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!

If you are in the market to buy a Silicon Valley home, you’ve probably noticed that about 1/3 of all real estate listings are distressed sales. Of those, most are short sales but some are REOs or “Real Estate Owned” by a bank or lending institution.  Most Silicon Valley REO listings, and even a few that aren’t bank owned, have comments from the listing agent insisting that the buyer be pre-approved from a direct lender. Some will go so far as to insist that it be Wells, Chase, B of A or some other institution. Or even that the buyer be pre-approved via that listing agent’s hand-picked lender.

Why all the fuss about direct lenders? Isn’t a pre-approval from a mortgage broker just as good? Isn’t that asking a bit much to tell buyers who gets to see their financial info?

Pre-Approval versus Pre-Qualification

Typically, in my experience, when a bank or credit union (both are direct lenders) issue a pre-approval letter, it’s only after the buyer has actually submitted everything (pay stubs, taxes, bank account names etc.) and the info has been verified by the bank, submitted to underwriting and OK’d for a window of maybe 90 days to complete the sale. When they say a consumer is pre-approved, they mean it (the vast majority of the time).  In other words, direct lenders usually don’t write fake pre-approval letters.

Mortgage brokers sometimes do.  (Not the better ones, of course.) What they have in hand may really be enough for only a pre-qualification (or “pre-qual”), not an actual pre-approval.  But sometimes mortgage brokers will issue a pre-approval letter.  We Realtors know that this is not an uncommon problem, and many of us don’t trust a letter from such a lender if the loan agent is an unknown person to us for that reason. With mortgage brokers there’s a crisis of credibility and that’s Problem # 1. (This is not always the case, of course. Many mortgage brokers are very careful and thorough so I am not saying that they are all terrible!)

The next issue to point out is that with mortgage brokers, the process will often be slower because another party is inserted into the mix.  Your loan agent might be great, but she or he still has to submit the paperwork to an institution that actually has the money to lend.  There’s a little less control because the folks with the money are one step further removed.  It’s an indirect lending situation, and that’s Problem #2.

It’s only fair to add something here, though, and that’s that there are plusses to a mortgage broker that make them more attractive to buyers and for these reasons, I usually do suggest that my clients work with a mortgage broker whom I trust.  Here are the big strengths: First, they can shop not just one lender, but multiple lenders.  If your loan gets rejected by one, there are other sources for the loan at hand.  Secondly, because mortgage brokers have multiple lenders available, they can shop for better pricing more effectively than mortgage bankers usually can.  Disclaimer: you still have to watch the fees, so check the APR. For cost-conscious buyers, this may be the best way to go financially.

Another alternative that many consumers don’t seem to be aware of is the loan agent or lender who is both a mortgage broker and a mortgage banker.  How does this work?  Your lender takes all your info and completes the package.  At the end of the transaction your lender’s company funds the loan (they are the bank, so a direct lender for the transaction).  But it’s set up so that your loan will be sold after close of escrow and they’ll have money to do it over again with another consumer.  So your ultimate lender may be one of the big guys or someone you never heard of.  The plus to home buyers is that there’s the benefit of the direct lender and the shopping ability of a mortgage broker.  These folks are very rigorous and precise with their paperwork because they do not want to keep your loan forever.

If you are a Silicon Valley home buyer, or want to be one, it is not a bad idea to keep your eye out for a few lenders to whom you might want to turn if the situation requires it.  Let’s say you have a great lender at Wells Fargo but the listing agent requires a pre-approval from Chase.  Don’t hurriedly walk into a local branch and just grab the first warm body you find to do your loan pre-approval!  That is no way to pick someone who will be so key to your success.  Slow down and hire more carefully.   Get recommendations.  Most real estate agents know lots of loan agents and we can share with you the names of good people at a variety of banks (there’s no kickback or referral fee, fyi). We ALSO know the names of many great & trustworthy mortgage brokers, too.  Just ask!

