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.

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)

Buying a Silicon Valley home? Understand that unless you are buying “all cash“, you will need to show your real estate purchase agreement to your lender, and your lender may want to see inspections, reports or disclosures based on what you’ve written in that paperwork.  And then the bank, credit union or lending institution may ask for repairs prior to close of escrow, even in an “As Is” sale.

This happened to my buyers a few months back.  They were buying  their first home using an FHA backed loan.  In the offer, we indicated that we would be having a few inspections (home, pest, roof, pool). Because financing with FHA backed loans is a tougher road, the lender did, indeed, require certain work to be done prior to close of escrow.  It was supposed to be an As Is sale so the buyers ended up paying for work to be done in order to close (and the seller allowed us to reduce the price somewhat).  Luckily they were all improvements that my clients intended to make anyway – but it was inconvenient and stressful to have to rush to have the work done, and of course this did cause delays.  (We did discuss not having the inspections listed in the offer, but my clients very much wanted them in it.)

For this issue, does it matter which contract you use, PRDS or CAR?

If you are planning to purchase a Los Gatos, Saratoga or San Jose area home, most likely you and your real estate agent will use either the newest PRDS contract (Peninsula Regional Data Service, employed from Los Gatos to San Francisco) or the CAR contract (California Association of Realtors form which is used throughout the state of CA).

There are many differences  between the CAR and PRDS contracts, but both of them have a place for listing at least some of the disclosures which are to be expected and whether or not the buyer intends to order a termite or pest inspection.  The CAR form also has a place for listing any other inspections the buyer intends to have done.  (Below find part of the section which lists inspections – too wide to fully reproduce here, unfortunately.)

One of the nice things about the CAR contract is that it is very clear as to who’s ordering and paying for what.  Nowhere in the paperwork, though, does it state that unless an inspection or disclosure is named, it cannot be ordered later.  So what is becoming common practice “in the field” is to simply not mention these disclosures or inspections in the offer.

Is that lender fraud? Might be – I will leave that to our attorneys to say for sure. Most of the mortgage people I talk with suggest that we simply leave things out to keep the situation uncomplicated. (I wonder if others in the bank feel the same way?)

The difficulty comes when buyers want to buy and sellers want to sell but the house, or pool, or some other element isn’t 100% perfect… If the bank sees the inspections reports and disclosures, it will of course show that the 50 year old house isn’t “like new”.  The bank doesn’t like that.  In more than a few cases, lenders essentially don’t permit an As Is sale.  In these cases, the banks, credit unions or other lending institutions start rewriting the obligations on buyers and sellers.  Maybe the buyer wants to do the repair differently after close of escrow – perhaps with alternate materials, but now is forced into paying for whatever is fast just so that escrow can close.

It’s not a simple problem, it’s complex.  Just as every house or condo is unique, so too are the issues that come with them.  If it were a simple matter that every house had to have a pest clearance, we could easily manage that.  But in fact it’s not so straightforward.  In response, agents and home buyers are leaving more and more blanks in the contract.  Personally, I’m not comfortable with it.  I present the situation to my clients, they talk with their banker or mortgage broker, and they decide what to do.  I think we could have a better solution, though. Don’t you?

Silicon Valley real estate offers few simple answers but many recurring questions. One of them is whether or not you should write a “lowball offer“. So the first question is this: what makes an offer a lowball one?

It’s entirely relative to how the market in that area (not the county, not the state, but that particular area) is selling.  If houses in one area of San Jose are selling within 1% of list price and you come in 5% under, the seller may feel insulted.  But if properties are routinely selling at 10% under list price and your offer is at 13% under, that’s not such a big deal. So keep an eye on that.

Most of all, you need to run the comps and pinpoint the pricing.  Sometimes the list price is LOWER than market value and in that case, the seller is probably expecting overbids. In other cases, the seller may be way high just to “test the market“.  At other times, the Santa Clara County area home is priced exactly at what the market can bear.  So you and your agent must absolutely crunch the numbers to establish the probable buyer’s value or probable market value for that particular piece of San Jose area real estate.

