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

The Problem with Condominiums and FHA

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

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

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

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

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How can you get the most “bang for your buck” with Silicon Valley homes when schools are your top priority?

Santa Clara County Realtors know that the performance of local schools is often the leading factor which drives housing values. Different families have different wants and needs, so sometimes it’s not all (or just) about the API scores. (On a related note, consumers please note that real estate agents aren’t API experts and we will not have the exact scores of all schools memoriezed, but we do know how to obtain that information online and elsewhere.)

Because school district boundaries are not identical to city boundary lines, often times there’s confusion about which neighborhoods belong to which school. By understanding this small quirk, you may be able to save many thousands of dollars.

For instance, Cupertino Schools are very highly regarded. But you may not have to be in Cupertino to enjoy the benefits of the district! Part of San Jose (in the 95129 zip code) is part of the Lynbrook High School area. Prices are noticeably lower with the San Jose address.

Likewise with the highly esteemed Los Gatos Schools, the boundaries of the district don’t line up with the town’s boundaries. Hard to imagine, but one little corner of San Jose (in Almaden Valley, off Guadalupe Mines Road) actually belongs to the Los Gatos School district. Homes are less costly in Almaden than in Los Gatos, so this is another great bargain if schools are the most important thing to you.

There are less dramatic examples too, such as homes with a Los Gatos mailing address belonging to Saratoga schools, or Los Altos homes being in the Cupertino school area.

Experienced agents, like those of us at Luxor Real Estate Group, know about some of these “fine points” in Silicon Valley real estate and our knowledge can provide you with a distinct advantage in home buying. Please call us today for help in getting started or continuing your homebuying.

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

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

What makes residential real estate closing costs vary so much?

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

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Although Zillow is predicting that the San Jose real estate market will experience a “double dip” (second price drop) in 2010, you wouldn’t know it was even an item for discussion in much of Silicon Valley.  Right now, in many strata and locations, the problem is that prices are rising fast. 

Inventory is very low in many parts of Santa Clara County. In January 2010, there were 1801 houses for sale in the county; a year prior to that, the number was 4492.    The best homes (well priced, beautifully remodeled) are getting scooped up quickly and with multiple offers.  As a result,  frequently there are overbids and prices are rising beyond recent sales of similar homes.  (Sometimes the problem is compounded by appraisers who aren’t knowledgeable or experienced but are hired because lenders are no longer free to pick whom they want to have do the appraisal, so it’s luck of the draw there.)  When this happens, unless there is a very large downpayment, the bank may insist that the buyer put more cash (and less loan) into escrow to close the deal. Alternatively, the seller may be pressured to reduce the sales price to insure that the transaction closes. 

For this reason, cash is king - now more than ever.  “Regular” buyers who have 20% down or less are frequently finding themselves at a strategic disadvantage against those putting down 40% or more cash.  It is almost impossible for FHA borrowers with just 3% down to be successful when it comes to multiple offers because they don’t have that cash buffer that may end up being necessary.

What to do if you really want to buy a home right now?  Understand that multiple offers will make it very challenging for those who have 20% down or less.  If you are an FHA buyer with a very small downpayment, you will probably want to avoid multiple offers altogether.  More success is likely if you target the homes which have been on the market 45 days or more.   And if you do have a lot of cash on hand, realize that if you “win” in multiple offers, you may have to use more of your cash to secure the deal.

Perhaps one of the most important concepts that Silicon Valley home buyers need to appreciate is that someday, they’re going to be Silicon Valley home sellers.

It is true that there’s no such thing as a “perfect house” anywhere in Silicon Valley. No matter what your budget, there is always a change you might want in any home. (Often buyers want about 20% more than their budget allows, in my experience. This is equally true of first time homebuyers as it is for move up or even luxury home buyers.)

So it comes down to which compromises you’re willing to make. There will always be compromises - but which ones are acceptable, and which ones aren’t?