Finally, I want to add that I see a growing trend of listing agents even in regular sales wanting more control and access to buyers’ financial info.  Counter offers are coming back with demands that my buyers be pre-approved by the listing agent’s lender (often a direct lender, but not always). Recently I got a counter like that which added a “kick out clause” if the sellers didn’t like what the listing agent’s lender said about the buyers!  Our lending climate has been very difficult the last few years and too many real estate sales have been derailed by bad loan situations.

Do you have to show the other Realtor your credit report, taxes etc.?  No, in most cases you don’t.  Some of them are very pushy, though, and if you really want the house, townhouse or condo you may have to meet with their lender or give them more information to prove that you are financially capable of completing the transaction.  Often you can or perhaps should give them “proof of funds”, meaning proof that you have the downpayment or the full payment if it’s an all-cash offer (do black out your home address and account number, though) and they will feel more comfortable that you are truly qualified. 

A pre-approval from a direct lender may also increase your odds of being taken seriously.  That doesn’t mean you have to use the direct lender, only that you’ve really been vetted.  If you want to purchase property in the San Jose area, it’s a good idea to be ready to engage a direct lender at a major bank should the listing agent require it for offer acceptance.

If you’re working with a mortgage broker, add another step to strengthen your case: have him or her phone your agent and the listing agent.  This will very likely smooth over any potential unease that exists if your lender and the listing agent don’t already know each other.  A conversation can do a lot to help.

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Note to readers/commenters: please limit your comments so that they are not so long that they should be a blog post themselves.  Blog protocol is to keep comments brief and concise.  I allowed a couple of readers to make long comments (more than 200 or 400 words) but reserve the right to edit longer comments for brevity or to not publish them at all, particularly if it’s a second (or third) comment by the same person and both (all) are long.

If the excessively long c0mments continue I will probably close commenting altogether on this post.  Thank you for your understanding.

Today I was chatting with my lender friend, Shashank Shekhar, who’s also a very active blogger and social media maven. We discussed a variety of topics, including how to price a home for sale and establishing the real estate market value of Silicon Valley homes.

Sometimes it can be tricky to estimate what a home might sell for or its market value.  I usually talk with my seller clients about trying to find the probable buyer’s value.  The seller may have a range of prices that he or she anticipates and would accept.  So too with the buyer, whose range will likely be lower than the seller’s.  The key is finding where the buyer and seller price ranges overlap. If it’s unlikely that their ranges overlap at all, we’ll have a listing that is difficult or impossible to sell.

Let’s take a hypothetical case of a home worth about a million dollars (see image above). The seller would love for the property to sell close to $1,040,000.  The buyer would like to purchase it for $960,000.  The agent’s competitive market analysis indicates that similar homes have sold or are selling at around a million dollars, give or take a percent or two.  If the buyer and seller can come to a meeting of the minds, and there’s no undue pressure on either one of them, we have (hopefully) a sale and we have market value.

But as we know, sometimes homes sell for much more than they would seem to be worth, and other times much less.

What causes property values to go above or below what would seem to be the probable value?  Undue pressure can certainly cause values to rise (desperate buyer who just has to get into a house, even if overpaying or desperate seller who has got to unload a property, even if selling too low).

We saw the high values happen in years where the market was terribly overheated, like in 2000,  and buyers were exhausted (desperate) from losing time & time again in multiple offer situations.  Sometimes the buyers got agitated and spiked the price. Here’s what I mean by that.  We would see multiple offers on some homes, let’s say 10 offers, with 8 of them in a band of prices that were close to each other (true market value) and one a bit higher and another crazy high.  The “crazy high bidder” got the home, the seller was ecstatic, but it was not typical of all homes and those drastically overbid homes were just creating a worse “bubble”. Those homes sold artificially high, but each time one closed, it raised the bar on what everyone thought was “market value”.

Additional causes of price fluctuations:  If there is no extreme pressure, though, the rest of the odd pricing fluctuations usually come down to a couple of things:

• timing (if the home sells fast or not)
• the number of offers
• and the terms of the offer

Timing, number of offers and sales price

Homes that sell very quickly (in a week or so) may get so much attention that they also get multiple offers and they may sell with a great price and great terms for the seller.  This can also happen after a dramatic price adjustment but the best chance of it happening is usually when it’s a brand new home on the market.

