Many Silicon Valley home buyers rely on PMI, or Private Mortgage Insurance, to purchase a house or condo. But what is it and who needs it?

Private mortgage insurance is usually required with loans in which the buyer has less than a 20% down payment.

PMI does not protect you, the residential real estate consumer. It protects your lender in case you default!

FHA loans don’t have PMI but instead there is a “government guarantee” and for that you pay a premium – so not called PMI but it works similarly. The cost may range from 1 – 2.5%.

FHA or Conventional with PMI?

If you have less than 5% down, FHA will be your only option. But between 5 and 20% down, you may choose.

If you are trying to decide between FHA and conventional loan products with PMI, talk to you mortgage broker or banker to see which one really costs more in the long run, factoring in the total package of interest rates, premium rate etc. (FHA loans may come at a lower interest rate but with other added costs – so don’t just compare interest rates.)  The result may depend on the loan to value of the property, your credit score, and other factors. There don’t seem to be any “easy answers” as to which one is necessarily better.  This decision will require a little research!

If you expect to be bidding in multiple offers, this is another consideration too – it can be very hard for home buyers in the South Bay to win out in multiples if they are using FHA financing (as opposed to conventional).

Finally, like HOA dues, PMI is not something you can usually deduct from your income taxes (unless the PMI cost was simply rolled into your interest rate).  Please talk to your lender and tax professional for more information on PMI and the tax ramifications.

Related reading:

Is your lender pushing you into an FHA loan?

The challenge of being an FHA home buyer in a seller’s market

First Time Home Buyer with FHA Financing? Make Sure That Your Offer is Well Drafted!

Recently I was speaking with a neighbor of mine in Los Gatos who’s a high powered lender with decades of experience all over Santa Clara County.  In the last year or two she’s been doing many more FHA backed loans, rather than conventional ones, as smart home buyers, especially first time home buyers, try to get into a house while both home prices and interest rates are at record lows.  This makes a lot of sense as it can take a long time to save 20% or more and in that time, both interest rates and real estate prices in Silicon Valley could go through the roof.  (If my kids were out of college and working, I’d be encouraging them to buy a home using FHA backed financing too.)

FHA backed mortgages do require a lot more work, though, so I extended my sympathy that she’s having to jump through so many hoops and that they are for much smaller sales prices (many areas of San Jose have dropped 35 – 40% since the market collapse).  Mortgage brokers often make about 1% of the value of the loan as their compensation, so I imagined this great loan officer spending twice as much time with FHA paperwork as on a normal loan, on a smaller priced property, resulting in “half the pay for twice the work”.

Apparently that’s not the case with FHA loans!

“It’s better for me when the buyer uses FHA”, she assured me.  Really?  “Instead of getting 1 point, we are often paid 2.5 points when we close an FHA loan.”   That didn’t seem unfair to me since there’s a lot more paperwork involved.  But consumers probably don’t realize that their banker or mortgage broker will be paid much more if the loan is FHA backed rather than conventional.

If you have saved enough money for a conventional loan product but your lender is pushing FHA, be doubly careful before deciding what to do. There are pros and cons to each loan product you buy (you are “buying” or “paying for” a loan).  Make sure that you aren’t getting FHA financing only because it is more profitable for your lender.

Early in my career, I had the pleasure of working with a wonderful young woman (let’s call her Ann) who was preparing to buy her first house in San Jose.  Ann was all of about 23 or 24 years old, but she had been saving since she was 16 or 17 years old. So much discipline!  This Silicon Valley native had a clear idea of what she wanted (a house in a good part of Santa Clara County), what she expected (a bigger place that probably would need some work) and her long term goals (get a house and rent bedrooms out to friends and relatives later).

Together, we got her into a 4 bedroom Blossom Valley house with lots of potential.  Ann rented the other 3 rooms out to friends and relatives.  She worked to save the money to buy the property and has labored to make it better over the years.  This was not an impulse buy at all – instead, it was part of a big plan she had since she was a teenager.  I did and do respect her so much: she had a very clear idea both of what she wanted, and what she needed to do to attain it.

How many of us can say the same or have so much discipline and planning?

I have a ton of respect for people who carefully save and plan.  At the other extreme, I worry tremendously about those who make spur of the moment, highly impulsive and seemingly unrealistic decisions.  When or if they ask me for advice, they don’t always like what I have to say, because as a friend or as their Realtor, I need to try to help them to make better decisions.

• Someone I know says that she is writing an offer on a house (not with me, but out of this area) but is about to lose her job.  I suggest that she rethinks this idea and she says that I’m negative and ruining her dreams. I’d like to think that I’m helping her to avoid a credit disaster!
• Another person I know says that he’s going to purchase a house with a friend. It’s a rocky relationship at best and I suggest, since he brought it up, that he rethink the wisdom of this since it’s a surefire way to ruin a friendship and potentially lose the house later too.
• Friends wander out on a sunny day and make an offer on a house because they like the floor plan, but know nothing of the area (which, by the way, is very near a state prison, a major earthquake fault and a freeway). It was their first day house hunting and I wonder why their agent doesn’t try to help them to make the best decision, rather than a fast one….

If you want to buy your first home, slow down, make a plan, check it out with trusted specialists and friends (financial planners, close relatives or friends) and see if it makes sense.

