Buying in a seller’s market? Do not expect a perfect house or condo!

Buy less than you can affordIf you are purchasing a home in a seller’s real estate market, as is the case in the San Jose area today, you may be horrified to learn that the successful bidders are those who write contracts far above list price, include few or no contingencies for loan, appraisal, and inspection, and of course take the property in “As Is” condition.

Because inventory is about half of normal, home sellers can do very few repairs and will still garner multiple offers if the home looks good, is priced attractively and marketed well.  Often there’s fresh paint and new carpets, and frequently these properties are nicely staged too.  The pre-sale home inspections – which you should read carefully prior to submitting  your contract – for property, pest, roof, chimney etc. may reveal that work is needed, such as tenting or fumigating for drywood termites, repairs in bathrooms for dry rot, plumbing, heating or roofing at the end of their usable life.

Planning to purchase a Silicon Valley home soon? In this climate, home buyers absorb the costs to make the home move in ready in most cases.  How much does that cost?  As a rough estimate, set aside about 2% of the home’s value for repairs.  In some cases it will be less, and others more.  For instance, if you set your sights on a home with a pool but plan to remove and re-landscape it, you’ll want to budget in that cost as well.

Ideally, you will be purchasing below what you can truly afford or are qualified for.  Where problems happen the most is when buyers look to the top of their range, then have to bid higher still, and finally get stuck doing repairs as well.  Aim lower at the very beginning so that you are factoring in everything which will make up the true cost to purchase – count the overbids and repairs as part of your formula.  If you qualify for a $1 million purchase, try to look at homes priced closer to $800,000.  Often those houses are selling at 10-15% over list price (more in places like Cupertino, Palo Alto and less in areas such as Blossom Valley, Morgan Hill).  If you can comfortably use this strategy, you will not be as likely to get home buyer burnout or quite so stressed with the final outcome.

What is an “As Is” sale with Silicon Valley real estate contracts?

As is home saleWhat is an “As Is” residential real estate sale or purchase? In Silicon Valley, we have 2 sets of purchase agreement forms with are normally used (though of course others could be used): the CAR (California Association of Realtors) and the PRDS (Peninsula Regional Data Service).  Both have either the default or the option of an As Is sale.

But what does that mean?

An As Is sale means that the seller makes no  warranties about the condition of the property and promises nothing upfront, at contract acceptance, about any repairs being made or credits being given for repairs prior to close of escrow.  In other words, what you see is what you get (thinking back to Geraldine Jones / Flip Wilson) – no promises that the seller will fix anything.

Here’s what the CAR contract says (in part):

 

As Is clause

 

In other words, the property will be maintained but not improved prior to close of escrow.

What about negotiating after inspections or new inspections?  The As Is clause does not preclude a buyer later asking for repairs or credits. However, if presale inspections were available, it’s presumed that the As Is includes whatever was already disclosed.  Surprises, however, are often negotiated (though not always).  For instance, if a buyer does inspections and find that there are $20,000 worth of important repairs which were not previously disclosed, it’s very likely that this buyer will ask for repairs or a credit on all or part of what was discovered.

Then what?

The seller in an As Is sale is not obligated to do any repairs, but the buyer may walk, that is, the buyer may back out of the contract and get the deposit back as long as it is prior to the property condition contingency being removed, and any inspections which have been done must later be passed on to the next buyer – so there is some pressure to try to work with the current buyer.

If the seller says yes to the request for repairs, the buyer is then to remove all contingencies and close.

What if the seller says no?  In that case, the buyer has a choice: buy anyway or cancel the contract and get the deposit back.

How often do As Is buyers ask for concessions, repairs or credits? In my experience, most buyers will not ask for any changes to the terms of the contract unless there are surprises which are either “big ticket items” (expensive) or related to health and safety.  If the seller has had ALL presale inspections done, there should not be any surprises or any new requests for repairs or credits.  But if all inspections haven’t been done, any surprises are likely to result in a request for some sort of remediation. (All in all: about half the time.)

 

 

 

Should you buy or sell a Silicon Valley home in fixer condition?

Home Sweet HomeWhich is better: buying or selling a home in “fixer upper” condition, or aiming at “turnkey”?   In Silicon Valley today we are experiencing a shortage of good inventory. Home sellers may be tempted to market their home without preparing it well.  Buyers may feel that they will get a better deal if they purchase something that needs some work. What is really in your best interests?

Silicon Valley home buyers decide: bargain price and do the work, or turnkey and pay a premium?

Often it’s not a black and white choice of extremes between a “total fixer” and a “completely remodeled” home, but often there’s a basic stance that Silicon Valley home buyers must take: am I searching for turnkey or something that needs work? And if it needs work, how much am I willing to do?