Right now, homes that are priced appropriately, in good shape, reasonably easy to see and have no issues are mostly selling within 3-4 weeks. If they do so, and sell with one offer, maybe a couple of offers,  and a normal 20% to 25% downpayment, the property will likely sell close to list price.

Homes that stay on the market too long become “shopworn” and get passed over by most buyers (and their real estate agents).  When they do sell, they will usually sell for much less than if they had snagged a buyer within the first month.

The terms of the offer

The terms can make an enormous difference in whether a home sells for top dollar or for bottom dollar.   In a nutshell, if the buyer’s terms are bad, the price will have to be good to compensate.  Conversely, if the terms are great, the price may be much lower.

What kind of terms are good or bad?  Most of the terms which impact sales price have to do with the financing, so the amount of cash down or other loan terms.

Great terms, extremely strong: all cash, large cash down payment, no issues with appraisal (either because of all cash, large cash down or no appraisal contingency)

Bad terms, weaking the offer: small down payment, FHA financing, asking the seller to carry the loan

Other terms not related to financing can sweeten the deal for the buyer or make it worse in the seller’s eyes.  The seller wants a “done deal”, so will likely take a lower price if the transaction looks more solid and sure (and less likely to fall apart).

Good terms: seller gets fast close of escrow (if desired) and a rentback which if needed (even stronger: seller gets free rent back).

Weak terms: buyer’s offer is subject to the sale of another home (worse yet: it’s not even on the market – better, it’s actually under contract and just needs to close escrow)

Strong terms can make the home purchase a “better deal”.  Weak terms will need to be compensated with a higher price.

Let’s look at that hypothetical million dollar house in Silicon Valley once more and this time have a look at what can happen to the sales price with the terms, timing & number of offers in mind.

This is not comprehensive, of course, it’s just to give you an idea of how pricing can be influenced (and hopefully to dispell the idea that a house, condo or townhouse is worth exactly one precise amount).  If the home’s impossible to see (requires too much notice, or has to be by appointment only but the agent’s cell phone rolls to voice mail and then the VM is full) has terrible odors or creepy occupants who don’t leave the house when the buyer is viewing it or it’s on the market for 2 years before selling  – it will sell for less. To say nothing of what happens to the purchase price if it’s a short sale, bank owned or stigmatized property.   Most of all, I want to give the sense that the price where the home will sell has a lot to do with how fast it sells, how many bidders there are and what the terms are like.

Last fall I did a series of posts aimed at buyers who were facing multiple offer situations.  If you would like more information on the contract or purchase agreement terms and how they impact positioning and pricing of offers, please have a read.

Tips for Writing a Competitive Offer: Part One

Writing an Offer in a Multiples Situation? Financing Tips (Part 2)

Writing Strong Offers: More Financing Tips (Part 3)

Tips for Home Buyers Competing Against Multiple Offers – More Financing Tips (Part 4)

Competing Against Multiple Offers: Contingencies and Timeframes (Part 5)

Real Estate Purchase Offer Terms to Consider When Competing in Multiple Offers (Part 6)

Finally, if you would like to get some data on the probable buyer’s value for your Santa Clara County home (San Jose, Los Gatos, Saratoga, Campbell & nearby communities) please fill out a request here: http://www.SiliconValleyHomeValue.com.  The more information you provide, the more accurate my estimate will be for you.  (Offer good for home owners only.)

In the last few weeks, I have been very busy with Silicon Valley home buyers and on average am writing at least two offers per week.  Most of the time, the listing agent requests that the offers be faxed or emailed in.

Why do so many listing agents do this? It’s faster, it’s more expedient. But it may not give you all the information you need to know if you’re a seller (or a seller’s agent).

This week, I had the pleasure of twice being able to present an offer “in person”. In the first case I presented my contract to both the listing agent and her clients at the agent’s Cupertino office.  In the second I met with the listing agent at the home my buyers were bidding on in San Jose’s Cambrian Park (the seller is out of the area).  We got into contract on the first and are waiting to hear on the second.  Both were multiple offer situations (one with 6 offers, the other other 5 bids).