What do you need to buy a house or condo in the San Jose area? There are three main areas you need to address:

• Employment – I know it’s obvious, but you need to be gainfully employed and you need to have a good reason to believe you’ll have that job tomorrow.
• Savings – at a minimum, you need about 5% down (for an FHA loan) or more. More is better: there’s a good chance you will need to make repairs or improvements.  Shoot for 10% to 25% down and you will be the better for it – interest rates are cheaper when you put more down too.
• Clean credit – early on, very very early on, get your credit scores from AnnualCreditReport.com and see if there are any errors or any issues which you can resolve. If your credit stinks, your interest rate will too.

Without all three of these in check you risk paying more in interest rates and worse, you risk ultimately losing your future home.

Wanna be Silicon Valley home buyers: slow down.  Check your credit.  Make a plan.  Save money.  Then proceed.  Don’t try to do it without these three in check,  Without them, it’s a recipe for disaster.

Lately I am meeting people who work hard but aren’t saving anything – and they want to buy a a house.

Let me tell you:  It doesn’t work that way.  Few important things in life are that easy, actually.

If you want to buy a home in Silicon Valley, you have to embrace the “new frugality” and start saving your money for the down payment, the closing costs, and improvements you’ll want to do to the property.  Real estate isn’t cheap (you may have noticed) and the taxes, insurance and upkeep will require that you have a reserve account to pay these things after you purchase the townhouse, condo or house.

How much should you be saving?  As much as humanely possible.  Yes, that means probably giving up a lot of ski trips in winter, lavish nights out on the weekends, dinners and maybe even coffees out.  When you do buy a house, you will probably be spending 33% of your gross income (total, pre-tax) on the property (mortgage, interest, taxes and insurance).   Try living on what’s left now – see how you do.  If you can’t live on just 67% of your gross income, you might reconsider whether you can or want to sacrifice that much to purchase a home here in Santa Clara County.

Yes, there are lower down payment options like FHA backed financing, but with a tiny downpayment (6% or so) you will have very high payments and to top that off, your interest rate will be higher.

If you really want to buy a house, you need to sacrifice and save.  Aim at 25% down so you can afford to fix it once you’re in and pay lower interest rates.  Or if FHA is the way you want to go, more like 8%.  Save, save, save.

Multiple offers have returned to many segments of the Silicon Valley real estate market, so it is more important than ever for motivated home buyers to pinpoint the pricing.

Most of the time, when there are multiple offers, the sales price goes higher than the list price.  Does that mean you would be over paying for the property? Possibly.  Or it could simply mean that the listing agent and home seller listed it strategically low – under its true market value.  In that case, the list price was never the expected sales price.  Unless you and your Realtor carefully analyze the comps (comparable listings, pendings and sales), you won’t have a sense of the probable buyer’s value for that house, townhouse or condo.

Common home buyer mistake

A very common mistake for new home buyers is to get as far as to analyze the comps and find what they think is market value…and then start subtracting for everything wrong with the house.  This is because they assume that the house is supposed to be perfect, or that they should not have to pay for any improvements or repairs after close of escrow.

The difficulty here is that most of the time, the house or townhome or condominium is not brand new.  The comparable sales were not new, either. A 40 or 50 year old property is not going to be in perfect condition.  Had you or any buyer seen all of the comps’ presale inspections and disclosures, you’d have learned that they also had a myriad of things wrong with them – mostly small but items to be repaired, replaced or improved nonetheless.

If possible, find out what you can about the the condition both of the real estate you want to buy and that of the recently pending or sold properties.  Were they sold As Is? (If they got multiple offers, that’s probably the case.)  Sometimes the MLS will reveal, in the private agent comments section, whether the property got multiple offers, if work was needed or done etc.

In short, if you are buying a used home, especially if it’s decades old, expect that it will not be in like-new condition.  If buying it in a multiple offer situation, use comps of a similar age and realize that all of these homes have at least some little items (not health and safety) wrong and also had repairs required in 99% of the cases.  So if you find the market value and then start subtracting, you will fall short and not be able to compete in purchasing the home – and in fact will probably end up low-balling, unintentionally.

To really pinpoint the pricing, it’s imperative to understand the true condition of the comps and not mistakenly assume that they were all absolutely perfect. Then you are really comparing “like to like”.

Fear of over paying & fear of not getting the home

Multiple offer situations tend to make buyers nervous, especially if they really want the home and aren’t just throwing a lowball offer out to see if it works (not a strategy I advise). If you make a great, strong offer and win, you may find that you have buyer’s remorse immediately!  The odds are that you were willing to pay more than everyone else.  Sometimes several offers come in at the same price, and that’s more consoling. But just as often, yours was the clear best offer.  How will you feel knowing that no one else was willing to go as high, or write terms as strong, as your offer?  It’s a little nerve wracking.

The other extreme is when you “just miss it”.  Sometimes with multiples, there are a couple which are neck and neck, and you lose the house by a slim margin.  Sometimes there are two nearly identical offers but one is just a tad  better: either the terms or price are better, the offer is better written or presented, or some small (even emotional) item like a letter from one buyer and not the other could be the tie-breaker.

It’s easy enough to do the little things which can be tie breakers.  Harder is the $5000 or whatever price difference.

With these two fears in mind (over paying or not winning the home), I suggest to my buyers, once all the analysis is done, to write an offer that they can live with whether they get the house or not.  And I talk about winning in multiples (and immediately knowing that no one else would go as high, most likely) or missing it by a hair.  “Will you be OK if you miss this home by $5000?” is a question I often ask.  “Will you be OK if they do accept your offer?”  Write such that you can sleep either way – that you put your best foot forward and are ok if someone else pays more for it and are happy if you get it.

