cannot happen in the future.  You hand down new policies and get them implemented immediately.  No exceptions.

Some of my buyers got caught in this situation, without warning, when their lender informed us that there will be a week-long delay in closing due to new procedures which are mandatory for every file, bar none.  Our loan contingency was removed awhile ago (with the lender’s assurance that all was fine).  We will still close escrow, but late.  This never makes anyone happy.

Right now, if you are trying to buy a house and will be relying on lender financing, I suggest you find out if your bank or lender is involved in a big lawsuit and if so, how this may be impacting real estate purchase contract deadlines.  Most lenders do need 17 days to get you fully approved if you go into the escrow pre-approved (with a real pre-approval, not a pre-qualification only) and 30 days to close the sale.  But if your lending institution is in a messy legal battle, it could take longer, and it could be a surprise.  In escrow, no one likes surprises, especially if they cause any sort of default.

This situation will probably benefit the credit unions and banks which did not misstep with the subprime loans.  Got a great bank that performs fast and is free of legal battles? Please share it here!

Many newcomers to the San Jose & Silicon Valley areas want to buy new homes (or newer ones).  Santa Clara County, though, had a big “building boom” after World War II ranging from the 1940s through the 70s.  At the end of the building frenzy, most of the land was taken.  More importantly, most of the really good land was built up.

How old is the “average” San Jose home for sale?  Probably about 45 – 50 years old, on average.  Depending on where you’re looking, precisely, the homes could be younger or older on average. 

There are some nice communities of new and younger homes in Silicon Valley, but there aren’t a lot of them.  Most of the new home communities have houses on small lots.  Some are near high voltage power lines (homes on Taft in San Jose’s Cambrian Park area) or next to freeways (Summerhill development off Samaritan Drive in San Jose). 

It’s easier to find newer homes in Morgan Hill, Evergreen, Milpitas, and areas that held onto agriculture longer. Pockets of newer homes exist throughout the valley, and some of them are on good land (such as the Willows neighborhood of Willow Glen or the Almaden Winery area in Cambrian/Almaden). There’s a beautiful subdivision of luxury homes in Saratoga where the homes enjoy gracious, large lots.  That land used to belong to an order of Catholic sisters (Notre Dame de Namur).  Good land!  Much of the other good land was either horse property, orchards, or vineyards until somewhat recently. Small pockets of that remain, including the “North 40″ in Los Gatos – which I understand has been sold and is soon to be developed.

Several parts of our South Bay community have roots that go back into the 1800s or earlier: downtown San Jose, old Santa Clara, Willow Glen, Mountain View, Los Gatos, Campbell, Saratoga, Alum Rock Park… many of these neighborhoods have Victorian era houses.  Japantown, in San Jose’s downtown area, has some beautiful Spanish style homes dating from the 1920s. (There are only a few of original adobe houses left that date to the late 1700s.) 

Don’t rely too much on the age listed in the mls!

One thing to be aware of is that some homes that are said to be 60 or 80 years old may have been virtually rebuilt and “like new”.  Sometimes the MLS will show the older number but only reveal the drastic remodel in the comments. So if you’re looking for a younger home, don’t just search by the age listed in the MLS – it may not be a true representation of the home’s condition!

Normally I do not reference other Realtors’ blog posts on any of my blogs or sites, but this morning I read one worth calling out because it raises a good issue that home buyers and sellers often never consider: the ongoing exposure of sold listings’ information, videos and photos on the web will continue to be present long after the home sale is closed.

The post, by Norma Toering of ReMax Palos Verdes Realty, is entitled “Please remove my home from the internet” and can be found on the Active Rain website at the link provided above.  This conscientious Realtor sold her listing and got it closed last week.  Now the buyer, the new owner, wants all traces of the listing removed from the internet.  Many people are private and may be uncomfortable with videos and pics of their home online (even if with the last owner’s consent, decor and furnishings).  But it is nearly impossible to remove all online photos because they are syndicated or pushed to other sites where we agents have no control. 

One commenter suggested that perhaps we need another disclosure so that buyers know and understand that what’s out there on the internet cannot be removed (and for that matter, that agents don’t want to spend many hours to remove them – a challenging task for which there is no compensation).  Having photos on the web is part of marketing and once it’s done it simply cannot be undone (at least not fully and certainly not easily).  I don’t think a new disclosure is a bad idea.  Our purchase agreement forms or contracts inform buyers and sellers that there will be dissemination of information on the MLS regarding the sale status and later the closing price and terms.  It wouldn’t hurt to also warn the parties that once images are disseminated on the internet, they are very likely to remain online a long, long time.

