Tips for Silicon Valley Home Buyers
Earnest money refers to a home buyer’s deposit on a home that he or she is in contract to purchase. It’s often called an earnest money deposit, initial deposit, or good faith deposit in Silicon Valley. The terms are all interchangeable.
How much is the earnest money?
In the San Jose & Los Gatos areas, and Santa Clara County generally, the earnest money is usually 3% of the purchase price of the home. It is placed in an escrow account, which is usually at a title company (in northern California that’s how it is handled – in Southern California, often there is a separate escrow company).
Ordinarily, funds are due within 3 business days of acceptance of the contract, but that can be changed (it’s one of the few places where the CAR and PRDS contracts reference business days rather than calendar days). Some listing agents will counter back that funds need to be in title the next day after the offer is ratified. Some buyers may request more than 3 days if their funds are coming from abroad. With competitive, multiple offer situations, buyers should anticipate needing to get the money to title fast and have it ready to go before the offer is presented so that they aren’t at a disadvantage.
Is a cashier’s check required for the good faith deposit?
The initial deposit does not have to be a cashier’s check, however, some listing agents and sellers may request that in a counter offer. That’s most likely to happen in a very competitive multiple offer frenzy, and unlikely to happen if it’s just one or two bids.
Increasingly, the funds today are wired to title, but in some cases, buyers may instead write a check. For the earnest money deposit, it may be a personal check. (At the end of escrow, it must be either a cashier’s check or a wire to bring the balance of the down payment to title. Both of these are referred to as “good funds”.) It is important for home buyers to draft the check correctly (not made out to just “title company”, for instance), and to understand that this isn’t a check that just sits in a drawer. The check for the initial deposit is cashed by the escrow company as soon as they get it. Real estate brokerages tend to prefer that Realtors don’t touch the buyer’s funds, so many are encouraging that consumers wire in funds rather than hand a check to a real estate agent.
Phishing and wire fraud is a concern, so when sending funds in electronically it is extremely important to phone the title company and verify the specific instructions.
Does the earnest money count as part of the entire down payment?
Yes, if the buyer is putting 20% down on some real estate, the initial deposit is likely to be 3% and the balance of the down payment will be 17%. The balance of funds will need to be in escrow a couple of days before closing. Many lenders will not fund the loan on the property until and unless the buyer’s money is in escrow first.
Can the buyers get the initial deposit back if they change their minds about buying the home?
This is not a “one size fits all” question. If the buyers have contingencies, it may be possible to back out of the transaction and have the full deposit returned. If the buyer has written an offer with no contingencies, that may be an uphill battle, and time to consult with a real estate attorney, as Realtors are not qualified nor allowed to provide tax or legal advice.
What is escrow? (on popehandy.com blog)
What do international home buyers need to know about financing a real estate purchase in the United States? (on Move2SiliconValley.com – relocation site)
Words can be so revealing.
Recently at an open house, a home buyer said that he and his wife don’t have a buyer’s agent. Later, though, he volunteered that recently they’d written an offer on a property and had “used an agent“.
What does that tell you?
Most Silicon Valley real estate professionals would like to have established professional working relationships with home buyers and sellers. They want clients, not customers. Realtors put in a lot of time reviewing disclosures, pulling comps, analyzing the realty market, looking for red flags at the property and in the paperwork. The real estate salespeople or brokers want to go “all in” to help their home buying clients to buy their next home with the best price and terms possible.
But do home buyers want the same thing that their Realtors do? I’d say usually yes – but not always. Often you can tell how committed a home buyer is by the way he or she speaks, but sometimes only in the way that person behaves. For those of us working in the industry, it’s very important to understand the client’s motivation and loyalty; spend too much time with buyers who aren’t committed to working with you and you will be in the hole financially.
Probably 15% or so of San Jose area home buyers really don’t want a relationship with a Realtor. They’d rather go it alone. At another open house, someone said to me that she didn’t like “feeling obligated” to anyone, and found that if she did anything with any real estate agent, that person was expecting her ultimate business.
Yes, that is how it works. We only get paid if a sale closes.