If you do submit a lowfall offer realize that the risk is that the seller will be insulted and then won’t be amenable to negotiation.  What I see most often is that a low initial offer results in a very high counter offer.  (E.G., house is listed for $1 million, offer comes in at $800,000 and seller counters to $995,000.) Throwing a lowball offer out on a home you REALLY want is probably not a very wise idea as the net result will probably not be favorable to your own interests.

Good negotiation is to be expected but if done poorly or overly aggressively, it can really backfire! So crunch the numbers, be sensitive to the local situation, and put a good foot forward.

If you are purchasing your Silicon Valley home “all cash”, you will be in a stronger negotiating position.  Most of the time, you will get a slight discount on the price and the escrow period should be smoother as there will be fewer hurdles with no financing contingency.  Sellers always welcome cash offers, especially now.

What do you need to know if writing an all-cash real estate offer?

First, make sure you really do have your funds available or “liquid”.  Sometimes buyers think that because they have stock worth a certain amount of money, funds in an overseas bank account or equity in another property they will have access to that cash almost immediately.  It often doesn’t work that way.

Large sums of money coming from out of the United States may have to sit in a bank account for some time, possibly 30 days.  Domestic wire transfers usually have little or no hold time. Is your money overseas? You may want to consider moving it well in advance of the close of escrow. Speak with your escrow officer and Realtor about the details.

Selling stocks, mutual funds or bonds?  The listing agent may be satisfied if not 100% is liquidated up front but will want to see that a substantial amount is already in cash.  Remember, though, that selling off those assets is NOT a contingency of the contract.  If the stock market falls through the floor tomorrow and you’re already in contract and with no financing contingency, your initial deposit could be at risk should you not complete the sale – that would be considered a default. (Please read your real estate contract carefully!)

Some home buyers write “all cash” offers when in fact they are taking money out of another residence or real estate.  In truth, it may look like a slam dunk to get the money but if there are any complications with the refinancing of the other property, those home buyers could be at risk.   These sales are contingent upon financing – just not the home in escrow!  There are many ways in which these transactions can get mucked up, so be careful if skipping a loan contingency when in fact a loan is needed.

Second, if you make an all-cash offer, you must provide proof of funds along with your purchase agreement.  It would be foolish for the listing agent and seller to not require this cash documentation -  it is an important element or term of your contract.  Your agent can white out or black out your address, account number for the sake of privacy but leave showing your bank balance and name.

Third, one of the pluses of an all cash offer is that it can close faster. If all the conditions are right, this could be just a few days or a couple of weeks.  My fastest ever was 5 days; there were already loads of inspections (2 of everything, as I recall) and the buyer was in an enormous hurry due to a tax deadline with a 1031 exchange.  An offer without financing could close in 2-3 weeks even if the buyer wanted new inspections.

Why would a seller want this? Sometimes the seller needs cash in the bank to purchase the next home.  For example, you could purchase his or her house in 3 weeks and that seller could complete a sale on another house maybe a week later.  (The seller would often deeply appreciate a brief “rent back” for that week or so to avoid 2 moves in a short window of time.)

How much of a discount could you expect with a cash transaction vs one with a loan?

Probably not as much as you might think. (About a year ago I had a listing that received multiple offers.  The lowest – a true low-ball offer – came in about 20% lower than list price.  The highest, of course, was well over list!  The low-ball buyer said “but my offer is all cash!” and could not believe that he didn’t get the house.  Most sellers will wait 30 days for that much more money.  Wouldn’t you?)

In my experience, the cash discount varies but is usually in the 2-4% range.  Most sellers (but not all!) will take a little lower of a sales price in order to have the higher probability of success with the closing due to no loan issues.  If there are multiple offers, you may get no discount but you will be the winning bid.  All cash is always a help!

For further reading:

What happens in escrow?
What are the benefits to paying cash for a home?

In most of California, the purchase agreement form used when writing an offer to buy residential real estate is the California Association of Realtors (CAR) form, the Residential Purchase Agreement (CAR-RPA).  Along the San Francisco Peninsula and in Silicon Valley, though, often we use another form, the Peninsula Regional Data Service purchase agreement (PRDS contract).  Few consumers know that there is a choice of forms to use when buying Silicon Valley real estate.  And too many real estate sales people do not understand the difference between them.

