If you are tired of paying $3,000 per month in rent for a 1 or 2 bedroom apartment and have decided that you want to buy a Silicon Valley home, you may find that it’s complicated and scary as the San Jose area is in a very deep seller’s market. Let’s take a quick look at the major challenges and decisions you’ll face as a potential Silicon Valley home buyer.
Silicon Valley home buyer challenges
Affordability – or the lack of it
Challenge # 1: the cost of housing is staggering, whether you are renting or buying, whether you are a first time home buyer or you’ve just relocated from somewhere else less expensive (meaning almost anywhere). Homes under a half million dollars are few and far between, as the newspapers and media have recently announced, and the median price of houses in Santa Clara County is about $1.1 million (and closer to $1.3 million in San Mateo County, less in Santa Cruz County), with the average price being higher still. Of course, condos and townhomes are less pricey, but they will have Home Owner Association or HOA dues to factor in. Same with mobile homes, which nearly always have space rents of $1,000 or more in Silicon Valley. If you want to buy a Silicon Valley home, figuring out “how much house” you can afford when purchasing can be a painful exercise. (Hint: your success in life is not reflected in the size or remodeling of your home here. The odds are good that you will be disappointed when you see how little you can buy.)
How much can you afford in this hyper expensive real estate market?
The old rule of thumb is that a consumer can qualify for a mortgage for 3-4 times his or her annual income. Translation: if you make $200,000 per year, and don’t have other debt (student loans, car payment, etc.), you may get a mortgage of $600,000 to $800,000 (and then you need the down payment on top of that). In most parts of Silicon Valley, that means buying a condo or a townhouse, not a single family home. In addition to the down payment, there will be closing costs, and most likely repairs to the property since in the current market sellers usually aren’t providing section 1 pest clearances or doing other repairs. Cash is crucial.
Challenge #2 if you want to buy a Silicon Valley home: money for the down payment, closing costs, repairs, and reserves – it’s more than you might think. Pulling together the hefty down payment and other needed money is always hard. In this crazy area, though, most people who want to buy a Silicon Valley home need not just 20% down, but additional funds in order to be competitive with multiple offers. So you may need to be able to throw $200,000 to $400,000 down on that normal, non-luxury house or townhouse. Saving that much money is a trick, and many first time home buyers either get help from parents or are cashing in on stock options to pull it off. Most of the time, home prices seem to appreciate faster than buyers can save, so having some sort of boost beyond your own saving power is critical for most. This has been true for many decades here – both the relatively high cost of housing and the difficulty in pulling together 20% or more for the down payment. (It was true in the late 1980s when my husband and I were trying to buy our first home, too.) It’s even harder now, though, as 25% is often the bottom amount that will get your offer seriously considered if there are multiple bidders on a home for sale.
Challenge #3: getting your desired location (given your price point). Traffic is pretty bad, so most Silicon Valley home buyers want to purchase something close to work. Properties with shorter commutes usually have higher price tags. A house that may cost $800,000 in the Santa Teresa area of San Jose (decent to good schools) may cost $1,150,000 in the Cambrian area of San Jose with Union or Cambrian Schools (very good schools). Or it may cost $1.5 in West San Jose with Cupertino Schools (top schools) or $2 million +++ in Los Altos. The reality of the sticker shock paired with commute is nightmarish for most consumers. Put another way, on a price per square foot basis, Palo Alto is about three times as expensive as the Blossom Valley area of San Jose – check out the chart in my related article.
Most home buyers have some sort of “anchor” that they want to be near – it might be a school, a work place, a recreation center, or a house of worship. They also have a hard stop price constraint. There may be other important considerations such as accessibility. For most Silicon Valley home buyers, the top criteria usually boil down to price point, commute length, home size & condition, and quality of schools or neighborhood.
Most consumers have a sort of continuum on the cost of housing vs time commuting – the worse the commute, the better the house or the better the public schools (or both). Put another way, if the “big 3” areas are price (budget), commute length, and schools, many home buyers find that they can get two out of three – and the solution to the dilemma often means accepting the longer commute. In some cases, as you probably know, it’s just too much for some people to accept, and people leave the area – or the state – entirely.
Challenge # 4: multiple offers, over bids, buying with few or no contingencies: Market conditions are great for Santa Clara County sellers (who are too few) and horrible for buyers (who are highly motivated). The end result is a market tilted severely in the sellers’ favor. Some are estimating that 75% of the homes selling in the San Jose area are sold over list price. Many of those will have few or no contingencies. I’ve seen many consumers shake their heads sadly upon this realization – they want to buy a Silicon Valley home, but this may be too much. (Solution: buy a property that has been on the market a few weeks and probably has a price tag that’s just too high.)