There are a number of things which are related to the purchase and sale of real estate which require the professional guidance of those other than your Realtor, namely a legal or tax professional.  This sometimes surprises consumers.  Once I was discussing one of these areas with a prospective client and she felt quite frustrated and exclaimed, “you know the answer, you just won’t tell me!”  That was many years ago, but I’ve never forgotten it.  Many Silicon Valley home buyers and home sellers assume that they’ll never need to talk to a tax or legal professional, and if advised to do so, may balk.

So let’s talk about it.

In other states, such as New York, attorneys are very involved in real estate transactions. Here in California, though, that’s not the case most of the time.  We call on CPAs and lawyers when there’s a problem or a question which is beyond the real estate licensee’s scope.  I’ll provide a few examples.

Holding Title: Probably the most frequent question I get that I’m not allowed (or qualified) to answer is about how people should hold title when buying a home.  The purchase agreements we use (both CAR and PRDS) lay it out best and puts it in bold so that consumers don’t miss it:

“THE MANNER OF TAKING TITLE MAY HAVE SIGNIFICANT LEGAL AND TAX CONSEQUENCES. CONSULT AN APPROPRIATE PROFESSIONAL.” (newest revision of the CAR contract, April 2010)

Most title companies have a nifty little chart that summarizes the pros and cons of the various ways in which people can hold title.  But neither the escrow officer nor the real estate agent can tell you what’s best for you.  We know what’s most common, but that doesn’t mean it is best for you and your particular set of circumstances.  So talk to a CPA or talk to a lawyer (or both) if you do your research and are at all unsure of what to choose! (Old Republic Title has a summary of the most common ways to hold title in a downloadable pdf file, which you can access via this link.)

Arbitration: Realtors or other real estate sales people should not tell you whether or not to initial for arbitration.  We can explain it, but on that point we cannot advise.  (I will share that in my experience, virtually everyone does initial for it, so as a practical matter I explain that it will likely be a counter offer issue in a purchase agreement. Again, though, the ramifications of agreeing to arbitration, or not agreeing to it, are a discussion for a legal professional.)

Distressed sales: In addition to these two areas, right now we are seeing many short sale and bank owned (REO) transactions.  The paperwork involved in them is significantly different than in a regular transaction.  Often the bank involved has addenda which nullify many of the “buyer protection” clauses in the purchase agreement, for instance, more so with REO sales than short sales, but significant in both cases.

And that’s only the tip of the iceburg.  It’s not unheard of that with a bank owned sale, the bank will not provide to the buyer signatures and initials on the contract which make it binding – but they want the buyer to go ahead, put the good faith deposit in escrow, proceed with inspections while the purchase agreement may still be voidable! (In other words, the bank may kick the buyer out of contract.)  Because there’s so much increased risk to buyers in purchasing homes in which the bank is the seller (or in some cases needs to approve a short sale), I advise my clients to consult with a good attorney to make sure that they understand what they’re agreeing to and what the actual risk is.

For home owners doing a short sale transaction, even the bank approval letter may be something to run past your attorney as the language used may indicate whether or not you will be open to trouble from the bank later. In my experience, short sale sellers are the most likely to need but not be willing to pursue professional tax & legal advice. Not so long ago I had a client who wouldn’t even make use of low cost or free legal services, insisting instead that he could find everything he needed on the internet.  That is really a mistake!

Transactional Nightmares: Finally, if a transaction is hitting a bad, bumpy stretch in which the other party appears to be in default (not performing), your Realtor may suggest that you consult with a real estate attorney if other avenues don’t get the desired results in a timely manner.  Every once in awhile, there will be a weird and unforeseeable turn that may put the sale on shaky ground.  It may even be that  who must (or can) do what may be unclear.  Realtors don’t often suggest that home buyers & home sellers call an attorney for a consultation, but if they do, take their suggestion seriously.   A good lawyer (or tax professional) can often get you an answer quickly and soon put your mind at ease and help you to establish a game plan, if that’s what’s needed.

In conclusion, if your trusted real estate agent suggests that you seek tax or legal advice from a qualified professional (or any other professional), it’s probably in your best interest to do so.  Your Realtor will not get any kickback or payment for the referral – it is made only for your own best interest.  While there’s a lot of good information to be found online and in blogs, none of it will be tailored to your precise set of circumstances, so it cannot substitute for a confidential conference with a lawyer or CPA.

In case you haven’t heard, there is a wonderful opportunity right now for qualified home buyers in Santa Clara County to enjoy both the state AND federal tax credits.  But this is truly a “limited time offer” and only applies to sales happening in April.  There are about 10 days left, so get into escrow now and enjoy a rare & wonderful chance to get Uncle Sam’s help with your home purchase!

Being an FHA home buyer in Silicon Valley is a challenge right now, especially if you want what everyone else wants: a nicely updated and remodeled home in a good area with no “issues”. (Issues meaning things like high voltage lines, busy roads, flood plains, or being too close to stores or spots not everyone wants to be near.)

