Why are lease options to buy so unpopular?

Kitchen scene with the words Lease options to buy - the good, bad, ugly - why are they unpopularSometimes I’ll get an inquiry from someone interested in lease options to buy property in the San Jose area.  It’s been a while, but I remember that phone call pretty vividly.  “I’m tired of wasting money on the rent”, she explained.  Hoping to locate one, she was phoning the agents of San Jose houses for sale – maybe one of them would do a lease option?  Not likely.

Why are lease options hard to find in Silicon Valley?

It is a challenge to find a lease option in the greater San Jose area for a number of reasons, most of them related to the extra risks involved as opposed to simply renting or selling the real estate outright.

1 – Cash needed at close of escrow: An overwhelming majority of the home sellers here want their cash at close of escrow, so the buyers can be all cash or part cash and part loan (20% down, for instance).  Most real estate sellers want to take the cash from the property being sold and do something with it immediately – and the majority of the time that means putting it into another home in which to live.

2 – Don’t want to be a landlord: Doing a lease option means that not only will the owners of the property not get their cash right away, but they also have to become landlords in the meantime.  If they pay a professional property manager, that may cost 8% per month in overhead, too, so it cuts into any profit.

3 – Lease options are risky: With lease options, there is far more risk for the seller, of course, but also for the buyer!  (And by extension, real estate licensees who get involved with lease options.)

  • The seller risks a default by the buyer/tenant and then having to go through the trouble of evicting him/her/them.
  • Pricing risks for both seller and buyer:  the purchase price is decided upfront, but the sale isn’t finalized for a year or more.  During that time, the real estate market could appreciate like crazy (leaving the seller to feel that the house is sold for too little, less than market value) or the prices could fall (with the buyer unable to complete the sale since the property wouldn’t appraise – thus losing all of the down payment in the process).  Either way, buyer or seller could feel unhappy and cheated. (more…)

Rental property down payment

How's The MarketInterested 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.

 

Monthly condo costs - estimate

 

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

 

 

 

Why Silicon Valley Realtors usually do not do rentals

I work with buyers and sellers not rentersSeveral times a year, people want to find rental housing phone me (or sometimes email me), asking for help with rentals of various sorts.  When I explain that most Santa Clara County real estate agents do not work with rentals, myself included, only buyers or sellers, the reaction runs from surprise or even disbelief to anger.   In many areas of the U.S., real estate agents routinely handle leases or month to month rentals.  Why not here?

In the Silicon Valley or San Jose area, most leases or rentals are offered “by owner”.  The owners choose not to hire realty professionals to represent them, and they elect not to want to pay commissions.  So while in many areas of the country, landlords employ real estate licensees to help them to rent properties, here that is seldom the case – at least in terms of offerings made available to the public.  (Owners may hire agents to manage properties, but don’t want to pay commissions to the Realtors or sales people working with people trying to locate rental housing.)

Most homes for rent can be found on Craigslist, but there are a very, very few offered on our local MLS (MLSListings.com).  How few is few?  Just now I ran ALL of the rentals available in all of Santa Clara County – apartments, condos, townhouses, attached homes, detached houses.  In a population of 1.8 million people, can you guess how many rental homes are on the MLS this moment? It’s 64. Just houses = 46.

Why this problem?  With our inventory shortage, most landlords feel that they don’t have to pay $500 or whatever the fee would be to locate a tenant.  Not only that, but many full time agents wouldn’t be too excited about spending weeks with a rental client only to get $500 and then split that with their company!  It’s just not worthwhile.

So when you call your local real estate licensee asking about rentals available, please understand that this isn’t part of what is usually done in the Los Gatos, Monte Sereno, Saratoga or nearby areas in general.  Yes, there are some exceptions.  But for the most part, the owners of those properties don’t want us involved.

For related reading:

Finding Rental Housing in San Jose, Santa Clara County and Silicon Valley

More affordable homes to buy or rent in Silicon Valley with better schools

What do Silicon Valley Real Estate Agents Do?  (how their time is spent)

Got dogs? Buying a home may be much easier than renting one.

Dog in Los GatosGot a dog? Many Los Gatos residents do – which is ironic when you consider that the town is named for cats (Los Gatos = The Cats).  The household pooch can, for many, make a house a home.  But if you’re a renter in Los Gatos or anywhere in Silicon Valley, it can also make it a challenge to find a place to live.

Why the fuss about dogs?

Landlords always worry that tenants will destroy their property, causing the need for loads of repairs later.  Having either smokers or pets increases the risk of property damage.  Additionally, dogs tend to be noisy, most with barking at strangers but some howling, too.   For townhouse or condo residents, this is cause for complaint from neighbors and the HOA.

Of course, not all canine situations are the same.  If you own a small, quiet dog, it will be much different than if you have a pair of Great Dane or Beagle puppies.  Some places may have restrictions on the animal’s weight, others on the breed (with certain types of dogs such as pit bulls, rottweilers or dobermans prohibited).

