Home buyers (and sellers too) here in Silicon Valley like to “see the comps” when trying to determine fair market value or the probable buyer’s value for real estate.  Usually that translates into seeing what sold & closed escrow recently and for how much.

In a rapidly appreciating market and a strong seller’s market, though, the comps are not so much help as you might hope.  They are yesterday’s news!  What closed escrow last week was negotiated 30 or 35 days prior, in most cases.  By the time a San Jose area home is on record as a newly closed sale, it may already be out of date information. Not only that, but the MLS won’t tell us, at least not in most cases, how many offers there were or details about them - such has how many of them were all cash offers.

I see this mistake a lot in my real estate practice across Santa Clara County.  Clients want to view sales around a property they’re interested in. With our terribly severe inventory shortage, there may not be enough recently closed sales – so we look further out in location, futher back in time.  If prices are going up fast (as they are in Cupertino, Palo Alto and elsewhere), the only way you will be in step with the market is if you also factor in the appreciation that has likely taken place since each comparable property has closed escrow, whether that was 2 weeks ago or 3 months ago.  And that’s hard to guage.

What to do, then?

Your best knowledge will come from or be supplemented by information from pending sales; the most recent ones and closest ones are going to be the best, of course.  This is where your agent may be of great help to you either from the networking he or she does naturally, from direct experience on sales made or lost, or from proactively reaching out to listing agents to see if they can glean some information.

Addionally, you will want to factor in the number of offers a property is getting before deciding the price you will offer.  It is another very common home buyer mistake to look at the price of sold homes nearby, determine what seems fair, and then plough ahead without considering the level of interest that the house or condo is generating.  If there are multiple offers, you can reasonably expect that most of the time (if not all, in today’s market)  the sales price will be above the list price.  It will be unproductive for you to lowball (writing an offer more than 5% or 10% under list price).  Even if your offer is all cash, remember that sellers want the most possible for their property – they are not going to give you a huge discount on pricing.  Some, yes – in my experience usually around 2-3% – but not a huge amount off. They would rather wait a month and get a lot more money!

Factoring in the absorption rate (months, weeks or days of inventory) may be helpful to you also, especially if you cannot get info on the homes which are sale pending. (My Santa Clara County REReport includes this information, btw.)

In summary, don’t just look at the comps – they are a backward and incomplete view of what happened when the sale was negotiated.  Consider what’s under contract or pending now, and perhaps above all, take into account the current competition for the property you want.

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

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

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

Cash is better because there’s less risk

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

What happens if the property doesn’t appraise?

With the 20% down (or FHA or other loan product) situation, if the property does not appraise to the sales price, either the buyer will have to put in more cash, the seller will have to reduce the price, or the house/condo/townhouse will end up going back on the market.  That appraisal is a great “safety net” for buyers but for sellers it’s an albatross!

Don’t lose heart, many cash buyers are unrealistically low in their bids

What I’m finding is that with multiple offers and cash buyers, some of those with money in hand are overly confident on what that no-loan status will bring them.  Recently I got 20 offers on a Santa Clara condo listing, 8 of them cash, but of those, only 2 or 3 were really ever contenders.  The rest of the buyers who were flush with money grossly under bid the home.  The cash is probably worth a 2-3% discount – but some cash buyers were off by much more than that – a giant gap of more than 15% from the lowest cash offer to the highest financed offer.

In most cases, the best cash offer will get a counter that raises it closer to the financed offer – but perhaps not all the way to that amount.  But the unrealistically low cash offers will get completely passed over.

As a buyer with a loan, what can you do?  Here are a few ideas:

• Try to avoid multiple offer situations (that may mean bidding on properties which are overpriced, distressed, need work etc.)
• Ask your agent to assist you in finding off-market properties (this will probably involve your signing a buyer broker agreement, since the MLS is the way in which agents are promised compensation for their work)
• Analyze which parts of the valley appear to be over heated – are there other areas which would suit you as well which are not getting so much attention? you may find a much better deal, and better odds, there.
• Find ways to make your offer less risky to the seller.  Some buyers will write non-contingent offers (no loan or property)

It’s hard to be a buyer right now, especially a first time home buyer.  There are often lots of offers written before one gets accepted.  If you can bring in a larger cash downpayment, it will improve your odds tremendously.  Cash remains king!