In many areas of the United States, it is very common for Realtors to engage with home buyers using a Buyer Broker Contract (buyer broker agreement). Here, it’s not so common. We prefer to work on a handshake, we prefer to work for our clients with the faith that they will reciprocate our hard work with their loyalty. Silicon Valley Realtors want to guide and assist you all the way through from before, during, and after the sale. They do want to know that you will work exclusively with them – and not just “use” them. If that’s the working, professional relationship you have with your Realtor, it will give you benefits for years to come as that buyer’s agent can be an ongoing source of advice and guidance.
When a home seller remains in the home after the close of escrow, it’s as a tenant or renter – even for a brief period of a few days. With the shifting role from home owner to new renter, the rules of engagement may not be clear, and expectations may not line up with the addendum for the rent back. So let’s do a set of what happens during the tenancy period after the sale is done.
Seller rent back True or False questions – which of these statements is true or false for the period when the seller is a tenant?
- When escrow closes, the buyers get keys to the home
- The seller must be undisturbed by the buyer until moving out
- The buyer can do repairs, including fumigation, during the rent back
- Prospective tenants may view the property during the rent back
- Contractors may enter the property during the rent back
- The new owners must give 72 hours notice before entry
- To enter the home, new owners must use an official CAR or PRDS “Notice of Entry” form
- The new owners may only enter the property if their Realtor is present or if the listing agent is present
- If the seller overstays the agreed upon rent back time, there’s a penalty fee that will be charged
- If there’s a rent back, buyers may do a walk through both before close of escrow and also at the end of the rent back period.
Some of these are challenging not just for buyers and sellers, but for real estate agents too. The reason for the confusion has to do with the number of forms involved. There are 3 different rent back addenda which may be employed in Silicon Valley: 2 options from the California Association of Realtors (CAR) and 1 from the Peninsula Regional Data Service (PRDS).
- PRDS form RSOAS – Seller Occupancy After Sale Addendum (1 page form)
- CAR form SIP – Seller in Possession Addendum (1 page form, intended for less than 30 days)
- CAR form RLAS – Residential Lease After Sale (5 page form, for more than 30 days rental to seller)
Some Realtors only use either CAR or PRDS forms, but I have found that depending on whom you represent, it may be worthwhile to tell the client about the differences between them as they are not exactly the same for all of these questions.
Now let’s go back to our questions and see what the contract & addenda have to say about each one. Continue reading
There are clever, but ultimately unsubstantial, things that real estate consumers might experience in the process of buying or selling a home – or just researching Silicon Valley real estate on the web. Here are a few of the doozies that some people fall for, in no particular order:
(1) Quoting the contract paragraph by number is meant to impress you with the agent’s grasp of the contract, which must be thorough if the thing is memorized like chapter and verse. You might hear something like this: “as it says in paragraph 14 of the purchase agreement”. Perhaps better is not so much the paragraph number, but the nuance, how it matters and perhaps how the alternative contract or paperwork reads on the same subject. I like this better: “The PRDS contract says that any repairs must be done by a licensed contractor. The CAR contract says that anyone may do repairs, even the home owner, as long as it is done in ‘workmanlike fashion’ with comparable quality materials.”
A similar twist may be quoting statistics that aren’t real. “There are 2.3 months of inventory in Campbell right now” may be a made up number. Realtors know that sounding precise makes them sound credible. But is it true? Check it out. (As for me, I am not a walking statistics machine. I have to look it up, or crunch it, to tell an answer. Yesterday a total stranger texted me and asked what the cheapest townhouse or condo in Mountain View is right now. I am not the MLS! I don’t know off the top of my head – and I’m not going to fake it.)