Your agent can’t tell you what you “should” offer.  At the end of the day, it’s your money and it’s your home or real estate investment.  You have to live with getting – or not getting – the property.  Your Realtor can and should provide you with good comps, and if well experienced, can probably estimate what the most motivated buyers would likely pay to get the property.  Then it’s up to you, whether it’s worth it to you to compete and if so, at what level.

Please also read:

What are typical buyer costs when purchasing a home in San Jose?

Lead paint

What happens in escrow?

Often when home buyers look at Silicon Valley properties for sale they compare the list prices to online valuations.    The difficulty is that the “auto-comp” figures are often wrong because they are based primarily, if not exclusively, on the “price per square foot” of the house’s listing.

Price per square foot is one way of finding value (or one factor) but often is not the best, especially if you use it alone, because there are other factors besides the square footage of the house.  Here are some of the other factors that can mess up that valuation based on price per SF alone:

• location
• lot size
• back yard size
• amount of remodeling
• care for the home
• whether the street is a good one or full of parked cars
• sale type – regular vs distressed
• amount of down payment
• whether it’s all cash, conventional financing or if the seller carries a note

The variance from “all original” to “all remodeled” alone can swing value 10% in the San Jose area, 15% or even in rare cases 20%.  Add to that other factors and the divergence in value can be much, much greater.

Additionally, smaller homes tend to sell for more on a per square footage basis than larger houses. The reason why is that kitchens and bathrooms are the most expensive rooms, but often there is just 1 kitchen and a similar number of baths with smaller vs larger homes.

The online valuations often pick the middle of the viable range between “total fixer, probably needs to be demo’d” to “completely remodeled or brand new home”.  Most of the time, the “range” is about 10% from fixer to fixed, so most of the time, the online valuation will be right in the middle with a 5% swing either way.

Let’s use round numbers to make this easy.  Let’s say that the online real estate pricing says that a home is probably worth $1 million dollars.  It might be that the actual pricing range goes anywhere from $900,000 to $1,100,000, but the virtual pricing tools don’t know if the home is next to high voltage lines, a busy road, is in the lesser school district, is remodeled or what.  Or, conversely, if it’s a short sale, has been a rental property that got totally trashed, or has terrible terrible neighbors in the immediate vicinity.  The true market value could be 5-10% higher or lower. It just depends.

So please take these things with a grain of salt.  If you look at the online pricing and decide it’s correct but the house you’re buying is in a lesser location or in worse condition, you’ll overpay.  And if it’s better, you’ll be too low and will wreck your odds of succeeding.

Today consumers have a lot of choices as to where to search for properties for sale in Silicon Valley (the South Bay area, Santa Clara County, San Jose, Los Gatos, Almaden etc.).  But not all “find a home” sites are equally accurate.  Some websites display listings that are sale pending, sold & closed or even withdrawn.

The very best, most accurate and most often updated site is the public branch of our agent-supported Multiple Listing Service or MLS, which is MLSListings.com.  You can find it at www.MLSListings.com. (If sending your own agent info a house, it is helpful if you provide both the street address and the MLS #.  By the way, the first few digits of the number imply the year that the listing was put into the system.  811 = 2011.  810 = 2010.)

Why is MLSListings.com the best source for finding Silicon Valley homes for sale?

It is updated constantly.  Within a few minutes of whenever a real estate agent or broker changes the listing status, comments, photos, showing instructions, open house information,etc., the new information is displayed on MLSListings.  While it’s not instantaneous, most changes appear within 5-10 minutes (photos being the slowest to load).

MLSListings is syndicated out to some other sites, but some don’t update often (or at all).  Other sites rely upon the listing agent to go to that one site and update the status.  Realtors and other licensees get busy and this task may slip through the cracks, making you believe that a home is available when it’s not. MLSListings.com is the source.

You don’t have to register. Some of the portals that you might consider visiting to view the MLS info may not include the virtual tour or all pics – or might show them to you only if you register.  You do not need to register to view houses, condos, townhouses, multi units etc. on MLSListings.com.

How is the public’s version of the MLS different from the realty agent’s version of the same data?

More info is shown to the agent, including the seller’s name (if listed), phone numbers, the sales type (REO or short sale, if distressed property), special showing instructions, school district name (and possibly the precise school name), commission rate or other compensation offered to the buyer’s agent, the sales history of the property, the tax records, and some other small details.

Your agent can provide you the info on specialized areas or home types that might not be displayed to you.

What about off market listings or pocket listings?

Some areas and some brokerages have seller clients with houses for sale which are not listed on the MLS.  There can be many of reasons for this.  But they are not impossible to find if your agent has a lot of initiative.  You do not have to go to a certain brokerage to get access to those listings.  But your agent should network – that old fashioned method of talking with other real estate professionals – to see if there are any hidden properties which might be a match for you.

I have several services which provide listing information to my clients and to my readers.  These are updated frequently but they “pull” from the MLSListings.com system.  For ease, a lot of home buyers or sellers want to keep a pulse on the market by getting listings sent to them by email.  These systems are updated every few hours, so are pretty good, but if you ever need or want to double check the status, go to the source.

Selling and buying homes can be exhausting and emotional, even overwhelming.  This level of stress can rise when children are involved as parents also “run interference” to a degree to help make the transition smooth for their kids.  Another added stresser is relocation to a new community far away.