Does it matter which one you use?  It certainly does!

While anything in the boilerplate can be modified (deleted or added to), the basic text is not identical from one to the next, and neither are the ramifications to buyer and seller.  Here are a few examples:

- Property condition: one is an “as is” contract and the other requires that the property be delivered with a warranty of condition (no leaks, no cracked glass, no structural defects in chimneys, all systems operational, etc.)

- Repairs in escrow: one says that repairs must be by a licensed contractor, the other that repairs must be done in workmanlike manner (can be done by anyone)

- Defaulting: one contract has more ”teeth” with buyer or seller defaults than the other

There are pros and cons to each of these two forms. A skilled agent is “bilingual” in both, understands the strengths and weaknesses of each one, and can modify as needed the form to benefit the client. What is tricky, even for Realtors who work with both sets of realty forms, is that they keep changing.  So there can be confusion on what is and isn’t covered, or the way in which various aspects of the contract are addressed.  Let’s look at some examples of why it matters which real estate contract you use in the San Jose area.

Subtleties Behind CAR and PRDS Contracts

There are many issues to consider, but let’s just think about property condition for a moment. If you’re a buyer, you may prefer the PRDS form because it requires the home to be delivered with all systems being operative (heater, water heater, appliances, electrical systems etc.), it requires a Section 1 Pest Clearance and it requires a licensed contractor to do the repairs.

The CAR form, on the other hand, is AS IS and the seller or a handyman could do the repairs. With the AS IS form, you can still request repairs, but the seller is not obligated to do them.  If you are buying a home and use the PRDS contract, though, and you discover leaks in the roof, at the shower enclosure, or elsewhere, for instance, the seller must pay to repair these items, and the seller must hire a licensed contractor to do them. It’s not a request, it’s already been agreed upon. (There may be some exceptions, but that is in the realm of real estate attorneys.)

Areas to Note for Sellers

As a seller, there are good and bad things in both contracts for you too. Many sellers will be happy to use the PRDS contract if they can make it ”As Is” because there are other provisions in that form that are favorable to the seller.

Comparing and contrasting the purchase agreements in use in Silicon Valley could easily be a multiple day course as there are many points to evaluate and juxtapose.

What is important to know, as a consumer, is whether your best interests are being represented when the form selection is made, and whether there are modifications that should be done to best protect you, such as an as-is addendum if you’re the seller (and it’s a PRDS contract) or writing in an appraisal contingency or a leak-free roof warrantee (if you’re a buyer).

A good Realtor will be able to discuss the strengths and weaknesses of each form relative to your position at the bargaining table, and will add, delete, or change things as needed to give you the best representation and negotiation possible.

Areas to Note for Buyers

The CAR contract does not obligate the seller to do any repairs whatsoever.  If you know that you want a pest clearance (Section 1 termite clearance) or a watertight roof, you must request these things up front to be guaranteed to get them.  Alternatively, you can request repairs or credits once your inspections are done and if the seller doesn’t agree to your requests, you can get out of the contract.  (This is true for both forms.) It’s just that you are having to re-negotiate partway through your transaction, and you may prefer to go into the sale knowing that all systems will be functioning, there are no section 1 items, etc.

Also, it should be added that not everything is covered even by the PRDS contract in terms of property condition.  Foundations, for instance, are not mentioned at all.  So if there are foundation, drainage, and related structural concerns (except for chimneys), that will have to be negotiated between the home buyer and seller.

Finally, when in doubt regarding contracts and forms, please see a real estate attorney.  Lawyers are the best equipped professionals to deal with contracts, and those who specialize in real estate will be familiar not just with the language of the form, but the subtle implications of each line.

For more reading on Silicon Valley real estate contracts and forms:

Should you write an offer with no contingencies? What is the risk with a non-contingent offer?

Real Estate Purchase Contract: Better to Pick a Close of Escrow Date or Number of Days to Closing From Acceptance?

Can home sellers back out of the contract or force a buyer out?

Silicon Valley home buyers sit on pins & needles once they have written their contract to purchase property.  They wait and wonder and may have trouble sleeping while they expect a response. This is normal, of course. It’s hard to wait.

