Do  you have a strategy for buying a home in Silicon Valley, where it’s a deep seller’s market?

No one who understands the market at all will tell you that it’s going to be easy.  If you are serious about becoming a home owner rather than a shopper, it’s time to get serious about what it will take for that to happen.

Creating a strategy for buying a home

In a deep seller’s market, it’s very helpful to have a game plan or strategy for buying a home.  The best place to begin is with an understanding of your competition and the inherent risks of buying in this climate.

• Approximately 30% of all sales in this area are “all cash”.  Not all cash buyers are savvy and may make mistakes (such as vastly overestimating the value of a cash offer – sometimes the lowest price comes from a buyer without financing).  All cash buyers need to be educated, too.
• When homes sell in under 2 weeks and with multiple offers, it is highly likely that the winning bid came in with no contingencies for inspection, loan, or appraisal.  Sometimes it’s both all cash and non-contingent on the normal items. Most of the time, at least half of the bids in multiple offer situations are non-contingent.
• A key strategy for buying a home in an overheated market is to have the strongest financial position possible. If a mortgage is needed, get the strongest pre-approval possible (pre-qualification is weak, pre-approval is typical, and pre-underwritten pre-approval is the strongest).
• Use a reputable, known lender, or at a minimum one known to your agents so that she or he can truthfully tell the listing agent that the lender has an excellent track record. Reputation matters. (Ditto that for your buyer’s agent.)
• Do your research:
  • Try to understand WHY it’s such a scarcity of listings and if there’s any reason to anticipate a change. In 2024, we see pent up seller demand, but those folks aren’t moving because (1) they have a low interest rate loan and (2) capital gains taxes take a big chunk of money that many of them would want to retire on. In other times, it could be different reasons. But these are the drivers now.
  • Understand that some homes are priced FAR below what they are worth. This may create a feeding frenzy with dozens of home buyers, and with that many bidders, it’s likely to sell higher than where it “should” (if we expect it to sell similar to recently closed sales).
  • Some buyers will have lost out so many times that their strategy for buying a home is to spike the price to be done with it. If the home ought to be worth $1.6 million, they may pay $1.85 million since that’s totally unreasonable and they should nail it this time. You don’t want to compete with that, and you cannot predict when it will happen.
  • Many won’t spike the price, but they may say “well if it should sell for $1 million, I’ll offer $1.1 million to clear it”. Get a bunch of those and the sale price will rise.
  • An old rule of thumb is 1% per offer over list price – so if there are  30 offers, it may sell 30% over list price. But sometimes that isn’t the case and it could be much higher or lower.
  • A few years ago I wrote a series of multiple offer tips and they are still good today.  Major hint: it’s not always only about price or even primarily about price.  The terms matter, and so do a few things which are harder to measure (and can include all sorts of things – even whom you hire to work with you on the purchase).
• If you dawdle, you risk being priced out of the market.  Sometimes when beginning to shop, home buyers who are new to the game feel that they have power and can “wait until the market improves”.  The problem is when there is deep scarcity of inventory and a ton of amply able buyers, the prices are going to go up steeply.
  •  If you take a year to buy, most of the time – unless you are extraordinarily lucky – it will cost you dearly.  I have seen buyers wait so long that they basically used up their entire down payment.
• The greatest fear that buyers have when purchasing in a raging seller’s market is that there will be a correction or crash, and they’ll be left with an over-investment in real estate.  Put another way, they don’t want to overpay and they really do not want to be upside down in their home.  No one wants to overpay.  But right now, some homes that sell will not appraise (many do, but quite a few don’t).

So that’s the starting point for a good strategy for home buying: get a realistic idea of what’s happening and what to expect as your starting point.

Getting ahead of the Silicon Valley home buying competition

In addition to the items listed in the bullet points above, in many markets, as part of the strategy for buying a home we also need to factor in the rate of appreciation. Are homes going up 1% per month in value, or 3%? Consider the trajectory of the market. If the house will close in 30 days, what is the likely appreciation not for today, but for a month from now?

Here’s a true story from my experience:

A few years ago, I was working with some nice folks on a potential offer in Saratoga. We were told that the listing agent expected 6 offers.

From all that I could see based on the comps and the overbids typical for that segment of the market and the level of interest, I thought the purchase price would be 10% or more over the list price (yes, more than the 1% per offer rule of thumb).

The buyers decided not to write an offer but had been planning to come in only at list price.

As it turns out, the 6 anticipated offers turned into 12, and the price went even higher than the 10% over that I had told them to expect.    Although I had given them all of the data and explained how the market worked, they remained perplexed as to what had happened, feeling it didn’t make any sense, no rhyme or reason. They felt quite strongly that it was only worth list price.

More demand usually equals a stronger, higher priced offer.  At the end, you will not have a home that “comps out”.  In a rising market, you will have the most expensive home that has ever sold in that area for that condition.  It takes a very strong stomach to buy under these circumstances. Sometimes it’s hard for buyers to believe it when I explain that a sale will be higher than the comparable sales support.

Is there a strategy for buying a home that is not so scary?

A strategy for buying a home that I have used very successfully (in addition to the tips listed in the series of articles linked above) is to look at properties which have been on the market a month or longer.  Some are there because of nothing more than the wrong list price. There’s no guarantee that the seller of that property will be realistic, but it’s worth a shot and often a month into marketing time and that seller is ready to take a lower price, even if he or she isn’t ready to accept a price reduction.

At other times, the listing is old because there is a problem with the property but it’s fixable.  Perhaps it is a tenant occupied home and it’s a bit of a train wreck.  The condition can be fixed!  If it’s been for sale awhile, try a lower offer.  You may be surprised to get it!

Another strategy for buying a home which has helped many times is to work on making the terms and entire package of the offer so attractive that the price becomes far less important.  I have seen buyers with a loan beat out those without one many times because they put together a better complete package (see that list of tips for multiple offers to get an idea of what goes into that).

It also can help a great deal if the buyer’s agent is well known, well trusted, and well liked, and has made an effort to set the stage properly ahead of time.  This may not always work, but often it does.

What about asking the listing agent to write up your offer?  That may bring success some of the time, but many of the best agents want you to come in with your own agent, for many, many reasons. If you come alone, you will appear to be a buyer with no loyalty. If you don’t buy the listing agent’s listing, you’re on to the next, right?  It’s not very flattering if a buyer only wants to work with you because it’s your listing.

Most successful Realtors are not transaction based, but relationship based.  They don’t feel that you must buy any one house because they know you will buy some house with them.  At least, that’s the case if you are a loyal buyer (and not a transactional one).

Hire a good buyer’s agent who can guide you.  By that I mean someone you will trust and rely upon.  If I have buyers and crunch data for them and help to analyze the market to give them good research upon which to rely, it can be really frustrating if they simply ignore it.  I also know that if they won’t use good data, we probably cannot work together.  (I don’t like to “sell”. I like to educate.  Most of the time, good information and statistics etc. will speak for themselves.) If you don’t trust your agent, move along and find someone you can trust.  It is key to your success!

There is no magic bullet to buying a home in a deep seller’s market, but if you have a good strategy for buying a home and are realistic, you will be able to buy (even if it’s not your dream home).  Most of the time it is a combination of persistence, working with a great agent and accepting his or her insight and guidance, and having a firm sense of how far out of your comfort zone you are willing to go.

Want to chat about home buying?  Give me a call and we can set up a confidential, no obligation appointment to chat for an hour or so.