What can parents and their real estate agents do to help the youngest members of the family to move as peacefully and contentedly as possible?

Communication about the moving process is key

Few of us like surprises that come on a big scale and change the way our lives are lived on a day-to-day basis.  This is also true for our offspring, for whom routine can be a comfort.   Just as you wouldn’t begin a vacation without explaining to your three year old that it’s only a trip and that you will later return home, so too it helps to explain to your child that the family is staying together, the toys, furniture and pets are coming along, but that the house or condo will be “new”.  Providing a sense of security and reassurance first can enable the process to be possibly even fun. (Young kids will think that the furniture and toys go with the house so will likely vocalize their preference for a new place with the most fun stuff unless they understand that their toys will move with them.)

Selling your kids on a relocation

If your move includes a relocation to a totally new community, it will be helpful to discuss (and better, show) your little one the benefits of moving there – the new park and playground, the children’s museum, being closer to the beach or whatever plusses are a part of the new area.   If you’re moving up, explaining that your toddler will now get his or her own room (“like a big kid”) or to your teen that the new house will have a pool or whatever new feature may help also.  Here in Silicon Valley, there are a lot of fun things to do with children so it will be easy to discuss the benefits of living here, especially with older kids who will appreciate how kid-friendly the San Jose area is.  Coming from an area with a lot of snow? Tell them about our weather!  Yes, relocation often involves doing a “sales job” with your kids – most of the time they won’t be interested in budging, particularly if they are teenagers or in high school.

Please note: school scores are extremely important for many reasons, including home values.  Please take a look at my blog post on understanding school scores in Santa Clara County at my Move2SiliconValley blog.

Selling a home in Silicon Valley with kids

Planning to sell your house or townhouse and have children at home with you?  This will require some extra time, effort and planning.  As with any other home sale, decluttering is key, but it’s more challenging if you have little people!  It is also important to do the fixes and improvements which will give you the best return on investment, of course, and finally to stage the home for sale – and try to keep it “perfect looking” for showings.  It is sometimes tempting for exhausted parents to skip the “sale prep” but don’t do it – there are ways to make it easier but not eliminate it.

Get help:  there are people who are professional organizers who can be hired to help you decide what to file, toss and keep.  I know services which can be hired to do the handyman type jobs, cleaners which can be brought in to tackle everything from the usual housekeeping to the deep cleaning which may be required in places such as the window tracks (often ignored but can gross out home buyers if there are years of grease and dirt built up!).  Don’t go it alone – when you have kids, it’s enough to pack and help them move without also trying to do every bit of physical labor too.

Depending on the family situation, sometimes it is easiest to complete the move to the new home first and then sell the original one (whether vacant or fully staged is another issue) since it may be nearly impossible and far too stressful to have the intrusion of showings and the constant effort in keeping one’s home in show-ready condition. (If the showing schedule is too restrictive, you will likely have much more trouble both selling and in getting your best price.  Making it easy to see improves your odds all around.)

If you cannot move first, it is possible to schedule showings so that your home life is invaded as minimally as possible, but understand that the more you restrict showings, the harder it will be to sell your place and to get top dollar.  Not every home buyer can see your property on the weekends (especially in winter, when many young buyers are off skiing at Tahoe).  They can’t all view homes before 3 or 5pm because many have a commute and cannot get there until 6 or 7pm.    My advice, if you need to keep showings down, is to provide at least a couple of evenings a week when buyers can see your home until 7:30 or 8pm plus at least the afternoons on the weekend.  Plan to take your family out for the afternoon or evening so that home buyers can see your residence without feeling pressured to hurry through.  (For religious reasons, some will not view homes on Saturdays and others will not view them on Sundays. So provide both.)

If you are juggling both selling one home and buying another, please read my article on this situation: How to Sell One Home and Buy Another Without Losing Your Mind.

Home buying in Silicon Valley with children

Want to purchase a townhome, condo or house but not sure if you should bring your kids along as you look at propertis in the San Jose, Los Gatos and Saratoga areas?  Often it is much easier for parents if they can get a family member, friend or sitter to stay home (or go out) with babies, toddlers and small children.  As you go through furnished abodes, many will not be child-proofed, may have delicate and even expensive things on display or have unsafe conditions for little people.  Most parents are so focused on their children (not getting hurt and not hurting anything) that it can be a challenge to concentrate on viewing the listings.  This is especially true for first-time home buyers.

With older kids and teens, having them join you as you house-hunt may help with their buying in to the process.  They may learn a lot and spot things which you might miss, so can be allies to you.  In some cases, though, your children or teens may be so opposed to moving that having them accompany you may backfire.  You’ll have to decide on that.

If your younger family members do join you, please make sure you stay together as you view the homes for sale.  The home owners and agents cannot keep an eye on either your kids or the belongings of the house if everyone splits up.  Additionally there may be information your Realtor will share with you, and often everyone will want to hear it, so it behooves everyone to stay together.

Each family situation will be different, but in most cases kids can do very well with a move when they understand what’s happening and why and there’s a degree of predictability to the process.  Communication is key, as is helping them to appreciate the positive aspects of the upcoming move.    Once you have moved, it can be helpful in the transition if they can continue to keep in touch with friends from their old area or school.  Play dates, when possible, can smooth some of the emotional bumps that they may have.  Making new friends through school, recreation opportunities (clubs, summer programs, etc.), and centers of worship can help them to integrate into their new surroundings too.