By presenting in person, the agents can get additional information, ask questions, and lots more.  They can also size up each other, get a sense if they could work together and whether the other agent is competent, for instance.  In some cases, a personal meeting may leave the seller or listing agent uncomfortale. With mutliple offer situations, this is huge.  The “red flag” may be there in person but not via email.

My hat is off to all the good real estate agents in Santa Clara County who slow down long enough to meet with the Realtors or real estate licensees who have taken the time to draft an offer on their listings.  Professionalism like that is to be respected and appreciated. I know it matters to me!

In addition to the financial part of your offer and your contingencies and timeframes, there are other terms that may help you to be more competitive when writing an offer in a multiple offer bidding situation in Silicon Valley.

What other terms could matter, beyond price and contingencies? Lots – they will matter to the seller and they’ll matter to you. 

As Is Offers

Sellers always want to sell “As Is” if possible. They don’t want to have to do repairs, to spend the time or the money to fix what may not be perfect.  This is an extremely important area to research, weigh, and understand prior to drafing your real estate purchase agreement, particularly if you are not the only one trying to buy that real estate.  When it’s a seller’s marker (and with multiple offers, it IS a seller’s market), the seller can request and will usually be able to sell As Is.

Buyers always want every imaginable repair done, if at all possible.  Buyers don’t want to have to do termite, roof, electrical or other work on the home. They want a “red ribbon deal” where the home’s been or will be in very good to excellent shape.  They want a section one clearance from the termite & pest company.  They want a leak free roof warranty. When it’s a buyer’s market, and you’re the only one attempting to buy the house or condo, you can usually request and get the seller to do all the basic repairs.

The important point is to understand which of these two markets you’re dealing with – buyer’s or seller’s - if it’s a seller’s market and you’re behaving as though it’s a buyer’s market, you will hurt your odds of getting the property if you request repairs or if your contract provides a seller’s warantee.

In this series of posts on multiple offers, I keep mentioning the two contracts in use, but this is exactly where the As Is issue comes into play.  The CAR contract is “As Is” unless areas of concern are added.  The PRDS purchase agreement specifically requires that the seller do certain repairs or provide the home at close of escrow in a certain condition: there shall be no leaks (roof, shower enclosures, faucet on sink in garage), there shall be no cracked glass, all systems shall be operative (understand systems to mean furnace, water heater, oven, doorbell, etc.) , no structural issues with the chimney.  You get the idea. In a buyer’s market, these are great clauses to have.  But in a seller’s market, or if you’re slugging it out against a bunch of other offers, this is viewed as a giant negative by the seller and the listing agent. It could kill your odds!

As Is sounds like a horrible situation to buyers. In many cases, though, the sellers provide pre-sale inspections (and sometimes even do some of the work that was noted in the reports) so you can often understand the property’s condition prior to writing your contract to buy the home.

The PRDS contract does have an AS IS provision, if you elect to use it. The CAR form is an “AS IS” agreement unless the buyer requests certain things and the seller agrees, such as a pest clearance or watertight roof.

So should you never use the PRDS contract if there are multiple offers? I would never say never.  First of all, you can make the PRDS an As Is agreement, and then you’ve mostly levelled out the playing field. 

Second, your agent should ask the listing agent if there’s a preference in terms of which form to use.  In most of San Jose, agents are using the CAR form (except in the westside of Silicon Valley such as in Almaden Valley, Cambrian Park, West San Jose etc.).  Many San Jose Realtors use the CAR form exclusively and may be spooked at a PRDS contract.  So have your agent find out. 

Next, find out, as much as possible, how many offers are expected. If it’s only one or two, perhaps having a PRDS contract will not be a liability.

Having an As Is offer does not mean that you are prohibited from inspecting the home.  With an As Is offer, you should still retain a property condition contingency, the right to inspect and research whatever you need.  As Is simply means that the seller is not obligated to do any repairs.

Please Note:  Do be aware that if you are trying to buy a bank owned home  (REO), the bank may have verbiage that limits your rights and alters the way your timeframes and contingencies are handled. If you see bank addenda, DO seek legal advice from a licensed attorney.

