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

Don’t count on it.

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

My usuall advice to buyers is this: if you don’t think that the home is worth within 5% of list price, then keep looking until you find a home that is.  Most of the time, sellers aren’t prepared to come down more than a few percent. 
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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.
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In recent posts, I’ve raised the issue of why “terms” are so important when writing a competitive purchase agreement to buy Silicon Valley real estate.

Whether you are buying your first condo, a retirement home, a luxury property or a move-up house, the basic challenges of competing in multiple offers when you want to buy a home but not overpay and not give away your most critical rights tend to be very similar. Finding that balance is tricky but hopefully this series of posts will shed some light onto how listing agents and home sellers tend to respond to offers and what they’re looking for so that you can position yourself in the best possible way with that balance in mind.

Today we’ll continue on with tips specifically related to the finance portion of your contract: loan type, loan amount, cash downpayment and loan terms.

Why should the seller care what type of loan you get? In the end, sellers usually get “all cash” once the transaction closes, right?  If there’s only one offer, and it doesn’t “cost” the sellers anything (they aren’t asked to pay points or other fees for you), that certainly seems to be the way financing is viewed: it will be all cash, eventually.

But in multiple offers, the type of loan you get and the terms that go with it can make a very big difference to your positioning versus the other potential buyers. It comes down to the issue of risk. Home sellers and agents know that some buyers have such solid financing that there is little or no risk there that the transaction won’t close.  And others have more risky loans.

At one extreme is the all cash home buyer.  With an all cash offer, there is literally no financing risk. (At one time, buyers sometimes foolishly made all cash offers when their money was actually tied up in the stock market. With downturns in 2000 and more recently, though, the industry and buyers both have wised up: the cash must be liquid, as cash in a bank account.)    At the other extreme is the no-down or low down payment offer.  The less “down”, the more risk - every time.  Likewise the less down, the worse your chances are of winning out in a multiple offer competition for a home.

Additionally, some loans are inherently more difficult to get through escrow.  FHA loans are wonderfully popular right now, but they usually need 45 days to close, not 30.  Further, they require a higher level of property condition and the appraisals are therefore much more involved.

There are a lot of special loan programs available to first time homebuyers, to veterans, to teachers and to municipal employees. Many of these are excellent programs for the homebuyer, but for the seller they often translate into more risk because there are more loans, the involvement of grants, extra costs or simply more complications - more that could possibly go wrong.  Most often, buyers with these special programs are anxious to buy but if put into a multiple offer situation will not have the winning bid unless everyone they’re competing against also is in the same financing situation (all offers happen to be FHA, for instance).  If you have a special loan - one that is not 20% down at least - it is very hard to compete in multiple offers, maybe impossible.

So, one of the most important aspects of your loan is the type, including the loan to value ratio (percent of loan to the purchase price).  The greater the amount and percent of cash down, the less  risk to the seller, generally, and the more favorably your purchase contract will be seen by sellers and by their agents.  A standard, conforming loan with 20% down or more will have a far better chance of success against multiples than a “special” loan with little or no down.

Another issue is that of loan terms: what interest rate is sought? which bank is going to fund the loan?  Are there points, and if so, who’s paying for them?
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Multiple offers are a joy to home sellers and a nightmare for home buyers.  There are many disclosures warning of the dangers of overbidding and giving away too many rights in the purchase agreement, and rightly so.  You certainly never want to give up that which will make you overly vulnerable (such as no contingencies for financing or property inspection).   At the same time, though, to actually be the winning bidder, your offer must be better than everyone else’s.  Financing terms can really “make or break” your offer.  Today we’ll discuss a couple of those financing terms: the initial deposit  & the increase of deposit (and related issues of liquidated damages and default).

What are financing terms?   They are all the details of how exactly you will pay for the home and get money into escrow.  For example:

• good faith deposit (initial deposit)
• increase of deposit (if needed)
• loan type (conventional, FHA, VA, seller carry?)
• loan costs (will you pay or are you asking the seller to help pay?)
• loan terms: are they realistic?
• is there a pre-approval letter or a pre-qualification letter?
• what is the total downpayment amount? (and % of purchase price)
• will you provide the “proof of funds” to the seller?
• will you submit a copy of the check with your offer?

The initial deposit or good faith deposit is the amount of money that you’re “putting down” with your offer.  If your contract to buy the home is accepted, that check will be cashed within a day or two, so make sure that you write one that will not bounce!  In the San Jose area, most real estate agents write the offer such that there are three business days to get that money into the title company (which handles escrow services in northern California most of the time), but make sure you know how many days it is because it can be variable.  It is written right in the contract, so read & understand it.