Silicon Valley home buyers sit on pins & needles once they have written their contract to purchase property.  They wait and wonder and may have trouble sleeping while they expect a response. This is normal, of course. It’s hard to wait.

What happens after the Silicon Valley real estate contract is signed?

Sometimes, offers are presented in person by your buyer’s agent directly to the listing agent and sellers and there may be a nearly immediate response, or at least something soon after – within a few hours.  More often, though, now offers are presented by email to the listing agent, who in turn gets it to the seller either at a personal meeting or also by email.  Most of the time there is a counter offer, but sometimes there was enough communication ahead of time between the agents that in fact an offer is written in an acceptable fashion and is simply accepted by the sellers without any counter (or there were multiple offers and one was good enough to accept without a counter).

Some real estate trainers insist that every offer should get a counter offer – sellers should never simply accept the contract presented by the buyers

Some real estate trainers (who are teaching Silicon Valley real estate agents what to do) insist that every offer should always be countered so that buyers do not later worry that they overpaid. “Make them work for it” so they don’t have buyer’s remorse is the theory.  The bigger the fear of “buyer’s remorse”, the more likely that the agent will further negotiate the offer – at least a little.
A few real estate trainers, luckily not many (but one in particular who’s popular in the San Francisco Bay Area), insist that every offer should result in not just one counter, but instead a prolonged series of counter offers.  The theory is that this is how we agents should “show our value”.  There will be not one or two but many counters going back and forth, preferably over several days, according to this philosophy. Personally, I can’t stand this type of thing because more than really fighting for the client’s dollar, it’s a show to impress clients of how hard agents are fighting for their dollar. It’s an exercise. More than a few times I have see this behavior serve to alienate buyers.  They end up feeling like they put their best foot forward, working in good faith to simply buy a home, but it wasn’t good enough.  They get countered something crazy (often these counters also contain too many changes) and respond with something fair, only to get yet another counter. At this point, they are miffed or even angry.  Do you really want to alienate someone who’s trying to purchase your house or condo? I don’t think so. It’s unnecessary and it’s counter productive. I submit that it’s never wise to make buyers and sellers detest each other, but that’s exactly what can happen if you get more than a couple of counter offers.  It might be a game to the agent(s), but for the clients, for whom buying and selling is very emotional, it creates prolonged anxiety and smacks of game-playing.  So beware: agents may or may not reveal that this series of counters is part of their strategy, but you should know that it could happen to you.

What can you do if you think the other side is out for a long battle of negotiating?

The answer really depends on how much you want to buy or sell the property in question, and whether or not there’s any competition.  For buyers and sellers, tell your agent you do not want to play games, you want to be expedient about this.  You can set your terms and draw a line in the sand – that may or may not be the best thing to do but it is always a possibility. Straight talk, agent to agent, about the damage being done to the relationship can help to curtail it.  A phrase I have used in this situation is this: “I am having to do damage control with my clients because of these prolonged negotiations”.  That’s a polite way of saying that my clients are getting mad and the nickle and diming is about to backfire. Get serious or we’re done talking.

What can you do to avoid getting a counter offer and to ensure that your offer is accepted right away?

Perhaps this is a multiple offer situation, or you’re concerned that if you get a counter offer, it will allow another buyer to step in with a higher purchase agreement and get the home. Or maybe you have some sort of time deadline (such as a 1031 exchange time frame or some other personal reason) and you want to just get your offer accepted. How can you increase the odds that it will be? First, do your homework and know the market values.  If you want the property, offer fair market value. If you don’t, they’re most likely going to counter you back up to what they think is fair market value (or they won’t counter you at all – they will simply reject your offer if they find it insultingly low). Buyers don’t want to over pay and sellers don’t want to sell for too little, but if you worry about “getting a good deal” you may end up not getting the house or condo at all. Second, have your buyer’s agent speak with the listing agent prior to drafting the contract.  This is a good policy for many reasons, but a very practical one is to find out what the seller wants or needs.  Sometimes that info is in the MLS printout but just as often it isn’t.  Does the seller need a longer escrow? A shorter one? A rentback? Is any fixture excluded?  Is a pre-sale escrow opened, and if so, with which title company?  There are lots of questions to ask, including the very open ended one of “is there anything I should know when writing this offer?”  In our San Jose, Los Gatos, Silicon Valley area there are 2 sets of real estate forms in use – the CAR and the PRDS.  Some listing agents insist on one or the other. (If not, talk with your Realtor about the pro’s and con’s of each.)

Sometimes, a counter offer is unavoidable: distressed sales almost require them

If your contract is for an REO or bank owned property, you will get a counter offer and lots of addenda.  Just expect it.  Read it all carefully and consider having a lawyer review it too. With a short sale, the odds are that you will get a counter offer as well. Sometimes it’s a matter of precise pricing – if there’s a pre-approval for a particular sale amount, you will be countered to that.  (In 2009 I got one like that which surprised me as the price was lower than what we had offered.) With distressed properties for sale, it’s very difficult to avoid being countered.  Not so with a “regular sale”, though, if the Realtors or agents communicate ahead of time, the buyers make a fair offer and the sellers are reasonable. Finally, just remember that if your offer is accepted without a counter, it’s a win, not a signal that you overpaid! Want to increase the odds of buying or selling without game-playing? Talk to your agent ahead of time, prior to the drafting or reviewing of offers, and discuss the strategy and how to make it work so that you are comfortable and get what you want at a price to which you’ll agree.