The Problem with Condominiums and FHA

I need to start by explaining that things aren’t always the way they look.  We tend to think of condos as looking like apartments, with no yard, for example.  We think of townhomes as a two story or more home with neighbors on the sides but no one above or below.  And we think of houses as freestanding buildings with a yard around it.

That’s really how things look.  But how these different types of homes are owned may be another thing altogether.  For FHA home buyer purposes, this makes a huge difference.

Some townhouses and even some houses are not owned the way they look, but are held in condo ownership.   A good example of this is The Villas of Almaden, a beautiful &  gated community at Meridian and Coleman in San Jose’s Almaden Valley. Structurally, many of the buildings are houses – but they ar “condo ownership” and are stored under the condo label in our local MLS. What makes these buildings be condos? Practically speaking, in addition to their own space for their particular unit, the owners also own a percentage of everything else, such as the pool, grassy areas, tennis courts, private roads, etc. They also have a share of the liabilities of the condo community, too. 

If you are an FHA buyer and you want a San Jose area condo (or any home which is held in condo type ownership), you have to make sure the complex is FHA approved. We had the option of getting individual units spot checked until February 1st, but that has now been eliminated. Getting an entire complex approved takes time, perhaps 60 days, and money – and most buyers don’t want or cannot take on that kind of financial liability (and most sellers don’t want it either). Here is the link for the HUD site which will list for you the condo communities which are FHA approved.   So it is important to know if the townhouse you’re looking at is owned like a townhouse or owned like a condominium.  It can be painfully disappointing to think that a home can be bought with FHA backed financing, only to later discover that it can’t due to the type of ownership and lack of approval of the asociation.

Houses Are Simpler, But Not Always Easier for FHA Buyers

If your heart’s desire is to purchase a house in Silicon Valley, or a townhouse (not held in condo ownership) or PUD (planned unit development), at least you don’t have to get the entire neighborhood’s approval, so that one hurdle is cleared.  What you will find, though, is that there is a lot of fear by listing agents, and thus by their seller clients, about taking on an FHA buyer.

With multiple offers, the one(s) with FHA backed financing are usually the first ones eliminated.  (It’s not just due to the FHA, but also due to the fact that usually FHA buyers have very little cash down.  We are finding a lot of appraisal challenges because prices are rising fast.  With more cash down, an appraisal problem is less of an issue.)

Sometimes even with single offers, though, FHA buyers are running into trouble.   In some cases, the MLS will instruct agents, “No FHA Offers“.  In a few of those, it continues, “home cannot pass FHA guidelines” or otherwise indicating that the property needs too many repairs to get past the FHA requirements.  In others, though, the listing agent isn’t so direct and either won’t say that FHA offers will be rejected or simply behaves badly because he or she doesn’t want to work with one.   This is frustrating but is part of the challenge we are finding today.

The Stigmatized FHA Offer

Why are FHA offers viewed so dimly?

• usually there’s very little cash downpayment (hence, any appraisal issues will be a big problem)
• the FHA requires the home’s condition to meet certain standards & if the home needs work, the deal may not close
• FHA backed loans usually take longer to be fully approved and to close
• overall, there simply appears to be much more risk to the seller that the transaction will fall through or need to be renegotiated

There’s quite a bit of variation among FHA offers  in term of the amount of cash involved.   I have seen FHA buyers have downpayments ranging anywhere from 3% to 20% down (some have offered less down and then asked for the sellers to credit them back that amount, trying to do a 100% financed deal).  Why would anyone with 20% down do an FHA backed loan? Because the parameters are less stringent than conventional loans.  So the FHA opportunity is one which can appeal to a lot of buyers who otherwise would not qualify for a conventional loan.    So one mistake that I see with listing agents and sellers is not apprciating that this variation exists among FHA buyers.  They are actually not all the same!  The super small downpayments significantly hurt FHA buyers’ odds of having their offer accepted.  The larger the down, the better your chances are that the seller will be comfortable with your contract.

A huge plus with FHA is that the downpayment can be gifted, partially or in full.  If you are an FHA homebuyer in Santa Clara County and your relatives want to assist you with the downpayment, you’re in luck!  It’s easy to factor that in, and easy to improve your postion if you can up your downpayment amount that way.

There’s also a lot of variation among the lenders working with FHA home buyers.  Some lenders say that FHA borrowers need 21 days for a loan contingency and 45 days to close.  One Los Gatos mortgage broker says she can do it in 21 days.    The new guidelines for the Good Faith Estimate is slowing everyone down – the question is, how slow does it need to be? The GFE has to be done before an appraisal is even ordered.  That alone stalls things by about 3 more days than before these new guidelines were in place.  The really long time frames do hurt FHA home buyers chances.  If it’s possible to work with an FHA lender who can perform more quickly, it will greatly help the stigma of the FHA offer.