(Please note that except for the initial deposit, the rest of the contract will reference days, not business days, if your agent is using either the CAR or PRDS purchase agreement form, both of which are standard in Santa Clara County and San Jose generally.)

Smart real estate agents will usually look for 3% deposit when a home sells, preferably in the initial deposit, but possibly part in that first check and the balance in an “increase of deposit”, which normally would happen when all contingencies are removed.  If you are competing against other homebuyers and your deposit is less than 3%, your position is weakened relative to theirs.

Why does the 3% target matter so much?  The reason is that it’s connected to the liquidated damages clause.  The liquidated damages clause is something buyer and seller would need to agree to for it to be enforceable, so in our PRDS or CAR purchase agreement forms there’s a place for buyers and sellers to initial it if desired (and in my experience, everyone does initial for it).  The deposit (and possibly increase of deposit)  is the potential penalty if the buyer defaults on the purchase.  (I’ll speak of defaults below.)  

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Right now in San Jose (and Silicon Valley generally), entry level single family homes are selling very briskly. In many cases, sellers are getting multiple offers when they put their clean, updated home on the market with an appropriate price & good marketing.

I work with both buyers and sellers, and can show you what will help your position and what will hurt it if you are writing an offer in a “multiple offer” situation. This will be the first in a series (I can’t put it all into one post) of tips on how to write a more compelling offer when you’re up against other buyers.

Purchase agreements are all about price & terms. Usually price is the main factor, but sometimes the terms can really throw the balance one way or the other. Often by providing better terms, you can nose out the competition.  Or conversely, if a couple of offers are close to each other generally, but your terms are worse, your “position” will suffer for it.

What are “terms”?  They’re the “everything else” of the offer. Things like:

• initial deposit (amount/percent of offer price)
• as is (or do you ask for repairs?)
• number & length of contingencies
• documentation  (preapproval letter at a minimum)
• length of escrow, seller move-out timeframe
• who pays for what

Once I heard of  buyers who wrote in as a term of the offer that the sellers’ dog would stay with the property.  The sellers were so outraged that they refused to sell their house to those buyers at any price.

These are just a few of the terms found in an offer - aside from price, these may be the most important terms for your offer. If you mess up on some or all of these, your contract will be given less consideration by the seller.

Got great terms? That’s awesome. But don’t get too cocky - at the end of the day, the seller does still want fair market value. So for instance, if you have “all cash” and can close fast, that is great and most sellers will want to work with you. But they won’t take an enormous discount for it. If a home’s worth a million dollars and there are several offers at one million dollars (or close to it), that seller will probably not take an offer of $900,000, even if it is “all cash”. If the seller is in a big hurry, he or she might take $950,000 or $980,000. Most of all, it will make your bid the preferred one. But in most cases, the seller won’t take a 10 or 20% discount for all cash.  So get an appropriate understanding of the power of good terms, neither underestimating nor overestimating them.  Often, truly excellent terms may be “worth” 1 - 5% to a seller, depending on what kind of terms are involved. Each situation varies, of course.

Next post on this topic: a list of financing terms (questions I ask my buyers prior to drafting an offer with them) and a discussion of the initial deposit, increase of deposit, and related concepts of liquidated damages and defaults.

Buying & selling a home is usually stressful for consumers, and some circumstances can heighten the anxiety further (being in multiple offers, buying a distressed home, or anything out of the ordinary).  Once you write an offer or receive one on your property, you may feel like a nervous wreck as you navigate the escrow period. In some cases, you may come down with a bad case of buyer’s remorse or seller’s remorse.

We’re In Escrow: Now What?

You will want insights and advice so that you’re sure that you are doing the right thing each step of the way.  Even if you have a great Realtor who thoroughly understands Silicon Valley real estate and is a fantastic communicator, perhaps you want some assurance from an outside source (who’s not being paid for closing the deal) that you really are making good choices in the home sale.

There are a bunch of bad ways to do this but also some good alternatives.

What not to do:

1. Don’t call all of your local Realtor friends whom you didn’t hire and ask for their input.  First, it’s not fair to them as businesspeople that you want their professional input but not for compensation.  Second, they aren’t supposed to meddle and it puts them in an akward position of “implied agency” in which they take on some risk (being your expert upon whose advice they rely) without the benefit of ever getting paid.
2. Beware the well-intentioned advice of non-professionals who may not be up to speed with the current market conditions, construction, your purchase agreement, etc.  Sometimes the “over the cubicle wall” advice can be very, very upsetting as these folks get a homebuyer or home seller freaked out - often over nothing or over a misunderstanding of the situation due to a lack of information.   Most often, this “advice” is from completely unqualified people and will compound problems rather than help to solve them.

How about some good alternatives?

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