Why are all cash offers such a big deal?
Buyers who are getting slammed out of the Silicon Valley real estate market due to low inventory and multiple offers are extremely frustrated. Part of the problem may be the amount of cash in their offer. It can be hard to compete with bids with smaller loan amounts or which are “all cash, no loans”.
The question arises all the time: why isn’t my 20% down offer just as good as the 50% down or the all cash offer? Isn’t 20% down good enough? Or for that matter, why wouldn’t a lower interest rate FHA backed loan be suitable?
All cash is better because there’s less risk
Twenty percent down is “good enough” if there are no other offers. If it’s multiple offers, though, it’s probably not sufficient for most sellers provided that the all cash offers are written with realistic pricing. Right now, about 15% of home sales in Santa Clara County are all cash, and sellers would far rather deal with an offer that includes no finance or appraisal contingencies. For sellers, the fewer contingencies the better and no contingencies is ideal. Particularly now, when we are seeing a very sudden and dramatic upswing in pricing, appraisal contingencies can kill an offer’s chances of success due to the fear of a low appraisal. With all cash, there is no appraisal at all – it’s a slam dunk on that front. (more…)
The percentage of all cash sales (all cash, no loans) rose in July, but the actual number of sales, shown immediately below, shrank a little. I pulled this data from the MLS today and it’s reflective of whatever the listing agent entered into the fields for financing.
Percentage of All cash sales, month by month, in Santa Clara County (single family homes)
Next, the actual percentage of all cash sales in the county for houses and duet homes.
The average for the 11 Julys shown is 13.9%, so July 2023 with 15.7% is interesting to see. Interest rates have skyrocketed over the last 14 months, forcing home prices down in the 2nd half of 2022. It’s a little surprising that we did not see a surge of cash buyers then, but their numbers stayed in the typical range from what I’m seeing.
Now, in mid 2023, we have seen both interest rates and home prices rising – at least for the first 6 months of the year – in most of the valley.
Cash buyers are usually investors, but not always. Sometimes they are homeowners who sold their long held family home and are now downsizing and buying with the proceeds of the larger home that they just sold. We don’t get that piece of data from the MLS, but anecdotally, that’s what I’m seeing with the cash offers I’m seeing and hearing about.
What does it mean that cash buyers are an increasing percentage of the closed sales?
- Rising interest rates not only don’t harm the all cash, no loans buyers, it actually helps them as it weakens their competition
- These buyers may be feeling more confident with the softened market and easier buying conditions generally
- My thinking when we saw interest rates rising is that it would help the mortgage free buyer more than anyone else – that seems to be the case.
In the 4th quarter of 2022, Santa Clara County home prices bottomed out after 6 months of interest rate hikes and sliding home values. The property tax assessment for many home owners on January 1st from the county tax assessor’s office may have been higher than market value for that day, depending on which comparable sales or comps that office used.
If your property tax assessment for this year came in a little higher than market value, you may be able to appeal that assessment.
Appealing the property tax assessment
The county tax assessor’s office uses comparable sold properties, or comps, just like you or I would do, to try to determine the current market value of your home. The comps used may or may not be the best or most realistic – they could be too dissimilar in size, location, or amenities, for instance.
If they aren’t good, you may be able to get your home’s assessed value, and hence the bill, reconsidered if you present better data and explain why your data is more accurate.
No one wants to see their property values depressed, but if it does happen, there may be a small silver lining: getting slightly lower property taxes, at least for a while.
How to appeal your property tax assessment
START HERE TO APPLY – you will find the prerequisites, the instructions, and the login to begin. (Have your comps ready!)
Information on appealing can be found on the county tax assessor’s office website. This page has links and information on the process and procedures of appealing the valuation.
The appeal application form can be found here: Assessment Appeal Application form
The folks in charge of the property tax assessment and appeal process, the review, and the hearing are:
Assessment Appeals Division
70 West Hedding Street
East Wing, 10th Floor
San Jose, CA 95110
Phone: (408) 299-5088
Fax: (408) 298-8460
It’s actually very straightforward to appeal your property tax assessment: you simply complete the form and submit it online together with PDFs of your comparable sales to provide support for the lower valuation. The application form states at the end: “The request must contain the basis of your opinion of value. Please include comparable sales, cost, and income data where appropriate to support the value.”
The probable buyer’s value for a home is very similar to market value, as a home is only worth what a buyer will pay. If the seller wants more than that, it won’t sell. If it’s unlikely that their ranges overlap at all, we’ll have a listing that is difficult or impossible to sell.
Quick summary on the probable buyer’s value:
- The probable buyer’s value is a range of what most buyers would pay for a particular property if there was no undue pressure on the buyer or seller.