What happens after the Silicon Valley real estate contract is signed?

Sometimes, offers are presented in person by your buyer’s agent directly to the listing agent and sellers and there may be a nearly immediate response, or at least something soon after – within a few hours.  More often, though, now offers are presented by email to the listing agent, who in turn gets it to the seller either at a personal meeting or also by email.  Most of the time there is a counter offer, but sometimes there was enough communication ahead of time between the agents that in fact an offer is written in an acceptable fashion and is simply accepted by the sellers without any counter (or there were multiple offers and one was good enough to accept without a counter).

Some real estate trainers insist that every offer should get a counter offer – sellers should never simply accept the contract presented by the buyers

Some real estate trainers (who are teaching Silicon Valley real estate agents what to do) insist that every offer should always be countered so that buyers do not later worry that they overpaid. “Make them work for it” so they don’t have buyer’s remorse is the theory.  The bigger the fear of “buyer’s remorse”, the more likely that the agent will further negotiate the offer – at least a little.
A few real estate trainers, luckily not many (but one in particular who’s popular in the San Francisco Bay Area), insist that every offer should result in not just one counter, but instead a prolonged series of counter offers.  The theory is that this is how we agents should “show our value”.  There will be not one or two but many counters going back and forth, preferably over several days, according to this philosophy. Personally, I can’t stand this type of thing because more than really fighting for the client’s dollar, it’s a show to impress clients of how hard agents are fighting for their dollar. It’s an exercise. More than a few times I have see this behavior serve to alienate buyers.  They end up feeling like they put their best foot forward, working in good faith to simply buy a home, but it wasn’t good enough.  They get countered something crazy (often these counters also contain too many changes) and respond with something fair, only to get yet another counter. At this point, they are miffed or even angry.  Do you really want to alienate someone who’s trying to purchase your house or condo? I don’t think so. It’s unnecessary and it’s counter productive. I submit that it’s never wise to make buyers and sellers detest each other, but that’s exactly what can happen if you get more than a couple of counter offers.  It might be a game to the agent(s), but for the clients, for whom buying and selling is very emotional, it creates prolonged anxiety and smacks of game-playing.  So beware: agents may or may not reveal that this series of counters is part of their strategy, but you should know that it could happen to you.

What can you do if you think the other side is out for a long battle of negotiating?

The answer really depends on how much you want to buy or sell the property in question, and whether or not there’s any competition.  For buyers and sellers, tell your agent you do not want to play games, you want to be expedient about this.  You can set your terms and draw a line in the sand – that may or may not be the best thing to do but it is always a possibility. Straight talk, agent to agent, about the damage being done to the relationship can help to curtail it.  A phrase I have used in this situation is this: “I am having to do damage control with my clients because of these prolonged negotiations”.  That’s a polite way of saying that my clients are getting mad and the nickle and diming is about to backfire. Get serious or we’re done talking.

What can you do to avoid getting a counter offer and to ensure that your offer is accepted right away?

Perhaps this is a multiple offer situation, or you’re concerned that if you get a counter offer, it will allow another buyer to step in with a higher purchase agreement and get the home. Or maybe you have some sort of time deadline (such as a 1031 exchange time frame or some other personal reason) and you want to just get your offer accepted. How can you increase the odds that it will be? First, do your homework and know the market values.  If you want the property, offer fair market value. If you don’t, they’re most likely going to counter you back up to what they think is fair market value (or they won’t counter you at all – they will simply reject your offer if they find it insultingly low). Buyers don’t want to over pay and sellers don’t want to sell for too little, but if you worry about “getting a good deal” you may end up not getting the house or condo at all. Second, have your buyer’s agent speak with the listing agent prior to drafting the contract.  This is a good policy for many reasons, but a very practical one is to find out what the seller wants or needs.  Sometimes that info is in the MLS printout but just as often it isn’t.  Does the seller need a longer escrow? A shorter one? A rentback? Is any fixture excluded?  Is a pre-sale escrow opened, and if so, with which title company?  There are lots of questions to ask, including the very open ended one of “is there anything I should know when writing this offer?”  In our San Jose, Los Gatos, Silicon Valley area there are 2 sets of real estate forms in use – the CAR and the PRDS.  Some listing agents insist on one or the other. (If not, talk with your Realtor about the pro’s and con’s of each.)