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

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

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

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

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

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

Sometimes an offer is submitted when it appears that there are only 2 or 3 others, but within a day there are 10 offers.  That is a very different landscape!  The buyer who submitted the offer earlier may submit a new offer, without even knowing what the prices are – often it’s just a new page 1 of the contract since that’s where the pricing information is.

As more offers pour in, the listing agent may tell the buyers’ agents what the status is.  More buyers may “improve” their offer, essentially bidding up the price before there’s ever a presentation to the seller or a counter offer to be seen (or hoped for). The bidding can be self-inflicted, in other words.

Once the seller sees the offers, there may be a counter offer to one or more of the bids – though perhaps not.  Buyers should NOT count on the opportunity of getting a counter offer (a mistake I see all of the time).  The old saying that “you only get one chance to make a first impression” counts here.  Some sellers will simply pick the best offer and be done.  Seeing a stack of contracts and all the ancillary documents can be overwhelming and exhausting for sellers – so many do not want to deal with countering a lot of them.

During the counter offer period, if it happens, some buyers may accept the seller’s price and terms.  But some buyers will go a step further and up their offer and terms further – either in a new counter or yet again with a new page 1 of the contract.  Here you really see “bidding wars” in action!

You may be wondering why we don’t just auction houses instead.  That’s a valid question.  It does happen in many countries around the world (Australia comes to mind first).  There are some auctions of houses here, too, but it’s not popular just yet.  Who knows, it may come to that at some point. But right now, most of Silicon Valley real estate is sold the normal way, but often with extraordinary circumstances when there are many buyers seeking the same house, townhouse or condo.

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’s the real estate market in San Jose’s Almaden Valley? Commentary and statistics…..

It’s actuallya lot hotter than the numbers for the Almaden closed sales in February might indicate; the last 2-3 weeks have seen a heat-up the likes of which I have not seen since 2000. Many properties are selling fast, sometimes with multiple offers.  We are experiencing this trend throughout the west valley areas: Los Gatos, Saratoga, Cupertino, Palo Alto and on up the Peninsula.  These multiple offers are pushing prices higher. In many cases, it is much higher.  I’m seeing some overbids of more than $100,000 in some cases as well as offers with no contingencies for loan or home inspection. Listing agents sometimes write in their private MLS comments for other agents “no pre-emptive offers“.

What’s driving it?  There are years of pent up demand in which would-be home buyers sat on the fence, either because they expected further price drops or because, in the case of move-up buyers, they didn’t have enough equity to budge.  With record low interest rates and prices creeping up – combined with an infusion of cash from high tech employees with either great stock prices (Apple) or an IPO (LinkedIn, Facebook, Yelp, and more), there’s the classic case of more demand than supply. 

Almost every offer I’ve been involved with over the last month has been a multiple offer situation, whether in south San Jose, Blossom Valley, Cambrian, Los Gatos, or Saratoga.  Prices from $400,000 to $1,800,000 – all at least 5 offers, sometimes far more.  As Chris Trappani, the CEO and founder of Sereno Group says, “we’re seeing it now – the papers will report on it in a month”.

Stats for the Almaden real estate market for houses in February 2012 (click on link to see more info):

Note that the median sales price is up almost 15% from January and the average price rose 7% month over month. Year over year it’s not so good but from what we are seeing, it’s unlikely to look like this when the March 2012 numbers roll in.  Also note the jump in pending sales and the lower number of actives – less inventory, more absorption.

Real estate market conditions advisory

This week I’m having a deja vu from 2000.  If you were here in Silicon Valley then, during the “dot com boom”, you remember a frenzy with the hot sellers market, of home buying with multiple offers, and prices rising rapidly.

In some parts of the market, it’s back.

One of the ugly parts of that market is back too, the “non-contingent offer“.  I’m not talking about offers subject to the sale of another home (aka “contingent offers”). I’m talking about home buyers waiving their inspection contingency and their loan & appraisal contingencies.  (Not clear on home buyer contingencies? Please see my article: “Competing against multiple offers: contingencies and timeframes“.)