Other Terms in Your Real Estate Purchase Offer

In addition to the enormous question of whether or not to write an As Is offer, there are many other terms written into the contract paperwork as well as others that you can insert that may help or hinder your offer’s odds of getting accepted.

A rent back can be very important to homeowners who are not sure where they’ll be moving next. Recently my buyers and I wrote an offer on a lovely Almaden home.  The listing agent did not tell me to offer a rentback but I realized that the sellers might have more peace of mind if we provided them the option to rent back for a few weeks while they try to find a replacement home.  The sellers appreciated that we would close in 3 weeks and offered another 3 week option to rent back and they accepted our contract without a counter offer.  (Rent backs can be free, at the buyer’s daily rate, or another amount.)

Inclusions and Exclusions can be another way to make your offer more appealling or to ease later negotiations. Does the seller want to take a prized rose bush? Keep the stereo speakers?  Remove a dining room light fixture or curtains in a bedroom?  Those are all inclusions that you might exclude (and allow the seller to take them).

Over the summer I was helping some Cambrian Park homebuyers to get into their first house.  We were in escrow and wanted the sellers to do some repairs that they didn’t have to do – but they mattered to us a great deal.  To sweeten the addendum, we made our request with the offer that the sellers could take a few items that should have remained with the house but they probably wanted to keep (and hadn’t countered them out earlier).  We got what we wanted and gave them something that they wanted.

Sometimes with relocating or senior homesellers, one of the biggest challenges is “debris“: clearing out of the home entirely. When there are multiple offers, under “other terms and conditions” I have sometimes suggested that my buyers offer to take on the seller’s extra “stuff”  so that they can be worry free about the items in the garage that they really don’t want, need, or know what to do with.  Offering to take over the job of getting rid of the debris can provide some sellers who may be feeling a little nervous a bit of a breather – one less thing to do.

Once I had a listing in the Vendome area of downtown San Jose (near Japantown, off Taylor).  The sellers were very attached to some ferral cats which they had been feeding, and they worried about what would happen to the cats after they moved.  The buyers offered (again under “other terms and conditions”) to continue to feed the cats.  That’s not enforceable, of course, but it meant a lot to my clients and they had peace of mind knowing that the cats would be cared for.

I would advise that when there are multiples, or even a later negotiation in escrow, that you consider the question of “what would make the sellers happy or make their lives easier?”  If you can anticipate their needs and provide for one or two of them, even unasked, it will make a good impresssion and that alone can be the reason why you’ll be able to edge out the other bidders.

As always, this post is no substitute for your obtaining professional real estate assistance. You should always strive to work with a highly experienced & ethical Realtor, no matter what kind of market you’re in. Consult with your agent and make an informed decision about how to approach a multiple offer situation so that you can win the bid but not feel like you’ve really lost by giving away all your rights.

In the first four posts in this series on writing an offer when competing against multiple offers to purchase a Silicon Valley home, we focused on the financial terms.  In the next few posts, we’ll address the non-financial terms that can “sweeten the pot” to help you succeed – without giving away all your rights!

Price & terms work together like the scales of justice.  When they are “level” to each other, you have a normal sale with a good reflection of market value (normal terms, normal price).  If one is low (poor), the other will need to be high (good) to “even out” the balance.  If the terms are fantastic, the seller may sell the home for a little less or may pick that offer if there are multiple bidders.  If the terms are terrible, the seller may only sell the home if it sells for a bit more to compensate for the terms.    With multiple offers, sometimes you can only go just so far with price.  But often you can improve your offer with the right terms.

Today we’ll focus on contingencies specifically.  Contingencies are not the only terms, but they’re among the most important terms in your offer to buy a home.  We’ll look at both which contingencies may be involved in your offer and potential transaction, and how much time (how many days) to allow for each.  In my opinion, you should never write an offer with NO contingencies. It is just too risky!

What’s a contingency? It’s something that must be done or obtained for the sale to move forward.  It is a “way out” of the sale if the contingency issue fails.  The sale is “contingent” upon the buyer getting the loan – or whatever the contingency may be.

