What’s most important to home sellers: highest price, fast close, all cash, no contingencies, pre-approved loan or what?

When home sellers receive multiple offers on their property, they get to prioritize what they want most. Is it all cash, the highest price, the fastest close of escrow, or no contingencies? This 45 second video of home sales in 2013 may surprise you!  (Per the California Association of Realtors – so apparently home sales in CA.) When writing your real estate contract, it’s good to keep this info in mind – too often, cash buyers in particular don’t appreciate that most sellers are after the #1 item listed in this quick video.

 

 

 

 

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.

Biggest home buying challenges in Silicon Valley today

As previously reported, it is an extraordinarily deep seller’s market in Silicon Valley today.  Some buyers are able to purchase a home – but it isn’t easy and it sure isn’t pretty, especially if the property has only been on the market for a week or two. The toughest home buying challenges really boil down to just one or two main things, which we’ll explore here.

There are two particularly enormous challenges which face most San Jose area home buyers in today’s market. This is in addition to price overbids (sale price to list price ratio often in excess of 10%, sometimes much more, as well as things like free rent backs for sellers).   The crazy low level of available inventory has home buyers competing in ways seldom expected.

Competition challenges: cash and zero contingencies

  1. Cash competition – buyers with a large down payment or all cash.   Depending on the location and price point, about 15% of all offers are “all cash, no loans”.  These are not all $200k 1 bedroom condos being bought for investment purposes, either.  Many of them are well in excess of $1 million and the intention is to live in them, not rent them out.  While some cash buyers still try to low-ball the price, we’re not seeing as much of that now, those days of being successful with a low price are pretty much over.  Many times the cash buyers also offer the strongest terms – a winning combination that sellers cannot resist. To read more on that topic, please see “Why do sellers care if the offer has a loan or is all cash?
  2. Offers with no contingencies of any kind – not for inspection, appraisal, or loan – even when there is a loan! For Silicon Valley home owners trying to sell, the best combination is the all cash, no contingencies offer because it’s the least amount of risk to them. But for home buyers, it’s a nightmare – often both not possible and far too risky. (I do not recommend writing an offer with no contingencies. At the same time, if there are a few offers on a home, the odds are good that some or all of them will be written that way, and that’s the competition.)

Not every buyer is drafting contracts without contingencies, but enough are doing it that if you are going to bid in a multiple offer situation, you want to be aware that competing bids may be all cash, or without any contingencies, or both.   If the offer is a tie, many times the seller will elect to work with the one which is less risky for the sale to fall apart, and that means shorter contingency periods.

This puts a lot of pressure on lenders.  Normally they want 2-3 weeks for full loan approval, but if they tell their buyers to request 21 days for the loan contingency, it’s likely to get those buyers eliminated from potential winners.

Cash is king, so if you’re able to put down more cash, the better your odds are of success. If the listing agent has a full complement of presale inspections, it would be wise to read them and the disclosures thoroughly and understand them prior to making an offer with short contingencies for property condition/inspections.  This includes HOA docs.  There could be information in those papers which reveal an upcoming special assessment or rise in monthly dues, so you want to know about it before giving it your stamp of approval.

 

For more reading on all cash, non-contingent offers in Silicon Valley:

Why do sellers care if the offer has a loan or is all cash?

Cash offers: what do you need to know if buying “all cash”?

Should you write an offer with no contingencies? What is the risk with a non-contingent offer?