- The probable buyer’s value will be impacted by many factors, such as the timing (if there are other houses which are more competitively priced or no other inventory), the property condition, the presentation of the property, the accessibility of the property (how hard is it to see – is it vacant or occupied?), the marketing (photos, floor plans, etc.), and many other things.
- The buyer’s terms weigh heavily on what the buyer can or will pay for any home.
Sometimes it can be tricky to estimate what a home might sell for. I usually talk with my seller clients about trying to find the probable buyer’s value. The seller may have a range of prices that he or she anticipates and would accept. So too with the buyer, whose range will likely be lower than the seller’s. The key is finding where the buyer and seller price ranges overlap.
Let’s take a hypothetical case of a home worth about a million dollars (see image above). The seller would love for the property to sell close to $1,040,000. The buyer would like to purchase it for $960,000. The agent’s competitive market analysis indicates that similar homes have sold or are selling at around a million dollars, give or take a percent or two. If the buyer and seller can come to a meeting of the minds, and there’s no undue pressure on either one of them, we have (hopefully) a sale and we have the fair market value.
But as we know, sometimes homes sell for much more than they would seem to be worth, and other times much less.
What causes property values to go above or below what would seem to be the probable buyer’s value? Undue pressure can certainly cause values to rise (desperate buyer who just has to get into a house, even if overpaying or desperate seller who has got to unload a property, even if selling too low).
Interested in buying a rental property? The first question to ask is if you want to buy it for cash flow or for appreciation.
Here in Silicon Valley, most investment buyers are looking for long term appreciation rather than to get a monthly source of income. In some areas of the country, you can put a small down payment on a property and break even each month. In other areas, that would create a negative cash flow situation.
Here in Santa Clara County, and the greater San Francisco Bay Area, rental values are relatively low when compared to purchase prices. That translates to a much larger down payment being needed to break even each month, let alone have a positive cash flow.
Rental property down payment needed in Silicon Valley
Some consumers believe that a 20% rental property down payment would do the trick to get them started as a real estate investor since that’s the most common amount for owner occupied homes.
While 20% down may work in some places. In most of the U.S. you’ll need 30% down to be “cash flow neutral”, meaning that you aren’t losing money each month. In pricey Silicon Valley, though, often it takes more than a 40% down payment on an investment property just to break even.
A few years back, a friend and past client asked me exactly this question. At that time I did the math and it looked like she would need to put more than 52% down just to have a neutral cash flow. Today I’ve updated it.
Depending on where and what you buy for the $1 million budget ,I suspect that the amount of rent collected each month would probably run between $3,000 and $4,000.
Side note: with a condo or townhouse, insurance coverage is probably going to be a lot less costly than with a single family home. The estimates below are for a townhome.
If my calculations are correct, you really need to put more than 50% down to buy this particular Santa Clara County townhome and have it support itself.
Is that a good deal? Not really. At least not if your main focus is cash flow.
There are other places in the country where you can put a lot less down and break even or have a positive cash flow.
Of course, cash flow is one motivator. Another, though, is appreciation. Depending on your own goals, you may be far more interested in appreciation than cash flow. If that’s the case, Silicon Valley may be exactly what you’re looking for as an investment buyer. Those places where the down payment can be smaller may not have the same upside potential with appreciation as we have here in the San Jose area, or the San Francisco Bay Area as a whole.
Interested in becoming a real estate investor? Have a good down payment saved? Please call or email me and we can chat. If Silicon Valley isn’t the right place for you to make your real estate investment, I can introduce you to wonderful Realtors in other areas where the numbers may be more favorable.
See also: Buy a Los Gatos home or real estate investment property
The rising interest rates are impacting most home buyers’ ability to afford the type of house or condo they expected to be able to purchase just a few months ago. The Fed wants to curb all spending, including home buying, and it seems to be working – rising interest rates are having a dampening effect on real estate sales.
Rising interest rates – hypothetical condo buyer
Let’s say a home buyer needs a mortgage of $800,000 to purchase the desired condominium or townhouse, and that said buyer has good credit and 20% down and is seeking a 30 year fixed rate loan. Interest rates may vary from one lender to another, but as of right now, a 5% to about 5.5% is fairly typical, but some online lenders are advertising 4% and 6% or 6.5% rates may be just around the corner.