Sometimes, a counter offer is unavoidable: distressed sales almost require them

If your contract is for an REO or bank owned property, you will get a counter offer and lots of addenda.  Just expect it.  Read it all carefully and consider having a lawyer review it too. With a short sale, the odds are that you will get a counter offer as well. Sometimes it’s a matter of precise pricing – if there’s a pre-approval for a particular sale amount, you will be countered to that.  (In 2009 I got one like that which surprised me as the price was lower than what we had offered.) With distressed properties for sale, it’s very difficult to avoid being countered.  Not so with a “regular sale”, though, if the Realtors or agents communicate ahead of time, the buyers make a fair offer and the sellers are reasonable. Finally, just remember that if your offer is accepted without a counter, it’s a win, not a signal that you overpaid! Want to increase the odds of buying or selling without game-playing? Talk to your agent ahead of time, prior to the drafting or reviewing of offers, and discuss the strategy and how to make it work so that you are comfortable and get what you want at a price to which you’ll agree.

Do you really want to buy a Silicon Valley home, or do you just want to write offers to see what will happen?  Some folks, who appear to resemble serious home buyers, write offers that are riddled with reasons why the seller should reject their offer, or at the very least write a very tough, high counter offer in response.

What kinds of things in a purchase contract make a bad impression on home sellers in the San Jose area?  Here’s  a list of things buyers (or their agents) have done I’ve seen recently which turned the tone negative when it didn’t have to be:

• On the good faith deposit check, don’t write the name of the title company.
• On the memo section of the check, write something vague or possibly nasty, such as “deposit for budget property”.
• On the contract, don’t write the seller’s name anywhere. Instead, write “Owner of Record”. Sounds like a bank owns it, but no matter what, it indicates that you don’t care who owns it.
• On the contract, omit the listing agent’s info in the agency confirmation and offer signature pages.
• Make a low offer, and if you are countered up in price, counter back to your original price.
• If the seller indicates that your offer is being reviewed favorably and that the seller is probably going to take it, ask the listing agent “is there any room still to negotiate?” and promptly cancel and submit a new offer which is 10% lower.
• Write offers on more than one property at once – even though you can only purchase one.  (That’s called “acting in bad faith”, even if it is a short sale.)
• Ask the seller to pay for everything, even items which are normally paid for by the buyer.
• If the MLS says that something is omitted or excluded from the sale, don’t mention it in your contract.
• If the MLS provides information on disclosures, inspections and reports, don’t bother looking at them before you write and submit your offer.

I’ve seen all of these just in the last couple of months.  Buyers and their Realtors need to remember that buying and selling houses, condos and homes in Santa Clara County (and everywhere else) is emotional as well as a business decision.  Being rude, inattentive, uncaring and generally not following instructions is not a good negotiation strategy!

The offer is the courting period.  If you are not polite and professional then, what will you be like in escrow?  Your offer is your first impression. If you want to buy real estate, make it a strongly good impression!

If you’re out to buy a Silicon Valley home this year, you may be tempted to look at real estate priced far above your ability to pay and hope that you can write a low offer that the seller will accept.

Don’t count on it.

Lowball offers are contracts written substantially below the list price (and often well below market price).  How low is too low? It really depends on the micro-market of the home you’re interested in (the neighborhood, price range, school district, etc.).  In most of Silicon Valley, houses, condos and townhouses sell within 5% of list price most of the time. The average list price to sales price ratio is usually closer to 1 – 3% of list price. 

My usuall advice to buyers is this: if you don’t think that the home is worth within 5% of list price, then keep looking until you find a home that is.  Most of the time, sellers aren’t prepared to come down more than a few percent. 