A deep discount will be had on properties which are “all original”.  The question, though, is whether or not it will be worth the effort and cost to go through the trouble of extensive repairs and thorough remodeling.  Often the biggest projects are more profitably taken over by contractors – and even then it may not be profitable in the long run. Last summer I sold an original condition home to a contractor who remodeled and sold it.  The contractor did a lot of remodeling and sold the property a few months later for about 18% more than he paid for it.  When you consider the costs of buying and selling (8-10%), the cost of the remodeling (probably another 8-10% of the purchase price if you include the value of his labor), I’m not sure he really make much money.  For his sake I hope so.  For consumers, though, not contractors, it’s even harder to break even with huge remodels if you want to sell anytime soon.  What you do, do for the long run and for yourself – not because it will make you money!

At the same time, buyers need to be careful of homes which have been flipped by investors for a quick profit: they may have simply done the most visible work, leaving undone items which still need addressing, such as pipes, foundations, or structural items.

A few questions to ask yourself if you want to do a massive remodeling job (and buy a fixer upper):

  • Do I have the time to oversee the work?
  • Am I knowledgeable about construction? Or do I have time to research and learn prior to doing it?
  • Can I do what I need and still put aside an allowance of 20% for non budgeted surprises?

For most buyers, changing paint, carpet, windows, appliances or counter tops is a big enough assignment. Rearranging floor plans and expanding a house is going to be too much work, cost, liability and stress for most.

Repair and staging advice for Silicon Valley home sellers

For most people who are selling Silicon Valley real estate, the house, townhouse or condo they are about to put on the market is the single largest asset they own. For this reason, maximizing the return on investment is extremely important. Most sellers avow that they want top dollar for their home.  Many, in the next breath, say “I want to sell As Is and I don’t want to fix anything.” Those two, unfortunately, are mutually exclusive. (more…)

What is the difference between the CAR and PRDS purchase agreements? Does it matter which contract is used?

In most of California, the purchase agreement form used when writing an offer to buy residential real estate is the California Association of Realtors (CAR) form, the Residential Purchase Agreement (CAR-RPA).  Along the San Francisco Peninsula and in Silicon Valley, though, often we use another form, the Peninsula Regional Data Service purchase agreement (PRDS contract).  Few consumers know that there is a choice of forms to use when buying Silicon Valley real estate.  And too many real estate sales people do not understand the difference between them.

Does it matter which one you use?  It certainly does!

While anything in the boilerplate can be modified (deleted or added to), the basic text is not identical from one to the next, and neither are the ramifications to buyer and seller.  Here are a few examples:

Property condition: one is an “as is” contract and the other requires that the property be delivered with a warranty of condition (no leaks, no cracked glass, no structural defects in chimneys, all systems operational, etc.)

Repairs in escrow: one says that repairs must be by a licensed contractor, the other that repairs must be done in workmanlike manner (can be done by anyone)

Defaulting: one contract has more ”teeth” with buyer or seller defaults than the other

There are pros and cons to each of these two forms. A skilled agent is “bilingual” in both, understands the strengths and weaknesses of each one, and can modify as needed the form to benefit the client. What is tricky, even for Realtors who work with both sets of realty forms, is that they keep changing.  So there can be confusion on what is and isn’t covered, or the way in which various aspects of the contract are addressed.  Let’s look at some examples of why it matters which real estate contract you use in the San Jose area.

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Real Estate Purchase Offer Terms to Consider When Competing in Multiple Offers (Part 6)

In addition to the financial part of your offer and your contingencies and timeframes, there are other terms that may help you to be more competitive when writing an offer in a multiple offer bidding situation in Silicon Valley.

What other terms could matter, beyond price and contingencies? Lots – they will matter to the seller and they’ll matter to you.

As Is Offers

Sellers always want to sell “As Is” if possible. They don’t want to have to do repairs, to spend the time or the money to fix what may not be perfect.  This is an extremely important area to research, weigh, and understand prior to drafing your real estate purchase agreement, particularly if you are not the only one trying to buy that real estate.  When it’s a seller’s marker (and with multiple offers, it IS a seller’s market), the seller can request and will usually be able to sell As Is.

Buyers always want every imaginable repair done, if at all possible.  Buyers don’t want to have to do termite, roof, electrical or other work on the home. They want a “red ribbon deal” where the home’s been or will be in very good to excellent shape.  They want a section one clearance from the termite & pest company.  They want a leak free roof warranty. When it’s a buyer’s market, and you’re the only one attempting to buy the house or condo, you can usually request and get the seller to do all the basic repairs.

The important point is to understand which of these two markets you’re dealing with – buyer’s or seller’s – if it’s a seller’s market and you’re behaving as though it’s a buyer’s market, you will hurt your odds of getting the property if you request repairs or if your contract provides a seller’s warantee.
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