$800,000 for 30 year fixed rate with 20% down at 4% interest – monthly principal & interest payment is $3819.32
$800,000 for 30 year fixed rate with 20% down at 5% interest – payment is $4294.57 (12% more than at 4 %)
$800,000 for 30 year fixed rate with 20% down at 6% interest – payment is $4796.40 (26% more than the cost at 4%)
Today I created a data table showing the payments for principle & interest with ascending rates. I took it as high as 16.50%, which was under the highest average rate in 1981, when some consumers paid more than 18% interest rate on their mortgages. (I remember my mom, a Realtor – Pat Pope – talking about those 18% rates at that time. As I recall, it spurred some sellers into carrying back notes just to get their homes sold.) When Jim and I bought our first house in 1989, our rate was 10.25% after we bought down the rate by paying 2 points. Hence my strong preference for fixed rate mortgages in recent years, when the concern was the risk of rising rates.
What impact will a rising interest rate have on qualifying for the mortgage?
How is the HOA’s reserve account? Does your HOA have enough in reserves so that you don’t have to worry too much about getting a special assessment?
When you live in or want to buy a condominium, townhouse, or other common interest development with Home Owner Association (HOA) dues, it’s important to double check the financial health of the community. If the account balances are not sufficiently funded, the risk is higher of negative consequences down the road.
Operating account and reserve account
HOAs have two types of financial accounts: one is for operating expenses (paying the gardeners, keeping up the complex, ongoing pest control work, etc.) and the other is the reserve account. The reserve account is a long term savings plan for major future repairs, replacement, or necessary upgrades. (more…)
Silicon Valley home buyers are sometimes confused about the difference between a home inspection vs appraisal. Are they one and the same? Not even close! The people who perform these important jobs for all of us have different backgrounds, skills, and expertise.
Home inspection vs appraisal – basics
A property or home inspection is done to determine if the major components of a house, townhouse, condo, etc. are all working and in satisfactory condition, and to point out defects and problems so that they may be addressed by the current or future owner. Many home inspectors will also lay out how to prevent future problems by addressing things like drainage or what sort of annual maintenance may be advisable.
Often, the home or property inspector is or was a licensed general contractor. This is a person with a good working knowledge of the basic systems of the house. They are not specialists in particular features (think pool, foundation, HVAC). For those specific elements, you’d hire that specialist. Also, in California, home inspectors are not licensed by the state because the state does not want them to perform repairs. (This is not the case with the special inspectors.)
The property inspector will make a visual inspection of things like
- the foundation (is it cracked, is it bolted?)
- any issues in the crawlspace (moisture, ponding water, cellulose debris)
- the attic (is there evidence of vermin? are electrical junctions all in boxes? is there enough insulation?)
- as well as the furnace, water heater, etc.
- if the water flow is good in the home and at the water main.
These are all things that the appraiser does not do. (There are other possible inspections, too, besides just the home inspection, such as chimney, roof, HVAC, pool, foundation, etc.)
An appraisal is a formal statement of value by a licensed appraiser.
The appraiser measures the size of the home to establish the square footage.
The appraiser does not check to see if the furnace works! I did once witness an appraiser turn on the hot water to make sure that gas is on for the property, though – but just once did I see that happen.
However, if the roof is very old, if the home needs substantial remodeling, that will impact the assigned value. The appraisal is used by the lender to determine how much the bank should be lending on. Often, that’s the same amount as the purchase price. But sometimes not!
Some lenders will add substantial value for an expensive backyard remodel. I’ve seen others add very little – surprisingly.
Home inspection vs appraisal – low appraisal for superior home
No one likes to see a low appraisal value when a property is being purchased. If a home has superior upgrades, particularly if they are not obvious or visible, it’s helpful to provide a list of upgrades to the appraiser. Sometimes agents know of mitigating factors on other sales, and that info can be useful to most appraisers, too.
What happens if the appraisal is lower than the purchase price of a home?
A buyer with 20% down payment is in contract to purchase a Cambrian house for $1,400,000. The expectation is that the bank will fund a loan for 80% of purchase price, or $1,120,000. If the appraiser finds the value to be only $1,350,000, the loan will be 80% of that number – not the purchase price. In that case, the mortgage would be at $1,080,000. Note: most people think that the buyer will be “making up” the full $50,000 shortfall, but that’s not the case. The amount to make up is $40,000, not $50,000 because it’s the percentage of the gap, not the whole thing.
If you happen to be buying residential real estate “all cash”, you will not be required to have or pay for an appraisal. You are also never required to have inspections, but unless a seller is providing excellent pre-sale inspections, it would be a huge and possibly costly mistake to skip having them.
Related reading to home inspector vs appraiser:
Home buying: home inspection (on the popehandy.com site)
Home selling: pre-sale home inspections (also on popehandy.com)
When are property taxes due in Silicon Valley?