(2) Focusing on less relevant marketing approaches to selling your home may be a way for the potential listing agent to appear better, to seem to “do more”. The most important is price, because a grossly overpriced house will not sell for top dollar even if the print and web marketing are over the top wonderful. The second most important is photos, because they are your first open house – albeit virtual. If the photos are poor, or if every major area or room isn’t shown, whatever is not represented is deemed as bad. Photos of a cluttered, mismatched home will cause buyers to skip your property. That said, some agents will say that they will advertise your home in China, so you should list with them. Well, Chinese buyers are real, but they either come over to buy or they have close family and friends here who will help them buy. And whoever is here can see the listing on the regular channels. Similarly, things like drone photography do not usually improve either the odds of a home selling or the price for which it will sell in most cases. For a luxury property with a lot of land, ok, yes, of course a drone video or photo series would be great. But some agents push the drone angle only because it differentiates them – they’ll provide what other agents don’t want to provide. (Because it doesn’t make sense for most tract homes.) Beware marketing gimmicks.
(3) Combined experience – if you have a team with 4 agents and they each have 2 years’ experience, you might hear this: “we have 8 years combined experience”. Nonsense. You have 4 people with 2 years each.
Alternatively, there may be things which sound like trickery but aren’t. One friend of mine, on the east coast, bemoaned that every time he wanted to buy a house, the listing agent told him that another offer was coming in. “Do they teach you to say that at real estate school?” he complained. No, they don’t teach us to say that. In fact, if it’s not true that another offer is coming in, we may not say so if we are Realtors – it’s against the Realtor Code of Ethics to lie. (Not all real estate agents are Realtors. The state issues the real estate license, but membership in the National Association of Realtors is voluntary.)
Another thing which make some sellers skeptical feeling is the need for staging. “Why should I fill my empty rental house with someone else’s stuff? Buyers can see that it’s a kitchen!” But let me tell you, there are statistics proving that staged homes do sell for more. A good Realtor wants your home to sell for top dollar, wants you to become a raving, lifelong fan, and hopes like crazy you’ll be so happy that you’ll refer your best family and friends to that same Realtor.
As a Silicon Valley home buyer or seller, the best thing you can do for yourself is to hire a great Realltor. Don’t do it because they use slick “closing techniques”, but because they are experienced, knowledgable, capable, honest, and not afraid of hard work. Right now 20% of all real estate licensees have less than 2 years’ experience selling homes in the US. (Source for that statistic: CNBC article.) It doesn’t cost more to hire a great Realtor, so please do your due dilligence and don’t fall for stupid tricks. Go for substance.
Odd shaped lots in older subdivisions are sometimes recorded as having the same amount of land as the smaller, normal rectangular shaped parcels nearby. I’ve seen this many times – an area with houses on 6,000 SF lots have a few “pie shaped lots” at the end of the cul-de-sac and they are bigger, but for unknown reason are said to have the same 6000 SF lots, even if it’s understating the amount of land.
If you are selling your home, you want credit for the whole lot size. And if you’re buying one, you’ll want to be on the lookout for undervalued properties which have not marketed the true amount of land in the sale.
Plat maps, lot shapes and area
Plat maps can be a little hard to understand without some deciphering, but one thing that is clear is the length of the sides of the parcel. If you look along the edge of any lot, you’ll see a number up against it – that represents the distance in feet of that side of the property.
With simple rectangular or square lots, it’s easy for consumers to do the math and see if the lot size represented is correct. But what happens if the parcel has a more complicated shape? Today we’ll look at this – and a possible solution to double check the figures provided by the MLS, the sellers, the county, or any other source. With irregularly shaped lots, the parcel’s area is very often misrepresented in the records.
With a perfect square or rectangle, the math is easy! Have a look at parcel # 12, circled in red. It has 2 sides with 100′ and 2 sides with 70′ so you simply multiply 100 x 70 to get the lot size of 7000 SF.
If all geometry were only so simple.
Now compare 12 with the other circled parcels:
- 14 isn’t too bad – 4 sides and almost a triangle (so for estimating, fairly easy)
- 7 is a flashback to high school geometry with 5 sides and only one right angle
- 5 boasts 6 sides and is above my pay grade
Odd shaped lots and figuring the true area: software to the rescue
There are pricey real estate programs that can calculate the area of a parcel, but I haven’t had access to them for over 10 years, as most brokerages phased out their subscriptions to it. Recently, though, I was involved in a transaction in which the parcel my client was buying happened to be irregular, and it seemed to be listed as having a much smaller lot size than it really did. What to do?
