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

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

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

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

Recently I have been involved with multiple offer situations, both on the listing (seller) side and on the buyer side. All of the multiple offer bidding events have involved first time homebuyers and in every case, at least one or some of the offers were presented with FHA backed financing.

Sometimes agents rush when they write up the purchase contract, and the offer is not well done; we call that “sloppy” and it’s not helpful to your position as a would-be homebuyer.  As a buyer, you won’t know which box needs to be checked or which blank filled in, but there are big areas that you can double check to make sure that your offer is “clean”, which will present you in a more favorable light and increase the odds that your offer will be the one the seller and the listing agent will want to work with.

1. If your offer is an FHA offer, make sure that the box on page 1 says so (there are boxes for FHA and VA offers on page one of the California Association of Realtors contract)
2. Make sure that the numbers all add up – the initial deposit, the increase of deposit (if any), the loan amount and balance of cash downpayment should all be listed and should add up to the correct number for your total purchase price.
3. The “loan terms” are supposed to be specified too. What’s the interest rate? Are there any points being paid – and if so, by whom? Blanks in that area are a problem because you have a finance contingency which relies upon everyone knowing those terms. Be specific.
4. It is doubly important – no, triply important – that your offer comes with a soid pre-approval letter.
5. Make sure that you give your agent a check, or a photocopy of the check you’ll use if your offer is accepted.

Once the offer is drafted, your agent should go through it with you so that you understand all the clauses and terms.  Ask your agent to double check everything; it’s better to take a lilttle longer and make sure it’s right than to get it off fast but sloppy.

Recently I’ve seen a few FHA offers from agents who’d rushed and many or all of the items listed above were off. In one case, the agent didn’t even include the loan amount.  In two offers recently, the real estate licensee hadn’t checked the FHA box when the contract was dependent upon it going through as FHA.

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