Right now it’s a seller’s market in much of Silicon Valley, which means that it’s hard for buyers to buy in general.  Add to that FHA backed financing and it’s tougher still.  But don’t give up if you’re a buyer & don’t assume the worst if you’re a seller!  FHA buyers are very anxious to get into a home, and their motivation is probably the most important element of all in terms of the likelihood of having a successful close.

How much extra money will it take, beyond the downpayment, to purchase a home in San Jose or Santa Clara County? The answer varies, depending on what, where, and how you buy. Today I’ll offer some general information on home buyer’s closing costs in Silicon Valley.

Just need a rule of thumb on the costs? A generalization, a really rough estimate is two percent of the purchase price, but your actual figure could be substantially more or less. If your loan is a “zero point” product and if you do not need to pay for inspections, your costs should be between .5% and 1% of your purchase price. If you buy a home that needs a lot of inspections and specialized ones to boot (structural engineering report), your costs will be higher.

What makes residential real estate closing costs vary so much?

• The City of San Jose charges a transfer tax which is normally split 50/50 between buyer and seller. The cost is $1.165 per thousand each for buyer and seller (so for a $600,000 purchase price, $990 each)
• Short sales and bank owned properties usually do not have pre-sale inspections available, so you will need to pay for all inspections (this is often a good idea anyway, but at least if the seller has some inspections available you can know whether you’re seriously interested in the property before spending hundreds of dollars on those reports)
• Condominiums and Townhomes will have HOA (Home Owner Association) transfer fees that you’ll have to pay when buying (they also charge the seller hundreds to provide you with a complete packet of documents on the minutes, budget, articles of incorporation, bylaws, newsletters etc.). Often this is about $300.
• Some neighborhoods may have extra bonds and assessments that residents have voted in, and these raise your property tax bill.
• Loan fees can range from a few hundred dollars to several thousand, depending on the mortgage program you choose. Points paid at close of escrow may be a worthwhile strategy for you – discuss it with your lender and your tax professional!
• Are you buying a home “As Is”? If so, expect repairs to be needed even if the home “looks great”. It is not untypical for a house to require about 2% of the home value in upgrades and fixes, so if buying “as is”, factor that in, especially if there are no pre-sale inspections!

What do inspections cost?

Roof inspections run between about $80 to $120 for most houses, but larger homes or those with special conditions may cost more.

Chimney inspections usually cost close to $100 too. Naturally the charge will be higher for more than one fireplace or chimney per home.

Property or house inspections are less expensive when the home is smaller, newer, and there’s no crawl space (usually). A tiny condo might be a couple or three hundred dollars. A large house of 5,000 square feet to 10,000 SF will be far more expensive, perhaps over a thousand dollars. Typical house? About $450.

Pest inspections likewise are less expensive on smaller, younger properties and more expensive on larger, older ones. Typical fee is appx $250.

Many or perhaps most inspection companies have two prices, with a good discount is usually offered if you pay the day that the inspection is performed. Either way, if you order the inspection, you are obligated to pay, even if you later decide to not complete the purchase of the home.

For most buyers of single family houses, budget in about a thousand dollars for inspections. You may need to do other inspections too, though, if something is uncovered in the home inspection. For instance, you may need a heating specialist to look at the furnace, an electrician to estimate repairing safety issues, or other specialists. If you need a foundating or soils expert, it will be very costly. If you are in a remote area of San Jose, you may need well water tested, a septic tank tested, or other atypical inspections and you’ll need to budget in more for these.

What are other typical closing costs for home buyers?

Your loan fees you’ll need to obtain from your lender. The appraisal fee is usually paid upfront and the cost is based on the size of the home, normally a few hundred dollars ($300 to $500 is the typical range, but again it varies).

The title company will charge a notary fee ($10 per signature on notarized documents), a fee for printing your loan papers (if they come by email, which is normal now, often about $300), a fee for the lender’s policy of title insurance (based on the purchase price of your home, often more than a thousand dollars), and possibly other misc fees to cover their paperwork.

Most lenders are looking for 20% down, and you will need to also have money set aside for closing costs (about 2% for many buyers) and finally also “reserves”. The bank wants to know that you have money “just in case”. Each lender will have a different guideline but some are looking for as much as six months of reserves.

That said, FHA loans are available up to $729,950 this year and they only require 3.5% down, so definitely talk to your lender if you are not in the 20% down category! The interest rates on FHA loans are very competitive. Purchases using these programs have more red tape and are more work all around, but it’s a great opportunity to get into a home when there’s not a lot of downpayment money to go around.