Once in awhile, of course, a million dollar home will sell for nine hundred thousand. But it is very rare that a home will go for 10% or more off of list price.  Most often, in fact, the seller will be angry about an offer that far off the mark and will simply write a high priced counter offer.  For example, let’s say a home’s listed at 1 million dollars (to use round numbers) and a buyer writes an offer for eight hundred ninety thousand dollars.  Most likely, the seller will volley back at something like nine hundred eighty thousand.    The best listing agents will tell the seller, “rather than take an offer more than 10% below list, let’s reduce your home’s price 4-6% and see if we cannot sell it for more than that”.  And usually, they can.

Buyers: if your budget is appx $500,000 or less, please don’t waste everyone’s time by looking at homes priced at $600,000.  Look at $500,000 or less – maybe a tad higher than five hundred, but not much.  Look within 5% over your budget, tops.

Sellers: if you are getting lowball offers but no “close” offers, the buyers are telling you something about the market conditions. Consider reducing your price so that your sales price can be reasonably close to list price.  Ask your agent for his or her unbiased opinion of your home’s probable sales price. (Some sellers browbeat their agents on price, feeling that if they can convince the agent the home is worth more, it will sell for more.  Give your agent the permission to be honest with you – that will be your best help.)

Recently I have been involved with multiple offer situations, both on the listing (seller) side and on the buyer side. All of the multiple offer bidding events have involved first time homebuyers and in every case, at least one or some of the offers were presented with FHA backed financing.

Sometimes agents rush when they write up the purchase contract, and the offer is not well done; we call that “sloppy” and it’s not helpful to your position as a would-be homebuyer.  As a buyer, you won’t know which box needs to be checked or which blank filled in, but there are big areas that you can double check to make sure that your offer is “clean”, which will present you in a more favorable light and increase the odds that your offer will be the one the seller and the listing agent will want to work with.

1. If your offer is an FHA offer, make sure that the box on page 1 says so (there are boxes for FHA and VA offers on page one of the California Association of Realtors contract)
2. Make sure that the numbers all add up – the initial deposit, the increase of deposit (if any), the loan amount and balance of cash downpayment should all be listed and should add up to the correct number for your total purchase price.
3. The “loan terms” are supposed to be specified too. What’s the interest rate? Are there any points being paid – and if so, by whom? Blanks in that area are a problem because you have a finance contingency which relies upon everyone knowing those terms. Be specific.
4. It is doubly important – no, triply important – that your offer comes with a soid pre-approval letter.
5. Make sure that you give your agent a check, or a photocopy of the check you’ll use if your offer is accepted.

Once the offer is drafted, your agent should go through it with you so that you understand all the clauses and terms.  Ask your agent to double check everything; it’s better to take a lilttle longer and make sure it’s right than to get it off fast but sloppy.

Recently I’ve seen a few FHA offers from agents who’d rushed and many or all of the items listed above were off. In one case, the agent didn’t even include the loan amount.  In two offers recently, the real estate licensee hadn’t checked the FHA box when the contract was dependent upon it going through as FHA.

Another common mistake with FHA offers: deliberately overpaying at a price so high it cannot possibly appraise.  Some agents do this by accident and others as a strategy. The thought is that if it doesn’t appraise (and it won’t in many cases if you come in 25% over list price), the buyer can back out and the seller will probably have to come down to the appraised level or lose the sale.  It’s a bad game to play and will usually merit being eliminated in multiple offers as nothing more than transparent game-playing.

What else can you do to improve your odds of success if you’re an FHA buyer, besides making sure that the offer isn’t sloppy?

Work with a great loan officer, mortgage broker or mortgage banker. Some lenders are fabulous with FHA financing and can close in 30 days. Others need 45 days. If you are fortunate enough to work with exceptionally good people and your lender can do it in a month instead of six weeks, you’ll be at a huge advantage.

Try to avoid multiple offers.  You will have much higher chance of success if you are not competing against other offers.  If you must go into competition, do everything you can to mitigate the FHA element of your offer. Go the extra mile.  Consider writing a personal note to the seller and seller’s agent about why you want the home.  Include proof of funds.  (For more tips, read my series on competing in multiple offers on my SanJoseRealEstateLosGatosHomes.com blog.)

It’s a tough time to be a homebuyer with FHA financing and unfortunately if there are multiple offers you’ll nearly always lose out to conventional loans (and conventional loans will usually lose to all cash buyers).