It is extremely helpful if you can prioritize, in order, what you must have or strongly prefer to have, in your next home. Sometimes couples have some, but not all, of the same preferences, wants and needs. Where they get into trouble in homebuying is when they have different priorities. In fact, that can make it almost impossible to buy a home and have everyone happy at the end.

I would like to suggest that one of your top priorities ought to be “resale value” and “resale ability”. Some may object, “I am never going to sell this home!” but in truth, we don’t know the future. If you buy a home with a problem that makes it hard to sell generally, and you get stuck having to sell it in a bad market, it will be brutal and possibly even risky if you later are selling due to any financial hardship.
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Silicon Valley features a number of upscale communities that enjoy beautiful estate properties. These luxury homes are not simply large houses, but rather they boast qualities generally not seen in regular residential real estate.

What makes a house a “luxury home”?

A luxury property in Santa Clara County often includes a number of elements that set it apart, such as:

• price tag: these homes usually sell for more than three or five million dollars (and may be $10 or $20 million or more)
• more than an acre or two of land
• house larger than 4000 or 5000 sf
• the inclusion of “out buildings” such as a guest cottage, gatehouse, etc.
• views (valley, hill, acreage) or special features of the land (waterfront, riverfront adjacent), a vineyard, or something else special and uniquely beautiful
• amenities such as a pool, tennis court, racquetball court, gym, sports court or facilities for enjoying other sports & exercise on site
• specialized hobby or relaxation rooms, as in a darkroom, library, workshop, conservatory
• entertainment centers not commonly found in private homes, like a ballroom, dedicated home theater room for movie viewing, pool or billiards and “game room”, and ice cream parlor
• safety tools such as a video survelliance system, electronic gates

The (main) house itself is qualitatively different too.

Kitchens tend to be the most important room for San Jose area home buyers of all price ranges, and this includes homes that cost upwards of ten million dollars. Usually, kitchens in these homes are designed with a very clear purpose in mind and are done beautifully, though recently in Los Gatos I saw a home listed for about ten million with a kitchen that needs to be completely remodeled. This is very unusual, though.

Most luxury homes features kitchens of one extreme or the other. On the one hand, it may be more industrial in nature if those cooking in it are primarily professional chefs, domestic employees or catering services rather than the homeowner. This is not the kitchen of glossy magazines, it’s not meant to impress anyone for all the maple cabinets, stainless steel appliances and granite countertops. This sort of kitchen is functional, not gorgeous, and it may have stainless steel countertops, for instance, alongside the giant gas range. Such a kitchen is usually separate from the living areas and the guests are not expected to visit this part of the home.

Far more commonly found in Silicon Valley is the other end of the spectrum, the kitchen where residents spend most of their time, and it’s meant to impress. Here we see high end materials and appliances in a room viewed as much as art as the meals created in it are. This type of kitchen is often the focal point of today’s upscale or luxury home. The home’s floorplan is “open” to the kitchen - often the kitchen and family room blend together as part of a Great Room. This is a kitchen designed for owners who cook, not those who have servants.
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Recently I was showing a buyer of mine a San Jose house which was vacant.  Often a home is occupied and the garage, in particular, is full of stuff so it’s hard to see the walls very well.  In this case, though, we could easily view where the walls in the garage meet the floor.  And this is what we saw:

Only a qualified, licensed Pest Control Operator can diagnose termites and pests, but this looks a lot like subterranean termite tubes to me.  When you see “mud tubes” such as this, it is time to call a good termite and pest control company for diagnosis and treatment.

Why do termite & pest companies insist that the garage be largely free of personal possessions when they inspect? It is so that they don’t miss things exactly like this. 

When buying or selling a home, understand that the inspectors arent being difficult if they won’t warrantee a garage as free of pests when they cannot view the walls or floor.  Bookshelves and personal storage can obstruct the view of things like this.  If you’re selling, be ready for the inspectors - have all your items away from the walls or even better, entirely out of the garage. If they have to call a packed garage as an “unknown further inspection”, it’s likely to cause you problems later, when there’s a time pressure.  Best to know upfront, for everyone’s sake, what the score is.