About a week ago, I sold a listing in Cambrian that got 12 offers. Of those, 8 had no contingencies of any kind (no loan, appraisal, or inspection contingencies). One was at list price and the rest were over list – with several of them sky high over list price. I’m finding this to be pretty typical. If you want to buy a house, condo, or townhouse in Santa Clara County and it’s in the lower price points (say, under $2.5 million), and the home is getting offers in under 12 days or so, it’s probably going to sell with multiple offers and without any contingencies.
I can not advise my clients to give up their rights and contingencies, because I know that means they may be putting their 3% initial deposit at risk. But also, I know that if there are a few offers, at least some, if not most, will have no contingencies – and that’s what the sellers want to accept. Sellers usually have pre-sale inspections, so that part isn’t so awful. What about the loan and appraisal contingencies? If the buyer has 30% down, a home falling a little short on the appraisal value won’t be a problem. Loan? Some buyers “double app” the loan – applying with 2 banks at once so that if one falls through, the other is a backup.
To summarize, the major challenges for renters or relocating folks who want to buy a Silicon Valley home are the steep pricing, saving or pulling together cash in hand, and compromises with commute length, home size & condition and home or neighborhood quality. Many of my relocating clients tell me that here they pay twice as much as wherever they’ve moved from, and they get half as much house.
Silicon Valley home buying decisions
If you want to buy a Silicon Valley home, the major decisions have to do with these items:
- budget (what you can spend vs what you choose to spend)
- commute toleration (many people want a short commute, but cannot afford it)
- home size (square footage, lot size, home type – house vs TH or condo) & quality (fixer? remodeled? partially updated?)
- how good do the schools have to be (for resale value, if nothing else)
- does the home need to be in walking distance to a cafe, restaurant or?
- does the house need to have (fill in the blank – a 2nd bathroom, air conditioning, formal dining room)?
- can the house not have (fill in the blank – a pool, a zero lot line, a seller who died there, a north facing front door)?
- financing decisions also, such as which lender to work with, what loan program to choose, whether or not to pay points to buy down the interest rate
- how to find and choose a good buyers’ agent
There is an infinite list of smaller challenges and decisions before you buy (will you wire in or bring a check for your earnest money deposit if your offer is accepted? how fast will you promise to get it to the title company?), while debating whether or not to write an offer, and even when in escrow and post-closing (say, how to handle the drywood or subterranean termites).
The silver lining
I know that I am painting a picture of pain and agony when I describe the challenges and decisions that Silicon Valley home buyers face in the current extreme market conditions. Why do it? Why put yourself through it? Why buy a Silicon Valley home?
Buying a home works well with putting down roots. Yes, you can have community ties and remain a lifelong renter; people do it all the time. But there is a different level of commitment when you sign up for that 30 year mortgage, property taxes, yard work, house repairs, and the occasional visit from people like the Roto Rooter guy (be glad you have a 2nd bathroom when that happens). Neighborhoods also have a different feel when most of the residents are similarly committed.
“No pain, no gain” may apply here, too, when you consider appreciation. I cannot promise you that the market will only go up – that would not be realistic. However, I can tell you that if you “buy and hold“, ten years from now you should be way, way ahead. Twenty years from now you will be thinking “it’s a good thing I bought back then, I couldn’t afford my own house today”. Thirty years from now, with some discipline, you may own that house free and clear. Talk about a good retirement plan! The upside potential with Silicon Valley real estate is probably the best in the nation – or maybe tied with San Francisco or New York for that honor.
There are other benefits, too, such as tax breaks and the eventual equity which may be useful when you have a kid in college. It is a hedge against inflation, at least with a fixed rate mortgage, as you make sure you are not victimized by a landlord’s steep rent increases.
For some people, the scenario here is just too tough, and they may move to Sacramento, Austin, Seattle, or other places to buy a home in a climate that does not offer so many challenges in the process. For folks who want to make Silicon Valley their own “Valley of Heart’s Delight”, there really is no place like here, no other place that is quite the same kind of home. For them – and for me – it’s worth it. They want to buy a Silicon Valley home, and even if it’s small, needs work, and offers a longer commute, they will take it on and get their foot in the door as home owners.