Listing agents know better than to give a counter offer demanding a non-contingent offer; that’s a lawsuit waiting to happen if the buyer feels coerced and later gets some sort of nasty surprise. But boy oh boy, do they know how to hint that it’s what they want.  And that’s not a lot different from demanding it.

Silicon Valley home buyers are given many disclosure and contract papers to sign when submitting their bids to purchase residential real estate.  It is important to read and understand them and the risks about which they warn.  One disclosure which is used – or should be used – on most every transaction is the “market conditions advisory“, which warns of risks in multiple offers and some of the ways that buyers may try to have the winning bid that may not really be a good idea in the long run.  The full name of the form is this:

ADVISORY REGARDING MARKET CONDITIONS,
MULTIPLE AND NON-CONTINGENT OFFERS,
FINANCING/APPRAISAL AND PROPERTY CONDITION

This entire 2 page form is worthwhile reading & comprehension, but let me bring just a couple of points forward about non-contingent offers:

“. . . a Buyer whose offer is fully “non-contingent” – - wherein all contingencies
are waived – - foregoes important protections. Among these is the right to cancel the contract based
upon an inability to obtain financing or upon a post-acceptance discovery of serious physical defects
and other problems. It is important to note that the discovery during escrow of previously unknown
defects does not (absent fraud) create for the non-contingent Buyer a new right to terminate the
contract.”

So with non-contingent offers, there’s no backing out without risking the entire initial deposit, which normally is about 3% of the purchase price.

How risky is it?  That answer depends in large part on how much information the home buyer is provided up front.  How thorough were the pre-sale inspections?  Are there any major red flags noted, or important further inspections recommended – such as a foundation or drainage inspection?  The form states:

“Risk factors vary in each transaction and must be thoughtfully considered in
each case. For example, where a non-contingent buyer has access to a seller-provided pre-sale
disclosure “packet” containing essential inspection reports produced by reliable, reputable professionals,
the risk to that buyer regarding those issues is far lower than it would be where no inspections have
been undertaken at all. The latter involves maximum risk, and is strongly discouraged by Broker.”

For San Jose area home sellers who would like to receive a non-contingent offer, the odds are increased if you do thorough pre-sale inspections: home, pest, roof, chimney, and possibly others (pool or?).

For home buyers, you need to be aware that other motivated consumers may be throwing non-contingent offers into the pile, and it can be a game changer in multiple offer situations.  The more homework you do upfront, the more carefully you read the disclosures and inspections prior to putting a contract on the table, the more comfortable you may be swimming in this sea of sharks.  Personally, I cannot recommend a non-contingent offer and I don’t think that I would ever do it myself.  But in some cases, unfortunately, that may be what it takes to beat the competition right now.  That’s a personal choice you will need to make should you be up against a lot of multiples.

Right now I’m working with a number of very frustrated home buyers.  Silicon Valley real estate inventory is painfully low, and in the lower price ranges especially, that means multiple offers are fairly common.  FHA home buyers, in particular, are getting out bid and out negotiated by all cash buyers, many of whom are investors.

How low is the inventory?  Let’s have a look at January’s inventory for houses & duet homes (“class 1″ or single family homes) over the last ten years in Santa Clara County (San Jose, Los Gatos, Campbell, etc.):

2012  1,382
2011  2,007
2010  2,426
2009  4,759
2008  4,872
2007  2,698
2006  2,202
2005  1,285
2004  1,612
2003  3,119

The average January inventory of available houses over the last 10 years is 2,636.  At 1,382, January 2012′s available inventory of houses for sale in the San Jose area was just 52% of normal.  It’s not really much different now, in early February (just did a quick check on the MLS and it’s  1509 houses now – 630 have sold & closed in the last 30 days so that’s 2.4 months of inventory – a hot seller’s market).  This is what constitutes a very severe inventory shortage.

Demand hasn’t slackened, but supply has.  You know what that means – it will push prices up, it will make buyers crazy feeling.

Why is inventory so low?

A common question is this: why is inventory so low?  I believe that there are a few drivers.  First, many home owners who would like to move really need more equity to do so.  They are waiting for the market to recover.  Some may be waiting for prices to return to their previous highs (they could be waiting awhile). Others just need a little more to make the move possible at all.