When we refer to a “contingent offer“, that usually means that the sale would be conditioned upon the buyer being able to sell another home.  That is perhaps the least desireable contingency as far as a seller is concerned, but even within contingent offers, there are several levels of risk.  We’ll come back to that in a moment. 

The normal contingencies are on the buyer’s side and they usually involve the loan or the property (or area).  The seller may have a contingency if it’s necessary to find a replacement home. Or a seller will have a contingency if it’s a short sale: the sale is contingent upon bank approval (and the seller accepting the bank’s terms).  

The regular home buyer contingencies in Santa Clara County are these:

Generally, they tend to be lumped together as finance (loan and appraisal) and property condition (everything else) contingencies.

Finance: The loan, or finance, contingency is for your deed of trust (we don’t usually have mortgages here, though we refer to the loan by that name).  Please note: your having the downpayment is NOT a contingency!  Need to get the money from your parents, or from the stock market, or from an anticipated bonus at work? If something happens and you can’t, you may be in default and risk suffering financial penalties if you cannot close on the transaction because that part of your financial package fell apart. Both contracts used in our area specifically inform you that obtaining your deposit and downpayment are not a contingency. Don’t be confused – the financing contingency ONLY refers to your getting the specific loan you write into your offer.

Some contracts distinctly name an appraisal contingency (the CAR contract), and in others it is assumed to be part of the loan (PRDS contract).  The two forms we use in the Silicon Valley area are similar but not identical so be sure you are clear on what may or may not be covered by the form you’re using.

How many days should you allow for your loan contingency? Ask your lender.  It used to be that we could remove a loan contingency within 7 days if the buyer were truly pre-approved. Now, though, it’s taking a little longer and 10 days is about as aggressive as you can probably go with a conventional loan. Got an FHA loan? You may need 17 or 21 days.  Some other, more complicated loans may require 30 days.

The longer you need, the worse your offer will be viewed by the seller, of course.  To compete in multiple offers, you’ll want to be truly pre-approved and be able to move quickly.

Unless yours is an ALL CASH OFFER, I would suggest that you do not ever write “0″ in your days for the finance contingency. It is just too risky – the market can change and you could be on the hook if your loan falls through and you have no contingency to protect you. Find out what’s doable, do your best to make that aggressive but not unreasonably short or long.

What happens in multiple offers?  When there are several offers, if some of them can remove all contingencies in 7 or 10 days but you need 17 or more, your offer will be viewed less favorably.  On the other hand, if everyone else is requesting 17 days or 14 days and you can perform in 10, your offer is stronger. But only commit to what you can do!  Always, always talk to your lender before deciding how many days you need.

As mentioned in an earlier post, unfortunately if you have a non-conforming loan that needs extra time or has extra issues such as FHA, it will be very hard to compete in multiple offers.

Property condition contingency:  This refers to your investigation of the home (house, condo, townhouse) and anything that may materially impact value or desireability to you.  So it’s the structure itself but perhaps also the local schools (are the scores good, the studenta teacher ratio good, is it impacted?), the neighborhood, the natural and environmental hazards, and much more.

How many days do you need? It really depends: did the seller do presale inspections and complete disclosures prior to receiving offers? (If so, hopefully you read them.)  If the answer there is yes, then most of the offers will probably have fairly short timeframes for this contingency – most likely in the 5 – 10 day range. If you ask for 14, 17 or 21 days when all the info was available upfront, your offer will be poorly viewed on that count.

If the home is a short sale, there may be disclosures but no inspections.  Allow a reasonable (but not excessive) time to get all inspections done once there’s bank approval. 

If the home is bank owned, you will not get any disclosures that are of any help to you at all.  You absolutely must inspect this property to a fare-thee-well because that’s the only way you’ll know anything about the home.  Allow plenty of time. 

You can always call your inspectors prior to writing an offer and check on their availability for the week ahead in case you do get into contract. I have many times had my inspectors “pencil me in” ahead of time. It’s a big help and peace of mind to know we can do the inspections in a timely manner.

