Rapid Appreciation in Silicon Valley Homes for Sale Creates Appraisal Challenges

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.