As with all things, I went to Google and did a query for software that could calculate the area of a lot. And I was in luck – not only did it exist, but it is free. The name is Google Maps Area Calculator Tool and you can find it here:
This is easy to work – you go to the page, input an address, zoom into where you can see what looks like the boundary lines clearly (fences, sidewalks as guides) and click from corner to corner. You can see the little pins where I clicked. When I did it for the land in question, it looked like this:
Google then provides both the area and the perimeter measurement. A nice bonus, it’s in both meters and feet.
After that’s done, how would you know if it is correct or not?
We again turn to the plat map and add up the measurements of all the sides of the parcel. For the # 12 lot we discussed at first, that’s simple – 100 + 70 + 100 + 70 = a perimeter of 340′. If the Google mapping effort is accurate, the perimeter it produced should be the same, or at least very close. When the perimeters match up, you have pretty good validation that you are at least close.
Where you can obtain a plat map
For home owners, sellers and buyers, you may be wondering where you can get this plat map. It is part of the county records for Santa Clara County, and you can see the plat map of any property in this county here:
When selling or buying real estate in Silicon Valley, it’s important to stay on your toes and not assume that the county records are always correct. If you read this blog, you know that I have often written about the county, city and town permit files often being incomplete, and sometimes missing entirely. Homes and land are very expensive here, and the county offices may not always have accurate information, so ideally consumers keep their own, complete records, and check the facts stated about the property they are buying or selling for accuracy.
How to fix incorrect property records in Santa Clara County?
Monte Sereno Building Permit Nightmare (Live in Los Gatos blog)
In this highly competitive seller’s market, some home buyers are choosing to purchase their house, condo or townhouse non-contingent, meaning with no contingencies for inspection, loan, appraisal etc. . The “non-contingent offer” has been present in the Silicon Valley real estate scene for a few years (since 2012 or so), to the horror of those of us working in the field in 2000 and the years immediately after (it’s a very bad deja vu, given the onslaught of lawsuits that came in its wake last time). My clients sometimes make this choice, too, explaining to me that they feel it’s the only way to get the property.
With no loan contingency to protect the buyers should the loan not come through (or fail to do so in time), some consumers are electing to “double app” the loan. Translation: they pursue financing with two or more lenders simultaneously (fill out two loan applications, pay for two appraisals etc.). Lenders, naturally, don’t like this because only one of them has the possibility of closing the sale or the loan, and only the one who closes the loan will get paid. In a normal market, with normal contingencies in place, I would not recommend this approach. But if there are no contingencies to protect the buyer, a second loan may provide a safety net as it increases the odds that a loan will be funded so that the home can close escrow. Continue reading
How do you choose where you’d like to live in Silicon Valley? Especially if you’re relocating here from out of the area, this can be a huge question (for more relocation-specific posts, check out my blog Move2SiliconValley.com). Most Santa Clara County home buyers have strong preferences for low crime, good schools, and pleasant looking, quiet neighborhoods.
My clients often ask me to compare for them areas which are somewhat similar, such as Los Gatos & Los Altos. Off the top of my head, I can give general answers, such as this: Compared to Los Gatos, Los Altos is a more expensive (perhaps 20 or 25% more?), has a very slightly smaller population, is a little more spread out, has slightly milder weather and is overall “quieter” in terms of the downtown night life. Los Altos is more convenient if you want to go to Palo Alto or San Francisco. Los Gatos is more convenient if you like to visit Santa Cruz, Monterey and the coast. Los Gatos is more mixed in terms of housing types (it still has many beautiful historic districts with nicely renovated Victorian homes, but also newer construction). Both are “nice looking” but Los Gatos has more varied terrain as it is nestled into the Santa Cruz Mountains. Both enjoy pleasant neighborhoods, good schools, lower than normal crime and community involvement.
That’s the kind of “ballpark” info I can tell people about various areas of the Santa Clara Valley, whether it’s comparing one part of San Jose to another (Cambrian Park vs Almaden Valley vs Willow Glen) or one city to another (Cupertino vs Saratoga). I can give general info on schools.