Contingent Offers

What if you have to sell your home to buy the next one?  If you need to write a contingent offer, understand that there are really four levels to it:

1 – you need to sell and close escrow on your home, but it’s not yet on the market

2 – you do have your home on the market but it has not get received an acceptable offer

3 – your home is on the market and is in escrow but the buyers have not yet removed their contingencies (so they might still back out)

4 – your home is sold and the buyers have removed their contingencies, but still must close escrow

If you want to buy your move-up home, please understand that the more risk that’s involved to the seller of the home you want, the less interested that the seller will be in taking your offer. There’s a huge range of risk in the four scenarios above.  Lots of risk in #1 above, hardly any risk in #4 above.  My usual advice to my clients is to hold off on writing an offer until the buyers on their home have removed contingencies. Otherwise you’ll have to pay lots more (possibly lots more than the home is worth) to woo the sellers into accepting your offer in any case, and in mulitples you’ll get cut in the first go-round.

There are a couple of hurdles with a contingent offer.  First, it’s getting the seller to consider taking it at all. Then it’s whether or not you can avoid being stuck with an immediate “kickout clause”, meaning that if the seller gets a better offer, your offer can get booted.   

We have two sets of forms (as I keep saying) in use in our area: CAR and PRDS. The addendum that each use for a contingent offer is slightly different.  One of them always provides for a “kick out clause” so that the seller can take a better offer if it comes along. The other one doesn’t. As a buyer with a San Jose area home to sell, you probably care a great deal as to whether or not you have any “protection period” for getting your current home sold and closed so that you can’t be kicked out.  If you don’t like the verbiage in the addendum relating to the sale of your current house or condo, make sure that you ask if another form is available.

With a contingent offer, if your home is sold and has contingencies removed, it will be viewed favorably if there’s not much time between when you present your offer on the home you want and when your current home is set to close escrow. The longer the wait, of course, the more the risk that something – anything – could happen.

To summarize, if you’re writing an offer in a highly competitive multiple offer situation, you’ll want to have a good grasp of which contingencies you want (or need) and how much time you’ll need for each.  If you have more contingencies and longer timeframes, your offer will be stratgeically disadvantaged.  Do not, however, be pushed into writing “zero” contingencies – that would mean giving away all of your rights and safety nets, and no home is worth it!

(The series on multiple offers will continue – check back for more on “terms” soon!)

San Jose is a hot seller’s market in entry level prices of many neighborhoods (Alum Rock, Evergreen, Blossom Valley, South San Jose, Willow Glen, Cambrian and more), and because of that, we are finding that in many cases, homebuyers are having to compete in multiple offers. (Offer writing generally tends to produce a lot of anxiety for buyers, and there are a lot of questions you may have about the whole real estate purchase offer process. Please also see my Q & A on Making an Offer on my other website.)

This post is part of a series on how to write a competitive offer when bidding in a multiple offer situation in Silicon Valley. We’ve looked at what terms are and why terms matter generally, and then we drilled down to particular financing terms: the deposit (and related issue of liquidated damages & default), loan type, downpayment amount & percentage,  and loan terms.

Today we’ll finish up the section on offer finance terms and will cover a couple of “easier” financing items:

• presenting a pre-approval letter for your loan
• having  a copy of the check when presenting the offer
• providing “proof of funds” with your offer

This will be the last post on financing terms for your Silicon Valley real estate purchase agreement. After these we’ll move into a discussion of other terms in the contract.

The Importance of a Pre-Approval Letter

Why be pre-approved? Why not just be pre-qualified? A “pre-qual” is not very helpful to you in negotiating for the best price with any offer, so even if you are not in a multiple offer situation, I would encourage you to go to the trouble of getting your loan pre-approved.   Getting pre-approved is either no cost or low cost (I know one B of A lender who charges $50 to do a pre-approval, but many will not charge you for this service).  It does take time because you must gather together your financial documentation, but it is in your best interest to do it for a variety of reasons.  You do not want to find the perfect home only to find that you really don’t want to get the only loan that will help you to purchase that property, for instance. Know what your budget is before you shop and you will save yourself time, energy, and disappointment.  And when you are ready to make a bid, you will be far stronger.