Cats are a little easier, in part because they’re smaller, quieter, don’t need to be let out to relieve themselves, and often can inhabit a property with little annoyance to those nearby.  But some felines spray, scratch curtains and can be destructive, so while the restrictions on dogs are pretty common, there’s often a bit more flexibility with cats, but it’s far from absolutely easy to rent with cats.

The Humane Society has tips for pet owners who are looking for a rental.  Great advice here:

http://www.humanesociety.org/animals/resources/tips/renting_with_pets.html

Right now, the Silicon Valley housing market is very tight, with limited supply of inventory both to rent and to purchase.  For people with multiple pets especially, though, it may be easier to buy a home than rent one (if the down payment is available) since landlords can have all sorts of animal restrictions, and if you are able to rent with them, the cost will undoubtedly be higher each month.    When buying, many prospective purchasers include personal letters and sometimes photos.  A friendly looking pooch may be a help in your securing that next home, too.

 

 

 

Finding Rental Housing in San Jose, Santa Clara County and Silicon Valley

Often I get emails from people asking if I can help them with finding a rental property. For the most part, my practice revolves around listing and selling real estate in San Jose, Los Gatos, and Silicon Valley generally, so my best information is on what’s for sale, not what’s for rent.  Once in awhile I work on rental housing, but not normally, as rental condos or houses through an agent (if they are listed on the MLS) will usually cost you more than homes you find to rent elsewhere.

The best resources I have found for locating rental properties in Santa Clara County are these (I cannot guarantee or warranty your results, but these are starting points for you):

  • Craigslist (link is to the South Bay area)
  • Bay Rentals (they do charge a small fee)
  • ForRent.com (search by city name or zip code)
  • Once you’ve located an area you like – drive around
  • possible – the MLS search – scroll down on left sidebar widget on this blog and pull down the menu under “all property types” and select Rentals OR run similar search by map on my popehandy.com site at this link ~ you must also find “property types” on left side and then locate rentals under that)

The last bullet point might seem silly, but some of the best apartments, townhomes etc. never get listed anywhere other than a sign in the yard.  So if you love Los Gatos, Campbell, Santa Clara or anywhere else, drive it and watch for signs! (Or talk with friends or acquaintances in areas you like – have them keep an eye out for you.)

Perhaps you want to be in a hotel or inn for awhile before deciding where to rent or buy, or while on temporary assignment at a local business or university. You don’t need me to tell you where to stay in a hotel, but if you are moving here with a pet you might want assistance finding a place which will welcome your cat or dog.  Here’s a great resource for finding pet-friendly hotels, motels and inns here: DogFriendly.com’s San Jose (and nearby) City Guide, which includes accommodations, parks, outdoor restaurants etc.

Right now, it seems to be the case that it’s harder to rent a home than to buy one – at least that is the word on the street.  (And it seems that like with the purchase market, the closer you get to Palo Alto, the tougher it is.)  Tougher still if you have pets or smoke.  If you have pets or smoke and find a rental, the cost per month will be higher.

 

 

 

Scam: Online ads for houses listed for sale are sometimes scraped and offered as rentals by those wanting your money!

DangerA quick word of warning to Silicon Valley renters hunting for a home: beware of scams online!

Some nasty folks are copying ads or online fliers  from houses for sale on Trulia and Craigslist and reposting them as rentals at a below market price.

Then when consumers phone the number on the “rental property”, they are told that they have to pay a couple of hundred bucks to fill out the application – sight unseen.

Two of my listings have been scraped in the last year  (once on Trulia and once on Craigslist). Confused consumers drive over to check out the place and are surprised to see the Sereno Group sign in the yard, call and ask me if it’s really both for rent and for sale.  Nope, it’s not.

If it sounds too good to be true, of course it is.  Google the address of any property offered for rent and see if the home is offered for sale, especially if the rent is on the low side or if the person posing as a property manager requires money upfront to see the house.  If you run into one of these creeps who’s committing fraud, please call your local police department and turn ’em in.

 

 

 

Parents of Silicon Valley College Students: Should You Buy a Condo or House, or Utilize Dorms & Campus Housing?

Silicon Valley is home to three great universities (Santa Clara University, San Jose State University and Stanford University), about a half dozen community colleges (Mission, Evergreen, West Valley, Foothill, De Anza, San Jose City, Ohlone,  Canada) plus smaller trade schools or polytechnic colleges for specific career-oriented individuals  (such as Cogswell in Sunnyvale).

Most of the smaller schools do not offer student housing while the larger ones typically do – though it may not be guaranteed for all four years.

If you are a parent of a college student in the San Jose – Santa Clara – Palo Alto area, should you consider purchasing a condo, townhouse or house for your son or daughter?  Does it make financial sense to do so? Over time, would this be a good investment? Would it be best for your son or daughter to skip the dorm scene?             (more…)