What I can’t do (and most agents can’t) is recite from memory school API scores, median household income, housing density, crime statistics, etc. For that we have the web! Here are some very helpful links which can assist you in your search to find the part of Santa Clara County that’s the best fit for you, your wants, needs, and budget:
Want to compare areas in and near San Jose? A great tool for some basic and broad information by zip code is Zip Lookup. Input a zip code and get an easy to read map of population information like density, age, and income. For more official documentation, census data is easily searchable online through Fact Finder – just search by county, city, town, or zipcode. A good overall source for research is Melissa Data.
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.
As a reality check, though – right now, and for the last year or so (as in this glance back to March, 2015), most homes in the Bay Area are selling OVER list price. Houses in Santa Clara County in March 2016 (San Jose, Los Gatos, Saratoga, Santa Clara, Sunnyvale, Cupertino etc.) sold, on average, at 105.3% of list price and condos at 105.5% (these numbers come from my ReReport, updated monthly at popehandy.rereport.com/). If homes are routinely coming in at or over list price, and you bid 3-5% under, and ask for a Section 1 pest clearance, or other contingencies, etc., this could be viewed as “lowball” given the current real estate market conditions in Silicon Valley.
Click through for the rest of the article.
Many Silicon Valley home sellers receive multiple offers on a set day, often 7 to 9 days after the house or condo is first on the market. What happens if they like a few offers and want to counter them? One option is to issue a Multiple Counter Offer. How does that work?
With the multiple counter offer process, the seller decides after one or more of the buyers accepts (or if they counter back and forth, or if one buyer improves his or her offer). No matter the exact path, the seller ultimately must pick one offer and sign off on it to ratify the sale. In other words, when a buyer agrees to the multiple counter offer terms, it’s not a done deal. The owner must sign again to accept and select that buyer. Only then is the contract ratified.
CAR and PRDS multiple counter offer paperwork
We have two sets of contarcts, addsenda, etc. in use in Silicon Valley – the PRDS and the CAR. The California Association of Realtors (CAR) set is used throughout the state. The PRDS is employed from about Los Gatos to somewhere south of San Francisco on the Peninsula. Many areas such as Almaden or Campbell may work with either.
The CAR forms library has a separate document for multiple counter offers. Near the bottom of the page, there’s a place for the seller to sign when selecting a buyer for the sale. Unless this is signed, the buyer doesn’t have the deal.
The Peninsula Regional Data Service (PRDS) form is not separate – it’s the same document used for just a single, binding counter offer. However, at the bottom, there’s a place to indicate if it is a multiple counter offer. Here’s how it looks:
Obviously, it is extremely important to notice whether you’re receiving a regular counter offer or a multiple counter offer. But either way, it’s clear that the seller must agree to choose one of the willing buyers. Just pay attention to the details!
Are the price and terms of multiple counter offers all the same?
When a seller responds with a multiple counter offer, the price and terms could be the same for all of the bidders. Most of the time, though, that’s not the case – the price and terms are not identical between one bidder and the next. There are many possible reasons for this.
- There may be an offer with great terms (
- all cash , no contingencies, or?) but a price that’s not quite right. That buyer may only get a counter based on price.
- Another potential buyer may have a strong price but not so hot terms (long contingencies, too many contingencies, less than ideal downpayment or financing). A good example might be a sky high price with 5% down and FHA backed financing and an appraisal contingency (but money available that the buyer just doesn’t want to put in the down payment). The seller may only counter out the appraisal contingency. Other times the offer may be great but the contingencies are just too long, so the seller asks for them to be shortened.
- Sometimes all the issues are relatively small, such as whether or not the washer, dryer and fridge stay, or how much to pay for a rent back.
- Some sellers approach multiple counter offers the way some high school seniors approach college applications and target a “safety” price, a probably attainable price, and a “reach” price – and put three different numbers out there.
- I have seen sellers who were annoyed by rude buyers (or their agents) give the unpleasant people a sky high counter. (The period before the offer deadline is the courtship, and buyers really need to be on their best behavior with both the seller and the listing agent.)