Pre-approval letters are not all equal, by the way.  Some mortgage brokers will zip out a pre-approval letter because they feel “confident” that you can get the loan.  That’s not a real pre-approval.  A true pre-approval for a loan means that all your supporting documentation has been turned in, together with the application, and your credit report has been run, etc.  Further, it has been packaged together and submitted to an underwriter.  With an actual pre-approval letter, there should only be three things needed for the lender:  the ratified purchase agreement, the appraisal, and the preliminary title report.

Experienced agents can see that some pre-approval letters are really just gussied up pre-quals.  When receiving an offer from a buyer’s agent, the listing agent may phone your lender (mortgage broker or mortgage banker) and ask a few “hard” questions to test how solid the pre-approval is.   So realize that since the letter is part of your offer package, it too should be rock solid.

If you want to buy a home, eventually you need to do a little work to get a loan approved.  Do it upfront and have a good letter of pre-approval in hand and it will strengthen your positions in multiple offers.  Anything less will hurt you in terms of your competitiveness with other offers.

The Check, Please

Getting ready to buy a Santa Clara County property? Get your money into an accessible account, because you’re going to need it!  If you write an offer and your contract is accepted, your good faith deposit money will go into an escrow account and will be cashed within a very short time.

When your offer paperwork is submitted (the agency disclosure, the offer, certain other advisories and disclosures, pre-approval letter etc.), you should expect to write a check – made out to the escrow company – for that initial deposit (a much longer discussion of the deposit can be found in Part 2 of this series).   Don’t forget to give your agent a check before finishing the appointment!  Your Realtor (or other real estate professional) will photocopy the check and present that with your offer.  It shows the seller and the listing agent that you are ready to go. A missing check is not the end of your chances to get the property, but if put together with other weak spots in an offer it can collectively hurt you.  Since it’s easy to do and doesn’t cost but a penny or two to part with the check, this is something you should plan to do if you hope to be competitive.

Proof of Funds

Since we have been in the middle of a deep recession and incredibly tough financial crisis for well over a year now, the way buyers and agents present themselves as they bid on homes has changed.  Lots of wealth was lost with the housing market decline and stock market crash, and with it went a lot of confidence.  It’s turning around now, of course, but there’s still a sense of being shaken up that prevails. As a result, buyers now want to “show strength” and many agents are not only sending in the regular paperwork, but they are sending in proof of funds too.

It used to be that documentation on cash in the bank was only required with “all cash offers” to buy a home.  But this year I’m finding that about a quarter to a third of all offers are accompanied by bank statements, credit union account statements, and statements from financial planning companies indicating the potential buyer’s holdings in some sort of liquid account (not stocks or mutual funds, but cash, CDs etc.)

Although it strikes me as going a bit far to suggest providing proof of funds in multiple offer situations, I can tell you that if you don’t do it, someone else will and that other offer will be stronger than yours.  As an angle on how to raise the bar, this is one more thing which you can do to make your offer stand out. It is a “term” that does not cost you anything but a little time.

Of course you can “white out” or “black out” account numbers, your home address etc., leaving just your name and the bank balance showing.

This request can be really unnerving to people because we are all so afraid of identity theft, so I am not happy that this has now become a way in which homebuyers in Santa Clara County negotiate.  But things have changed, and any discussion of how to compete when writing multiple offers in Silicon Valley would be incomplete without making you aware of this.

Financing terms in contracts & multiple offer situations: summary

In conclusion, there are a lot of financing terms to weigh when putting your offer together.  If you are bidding against other home buyers, you will improve your position relative to the others if you can strengthen all your terms, with the financing terms being very important.  In some cases, you may not have any control.  For instance, if you only have so much cash to put down, you cannot simply make that number bigger than it can be.  But in others, with a little effort,  you can tilt things more in your favor:  having a real pre-approval letter, providing proof of funds, writing in a realistic loan interest rate, providing a copy of the check, putting 3% down upfront – this is usually doable if you’re putting any money down at all.  Sometimes agents are new or inexperienced, and they may play light of these issues and tell you that they aren’t important.  But if you’re up against 5, 10 or 20 offers, they are all important.