Historically Low Interest Rates!

Each person, couple, family is different and the best timing to buy a home in Silicon Valley may vary wildly from one to the next.  But with interest rates this low – low 4s – it’s a good time to be thinking about making use of “cheap money”, get off the fence if you’ve been waiting and plunge in (or if you are already a homeowner, consider refinancing or purchasing investment property).

I believe that the last time mortgages were this inexpensive was in the very early 1960s or late 50s.   (I recall my grandfather having a VA loan from the late 50s or early 60s that was in the fours.) But you don’t have to take my word for it.  Please have a look at this historical mortgage interest chart – scroll to the very bottom of the page.

These incredibly affordable rates are, in my opinion, very likely a “once in a lifetime” opportunity for home buying.  Today I had a look at the average interest rates for mortgages each year going back to 1972 on the FreddieMac site. At the right, please find the average interest rate for each year, and the average points paid.  This year isn’t over but I’m ballparking us at 4.5% (though as of right now, rates are even lower than that at 4.35% and less than one point).

At the risk of sounding old and self-focused, I want to add that when Jim and I bought our first house in 1989, we got a loan at 10.25% and paid 2 points to get it that low. We were ecstatic when a few years later we could refinance all the way in the 8s!  The 7s seemed impossible and when it got into the 6s and 5s, who could believe it!

Right now I have home buyer clients with 20% down who are getting a 30 year fixed mortgage for about 4.25% and 1 point.  Incredible.

Home buyers often focus on the price of the home to decide affordability. But the truth is that when you purchase real estate, unless you buy “all cash” you are buying two things, not one: you are buying a house or condo and you are also buying a loan product. It is important to consider the cost of BOTH.

Interest rates and home affordability: Buying Power with Lower Rates

Let’s say you can afford to spent $2500 per month on your mortgage (principle and interest). How much can you borrow for that budget? Let’s check out your “buying power” for a 30 year fixed loan based on a variety of interest rates.

If you suffered through with a 16% interest rate, your mortgage would be for a loan of a mere $185,907.
At 14%, it would grow to $210,993.
At 12% interest rate, the mortgage would be for $243,045
At 10% interest rate, your loan amount would be $284,877.
At 9% interest, your loan would be for $310,704.
At 8% interest your loan amount would be $340,709.
At 7% interest, your loan amount would be $375,789.
At 6% , the loan would be $416,979.
At 5%, the loan would be $465,704.
At 4.25%, the loan would be for $505,192.

What a difference the interest rate makes!

Conversely, let’s say you own a home and have a $400,000 balance.  If your current interest rate is 6% (not bad, historically), your principle and interest should be at $2389.  If you refinance to 4.5%, the new payment amount will be $2026.74.  Refinancing or getting any loan does cost money (often about 1% of the loan amount).  So if the cost of the refi is $4000, and the monthly savings is $362 per month, it would take only 11 months to break even on the cost of the refinance, and after that, it’s pure savings. As long as you plan to stay in your home more than 11 months, the refinance appears to be worthwhile financially.

Rates quoted are for conventional loans. Jumbos would be at a slightly higher interest rate, of course.
A note about refinancing:

When you buy residential real estate and get a loan at that time, the “purchase money” loan has certain protections in case of a later default. Those protections do not always exist if there’s a later refinance, so before deciding to refinance your property, talk to a tax and legal professional about the ramifications.  Lenders often don’t make this point clear – so do your research.

When’s the best time to buy a Silicon Valley home?

Most often, when interest rates are high, housing prices are low.  When housing prices are low, interest rates are high.  Very seldom do you get the situation where both interest rates and home prices are low.  But that’s the situation we have right now. Will home prices go lower? No one knows, but in most parts of the San Jose area, prices are up about 5% over a year ago. The bottom appears to be behind us.  What about interest rates, will they go lower?  I don’t know the answer but rates don’t normally either get or stay this low, so I wouldn’t count on it.

If inflation becomes a problem, then interest rates will go up. If the economy begins to recover more strongly, interest rates ought to go up.  I could be wrong, but right now it appears to me that we have a window of opportunity. I intend to take advantage of it myself!

Wheneever I have new home buyers, there are always components in houses for sale (or condos or townhomes) which need explaining. There are so many things which Silicon Valley home owners take for granted as known and understood, but sometimes they aren’t so obvious to new home buyers. So today I’ll share a few photos and simply explain what each is.

Ever see one of these (photo below) protruding from a garage on your way up to a front door? It’s the dryer vent!

Dryer vent

How about this next photograph – a funny hole with a wire or wooden opening at the base of the home out into the yard?

Crawl space access on the outside (older home)

This one, above, is the access to the crawl space.

How about this big boxy thing?

Air conditioning condenser unit

Heat register for forced air heating system

These are the places where forced air heat comes out into the room.  They are called the heat registers and behind them are the ducts that carry the hot or warm air to each room.

Next, the other side of the equation. Recognize this in a house?

Cool air return for forced air heating system

It’s the “cool air return” for forced air heating system.  And next? This one is a (very old) furnace).  The furnace may be in a closet inside the home or it could be in the garage.

Furnace (older model)

These are just a few of the items you’ll be learning about as you begin to try to find your first home to buy in the San Jose or Santa Clara County area.  It’s extremely helpful to work with someone knowledgeable who can help you to learn about the components of a house or home so that you understand what you’re attempting to buy!

If you’re gearing up to buy a home, you may want to learn more about how to save money in your transaction. 