Many owners of higher priced homes are holding on until the second half of 2012, when it is expected that there will be more people with buying power due to recent and upcoming IPOs.  Economists are now predicting a bit of a frenzy the second half of this year with prices in more expensive homes getting pushed up due to competition from employees of various high tech firms.  Smart buyers are trying to get in before that hits – a real challenge given the inventory situation.

Reality check: not every house is selling!

The best properties are selling well – those which are newer or nicely remodeled, in turn key condition, easy to see, great marketing with multiple photos, appropriate MLS exposure and priced aggressively.  This is what every buyer wants, the perfect house.  Most of my clients tell me that they are willing to replace carpet and repaint, but they don’t want to do anything big, such as kitchen or bathroom remodels, removing a pool, foundation or drainage repairs, etc.  No one does!

One of the easiest ways of improving your odds on being able to purchase a house is to move away from the new or fully remodeled vision of your ideal house.  Lower your budget a little, decide to prefer homes that have been sitting on the market not due to location issues, but rather to pricing or condition issues – both of which can be fixed.

For instance, many home buyers will take a pass on properties which have a pool in the backyard.  A few months back, I did some research and found that houses with pools are harder to sell right now.  Appraisers count a pool as an improvement, but many consumers view it as a liability – an ongoing monthly expense to heat and maintain and a risk if there are small children.  Many think that it will be overwhelmingly difficult to remove and relandscape a pool, so will not even consider writing an offer if the property includes an in ground pool.

Truth is, it’s not that hard to hire a company to redo a backyard; it is not invasive the way a kitchen remodel is.  You could have it done before even moving in!  The cost varies on whether you want the pool fully removed or partially as well as how to relandscape afterwards.  I have seen bids for pool demolition work under $10,000 (relandscaping extra) with more bids between $10,000 and $25,000.  Lawn and sprinklers are not so expensive to add!

The pool issue is just one example – there are many other properties for sale which are passed over due to the condition not being ideal.  Remodeling can feel a little scary but when inventory is so tight, it can be the ticket to home ownership.

Likewise with over priced properties.  Although most homes sell within a couple of percent of list price, there are exceptions.  Sometimes real estate is badly overpriced, and in those cases you may get a seller to agree to a larger price reduction – 10% may even fly.  (This is unusual, I would note. Usually if a house is not worth within 5% of list price, the seller is unreasonable and won’t accept an offer which is less. But sometimes it can work.)

Here’s to the over priced ugly duckling.  It could be your best friend when inventory is rock bottom!

This is 2000 all over again:

• rapid price appreciation
• multiple offers
• overbids
• offers with NO contingencies for loan, property inspection and appraisal
• and once in awhile, “sharp bids”

This type of market is a delight for sellers and a nightmare for buyers.  Some of the more crazy terms led to lawsuits and more disclosure paperwork after the purchases of 2000 led to the lawsuits of 2002….

Please think twice before writing offers with no contingencies at all!

What happened to the strong buyer’s market, where bargain hunters could scoop up great deals at ridiculously low prices?

Many buyers have waited to “find the bottom of the market”. Now’s the time to get off the fence; the market’s turning and is headed into seller’s market territory (at least in some areas and price points).

One of the best ways to understand the real estate market conditions is to track the absorption rate or months of inventory. Approximately 6 months of inventory is a balanced market. Five or less is a seller’s market and seven or more months is a buyer’s market.

Here’s a view of what’s happening among single family homes in Santa Clara County (about 60% of the county is represented by the City of San Jose):

Inventory is down, sales volume is up, the median sales price is up (it had been holding steady at appx $450,000 for the last three months – this is the first uptick we’ve seen this year). The days on market are holding steady at close to 100 and the percent of list price is hovering at around 97%, where it’s been throughout 2009.  No real signs of slippage here, but there are signs that inventory is being absorbed.

Once inventory starts declining, there will be pressure on prices to go up.  (It is supply and demand driven, of course.)

On the flip side, the foreclosure moratorium will be ending shortly and there may be an increase of inventory.  If that happens, it will stem the tide and it will revert into buyer territory.  Until and unless that happens, though, it looks like Silicon Valley real estate is generally turning back to the seller’s favor after three long, difficult years of buyer gains.