Anything else to know about multiple counter offers?
Two more things to know: first, some buyers, when given a multiple counter offer, won’t just say yes or no. Truly motivated and capable buyers sometimes instead just submit a better offer (redoing page 1 with a larger offer price, for instance). Don’t assume that you won’t get uprooted, even if the listing agent tells you something leading like “it’s looking good for you” (which shouldn’t happen but sometimes may). As long as the counter is in play, someone else can come in and get it.
And lastly, a good attitude and looking “rock solid” and sure can sometimes win the bid. Not every seller does this, but it’s not uncommon for a home owner to take the first multiple counter offer returned with an acceptance. The reason is that they want to sell to someone who is so sure that there’s no hesitation.
You may have heard that the Silicon Valley real estate market is softer now than it was a year ago. That’s true – at least for most of Santa Clara and San Mateo Counties and nearby. In many cases there are now half as many offers as there were then. But it’s still a hot seller’s market, and that means that often there are multiple offers, overbids, and sales with no contingencies.
For my last few listings – which have been in Saratoga, Los Gatos, the Cambrian area of San Jose and the Campbell area of San Jose – there’s been a consistent “spread” of offers. If there were 6 offers, it might look like this:
- Best offer is 5-15% over list price, 25-30% down at least, and has no contingencies for inspection, loan, and most of all, appraisal (the percentage over has to do with whether the home was priced spot on the value or strategically under). These offers come with all disclosures signed, and the buyer’s agent has even done her or his Agent Visual Inspection Disclosure. They include the proof of funds and usually also write a nice letter to the sellers about why they want to purchase that home.
- Next runner up is usually strong on terms (at least 25% down, no contingencies) but perhaps made an offer price a little under the top value. Sometimes the next runner up has a good price and mostly good terms, but seems “shaky”. Maybe they would not include their proof of funds. Perhaps they would not sign the disclosures yet or otherwise submit an incomplete package. They don’t come across as certain about buying this property.
- Middle of the pack is usually a combination of a price where the home should appraise, at least 20% down, and few or no contingencies.
- Bottom offers are barely over list price, have exactly 20% down, and include an appraisal contingency as well as others (one for loan or one for property condition).
If you’ve been writing offers and not succeeding, try to see your own pattern in this spread. Is there one thing, or perhaps are there two or more things, you’re just not ready to do?
Why it is so hard
Home sellers want to know when they agree to your purchase contract that you won’t back out and that you won’t renegotiate the terms later. If they have paid for all the presale inspections, they aren’t going to want you to have 7+ days to decide if the condition is to your liking. They want to know you have read everything and are cool with it. Likewise with the appraisal. In overheated markets like this one, many times there’s an appraisal shortfall. Sellers want to sell to buyers who can absorb any deficit, so you need more than 20% down to do that.
We Realtors generally don’t like the kind of market in which buyers get stuck writing offers with no contingencies in order to win the house, but the truth is, that someone in every pack will do it. And you need to know that if you’re trying to buy a home. (In my recent Belwood of Los Gatos sale I had 11 offers and 7 had no contingencies, as an example.)
A few years ago, I did a series of articles on multiple offers – everything from financing tips to the value of presenting an offer in person, and much more. If you’ve been unsuccessful in buying a home and bid more than 2-3 times, please have a read. It may help you a lot:
By the way, in even the hottest market, there are homes that don’t sell. (Some sellers fall for popular home selling myths that everything sells at every price, but it’s not true.) If you have feelings of aversion to these bidding wars, do yourself a favor and ONLY look at homes that have been on the market 3 weeks or more. Often the main thing wrong is an inflated price. Some sellers won’t do an official price reduction, but may take a lower offer than you may think. Some homes have just been hit with the Ugly Stick. Ugly you can fix. Often the Ugly Home will sell for a lot less because yes, it is not that heart warming and it is a lot of time, money, and effort to fix it up. But guess what – it can be a great price and you won’t have to deal with competing bids in many cases.
Happy home hunting!