Please call me if I can be of help to you!

Recently a friend asked me about the way in which vendors are selected when people buy and sell homes.  In some cases, Silicon Valley home buyers or home sellers know which title company, home inspector, home waranty provider or other vendor to hire.  Most of the time, though, they don’t. They are hoping that we real estate professionals can put them into contact with good providers.

When working with my clients, for most vendors I provide a trusted  list of sorts.  For the various inspections (roof, chimney, home, pest, etc.) or other service (lender, home warranty, title company) there might be as few as two or as many as six resources listed.  Most often, my clients ask me if I have one or more which I prefer, and most of the time it is one company for each category (I have a favorite termite company, favorite home warranty company, etc.).

The home buyer or seller in Santa Clara can pick or hire anyone or any company he or she pleases for these various jobs. We agents can and will assist with sharing the names and numbers of those whom we know, like and trust, but at the end of the day, it’s the client who chooses. So really it’s up to the client – he or she can do some research or not.  But if they tell me (as they most often do) to go with my preferred vendor, there’s one in each category and I don’t tend to “spread the business around”.  Over the years, agents tend to build relationships with people in these companies and get a sense of whom they can trust and want to work with. (We agents would hate it if a client with six homes to sell picked six different Realtors to rotate through, too. We tend to want and also to give loyalty.)

My expanded list of trusted vendors also tells my buyer clients that if the seller has done a pre-sale inspection and the company is “on the list”, I do trust them to have been honest and it’s probably ok to have that company do the work.  Sometimes they want a second opinion, which I totally understand and support, but an honest termite company will give the same report and information no matter who has ordered the report.

If the seller’s done a pre-sale inspection and the company is an out-of-area firm that no one ever heard of (I have seen that with bank owned properties where they bring a termite guy in from Stockton, for instance), then I will usually suggest that my buyer hire someone who’s a known entity rather than assume that the provider picked by the seller is OK. There are a few companies which I truly don’t trust, and if the pre-sale inspection is from one of them, I will ardently work to get my clients to hire better vendors.

(This happened a couple of years ago when my buyers were purchasing a Cambrian Park home where the pre-sale inspections were from companies with horrible reputations.  We hired all new inspectors and found $10,000 worth of items missed by the “bad inspectors” – all very visible to anyone who had actually gone into the crawl space.)

Finally, I would never hire or suggest hiring based on either speed of response or price alone.  Sometimes the very best in the category is someone who’s busy, and the one who can respond fast (or is cheapest) may not be as good.  For me the more important thing is whether the vendor is knowledgeable, ethical, dilligent and fairly priced (not over pricing).  Sometimes the cheapest vendors cost more in the long run if they miss a problem or won’t jump through hoops when we really need them to do so.  The best vendors will go the extra mile for me (us) because they know they’ll have my loyalty and they want to earn repeat business or endorsement.

For an escrow officer, sometimes that means working late, accomodating a sign off after hours or doing other things that no one can really expect them to do (because they “close at 5″).  For a home inspector, it may mean squeezing us in late in the day or even on a Saturday if there’s some true emergency.  If vendors know that you’re only there one time out of five or ten, they won’t feel the loyalty that might urge them to try a little harder.  The relationships built between agents and vendors can truly help consumers when there’s a pinch, especially.  Those things cannot always be easily measured, but they can be vital to performing or closing on time and in the long run make transactions easier, smoother, and put the consumer in a better position overall.

If you read a termite or pest report, you may bump into the phrase “cellulose debris“. What does it mean?

Usually cellulose debris means that there are scraps of wood, sawdust, or bits of wood (possibly paper). It’s any kind of material made of wood.   Most often, cellulose debris is mentioned as found in the crawl space of a home.  Sometimes it’s infected (meaning there is a wood destroying organism such as termites present), other times it’s simply an invitation for “wood borers” such as termites to come and feast on the wood members that are laid out as a buffet for them.

In our Silicon Valley area, pest reports are normally “separated” into Section 1 and Section 2 findings.  If the cellulose debris is called out as Section 1, that means that there’s an infestation of termites or other wood-destroying organisms present.  If it’s Section 2, that means that it’s not yet infected but is an invitation to trouble.

Pest control operators will suggest that cellulose debris be removed so that termites and other wood eating oranisms aren’t attracted to the crawl space or other areas of the home.  It’s a nuisance to get rid of it, but much better to prevent a problem upfront than to wait and have to solve it later.

Sometimes the list price on a Silicon Valley home for sale isn’t at all what the listing agent or the seller is expecting in terms of a sales price.

Sometimes it’s closer to a lost leader – that is, it’s really only intended to get home buyers into the door. Lots of them. The idea is to create excitement, and hopefully a feeding frenzy with multiple offers.

Other times, of course, a house or condo in the San Jose area may be an overpriced listing. In those cases, it’s more like a “fishing expedition”. More like, “let’s see if anyone bites”. There are always a percentage of these on the market. When you see homes listed for 60, 90 or more days on the valley floor, most often the culprit is an inappropriately high price – and most buyers aren’t biting at that bait.

Right now, it’s a mixed market in Santa Clara County real estate. If you find a home you like, the next question is this: what’s it worth? And finally, what’s it worth to you? Many times, the best advice is to ignore the list price, if it’s a new home, and just do your homework on what the current competition is and what’s been selling.

You may find that the home you love is priced high, on the mark, a little low, or crazy low.