Silicon Valley property taxes are due twice a year. This region is not a governmental area, like the City of San Jose or San Mateo County. Silicon Valley includes virtually all of Santa Clara County, most of San Mateo County, and parts of Alameda County and Santa Cruz County. Property taxes, or real estate taxes, are paid to whichever California county the home or land is located. Luckily, all four of these Silicon Valley counties (Santa Clara, San Mateo, Santa Cruz County, and Alameda) work off the same basic set of dates, so Silicon Valley property taxes do not have complicated due dates overall.
Fiscal year for real estate taxes and due dates:
Here’s how the system works:
The fiscal year for the county tax assessor’s office begins July 1st. Property taxes are billed in two installments. The first one covers July 1st to December 31st, and the second one begins with January 1st and runs through the last day of June.
- The property tax bill for the first installment is due November 1st and is late if not paid (or postmarked) by December 10th at 5 pm.
- The second installment of real estate taxes is due February 1st and is late if payment is not received or postmarked by April 10th at 5pm. (This one fools people because U.S. income taxes are due April 15th, so be extra careful!)
Should the delinquent date fall on a weekend or holiday, the deadline falls to 5 pm the next business day.
What happens if the payment is late?
If your payment is late, there’s a 10% penalty (and an administrative fee may be charged for processing the late payment as well). If taxes aren’t paid by the end of the fiscal year, the property is then “in default”. Eventually, if the tax isn’t paid, the home may be foreclosed on by the tax assessor’s office, though ordinarily this may take years and the owner’s credit can be damaged significantly in the process.
Other dates to know
Property taxes are mailed in September and October and should arrive before November 1st.
Property tax bills become a lien January 1st. Don’t be offended, it’s just a bill that is always due!
January 1st is also the assessment date, meaning that is the date when the county tax assessor’s office figures out the taxable value of your condo, townhouse, house, multiplex, etc. When you get your assessment, it’s the perceived value as of January 1st that year.
If you just bought your home, the tax rate applied at closing was the former owner’s rate, which normally will be lower than the new rate due. A few months later, when everyone has forgotten about it, a Supplemental Tax Bill comes in the mail. That’s a one-time “catch up” bill and after that you’ll get taxed at the rate you should have been since you bought, which is approximately 1.25% of the purchase price for the first year. After the first year, taxes can rise only 2% per year from that initial value*, even if the home appreciates much more. (This situation inclines people not to sell and is part of the reason for our housing shortage.)
This is Silicon Valley and really we ought to be able to get that calculated at closing, but for some reason, the systems in place cannot seem to muster it.
Did your home drop in value since you purchased it?
*If there’s a decline in value since a home was purchased, home owners may appeal their assessed rate and get a lower tax rate. When values rise again, the 2% constraints will not be in place as such. Real estate property taxes can jump up a lot, but not more than if they had been climbing 2% per year during the correction. But during the “down” time, your property taxes may be reduced.
If you are a past or current client of mine and your property taxes seem to be based on a value that you believe is higher than market value, please contact me and I’ll try to help you by providing “comps” (comparable sales) to bolster your case for lower property taxes.
Read more about high property tax assessments at this related post.
How common are “all cash” transactions for Silicon Valley real estate right now? During the first couple of years after the downturn ended and the recovery cycle began, we had a large percentage of all cash buyers in Santa Clara County and nearby. In recent years, though, that ratio has been declining. Where are we now?
Some areas and some types of sales are more frequently all cash than others. Here are a few quick stats for the last 60 days (numbers from MLSListings, crunched by me – disclaimer on good intentions but no guarantee) for single family homes, townhouses, and condominiums (not included are multi-family homes, apartment buildings, mobile homes, farms / ranches etc.). Also, please note that this is for closed sales, not pending sales.
What percentage of sales are all cash?
- Santa Clara County: 12% all cash
- San Mateo County: 20% all cash
- Santa Cruz County: 18% all cash
Few areas in Santa Clara County
- San Jose (entire city): 10% all cash
- Los Gatos: 12% all cash
- Cupertino: 11%
- Milpitas: 4%
- Morgan Hill: 13%
- Campbell: 10%
All cash sales close escrow without a loan. In higher priced homes, some new owners will put financing on the property after close of escrow. Particularly in lower priced homes, though, these are investor buyers who will be renting out the property. This is often the case with the lower priced distressed properties in particular.
With the crazy new demands that keep coming at us from banks and new requirements being imposed on appraisers, now more than ever, cash is king. That doesn’t mean that the cash buyer will get a deep discount, but there will be a slight one in most cases and certainly preferential treatment that will create a great advantage in multiple offer situations.
Learn more about buying and selling Silicon Valley real estate with cash offers:
Cash offers: what do you need to know if buying “all cash”?
Finding Your Next Home
What’s My Silicon Valley Home Worth? Estimating the Probable Buyer’s Value (financing impacts market value)