While it’s helpful to know what the average ratio is between list prices and sales price, that information can never substitute for market knowledge.  The most powerful figure to understand is the absorption rate or months of inventory (or days or weeks of inventory).  Six months of inventory is considered a balanced market.  The smaller the months of inventory is, the quicker the pace of the market, and the bigger a frenzy there is over good inventory. 

The other day I did a post on the micro markets of the Willow Glen real estate market and I specifically called out the absorption rate in varioius price points and school districts within the Willow Glen area of San Jose.  I have one client couple in Willow Glen who are thinking of selling their home.  In their case, they’re in The Willows area.  Most of those homes are worth more than the “jumbo conforming” rate of about $729,000, which puts it higher than where most of the buyer activity is happening right now.  Absorption rates for that part of WG, with San Jose Schools, is about 3 1/2 months. Not bad – it’s well under the 6 month marker for it turning to a “buyer’s market”.  But homes priced between $500,000 and $600,000 which have Campbell/Cambrian schools are selling about 3 times faster! The absorption rate for that segment of WG is only about 1 month.

When deciding how to price your home to sell or the offer price to make on a home bid, it is imperative to understand the market nuances.  Your real estate agent can run you the comps, and in fact can download them to a spread sheet so you can tweak the numbers by sale type and other factors.  If prices are rising or falling, you must factor that in, too.  Homes all getting 10 offers and each price selling higher than the last? You may want to consider jumping ahead in the trajectory.  Same if you’re selling and prices in your part of the market are falling.  Prices going down 10k per month? Then put your price under that limit to get your home sold.

There are no “easy answers” on pricing.  To pinpoint what it takes to buy or sell a home in Silicon Valley today, there’s no substitute for market knowledge, which means finding out how many offers homes are getting and if possible, the sales price, and for simply doing the math.  If prices are moving against you, it will cost you dearly to misjudge the market, so it is well worth the effort to get it right – hopefully the first time.

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.

Houses Are Simpler, But Not Always Easier for FHA Buyers

If your heart’s desire is to purchase a house in Silicon Valley, or a townhouse (not held in condo ownership) or PUD (planned unit development), at least you don’t have to get the entire neighborhood’s approval, so that one hurdle is cleared.  What you will find, though, is that there is a lot of fear by listing agents, and thus by their seller clients, about taking on an FHA buyer.

With multiple offers, the one(s) with FHA backed financing are usually the first ones eliminated.  (It’s not just due to the FHA, but also due to the fact that usually FHA buyers have very little cash down.  We are finding a lot of appraisal challenges because prices are rising fast.  With more cash down, an appraisal problem is less of an issue.)

Sometimes even with single offers, though, FHA buyers are running into trouble.   In some cases, the MLS will instruct agents, “No FHA Offers“.  In a few of those, it continues, “home cannot pass FHA guidelines” or otherwise indicating that the property needs too many repairs to get past the FHA requirements.  In others, though, the listing agent isn’t so direct and either won’t say that FHA offers will be rejected or simply behaves badly because he or she doesn’t want to work with one.   This is frustrating but is part of the challenge we are finding today.

The Stigmatized FHA Offer

Why are FHA offers viewed so dimly?

• usually there’s very little cash downpayment (hence, any appraisal issues will be a big problem)
• the FHA requires the home’s condition to meet certain standards & if the home needs work, the deal may not close
• FHA backed loans usually take longer to be fully approved and to close
• overall, there simply appears to be much more risk to the seller that the transaction will fall through or need to be renegotiated

There’s quite a bit of variation among FHA offers  in term of the amount of cash involved.   I have seen FHA buyers have downpayments ranging anywhere from 3% to 20% down (some have offered less down and then asked for the sellers to credit them back that amount, trying to do a 100% financed deal).  Why would anyone with 20% down do an FHA backed loan? Because the parameters are less stringent than conventional loans.  So the FHA opportunity is one which can appeal to a lot of buyers who otherwise would not qualify for a conventional loan.    So one mistake that I see with listing agents and sellers is not apprciating that this variation exists among FHA buyers.  They are actually not all the same!  The super small downpayments significantly hurt FHA buyers’ odds of having their offer accepted.  The larger the down, the better your chances are that the seller will be comfortable with your contract.

A huge plus with FHA is that the downpayment can be gifted, partially or in full.  If you are an FHA homebuyer in Santa Clara County and your relatives want to assist you with the downpayment, you’re in luck!  It’s easy to factor that in, and easy to improve your postion if you can up your downpayment amount that way.

There’s also a lot of variation among the lenders working with FHA home buyers.  Some lenders say that FHA borrowers need 21 days for a loan contingency and 45 days to close.  One Los Gatos mortgage broker says she can do it in 21 days.    The new guidelines for the Good Faith Estimate is slowing everyone down – the question is, how slow does it need to be? The GFE has to be done before an appraisal is even ordered.  That alone stalls things by about 3 more days than before these new guidelines were in place.  The really long time frames do hurt FHA home buyers chances.  If it’s possible to work with an FHA lender who can perform more quickly, it will greatly help the stigma of the FHA offer.

Right now it’s a seller’s market in much of Silicon Valley, which means that it’s hard for buyers to buy in general.  Add to that FHA backed financing and it’s tougher still.  But don’t give up if you’re a buyer & don’t assume the worst if you’re a seller!  FHA buyers are very anxious to get into a home, and their motivation is probably the most important element of all in terms of the likelihood of having a successful close.