How is home buying in Silicon Valley different from other places?

Home buying in Silicon ValleyIf you want to buy a Silicon Valley home and you’re coming from outside of the area, a few things are done differently here. Rather than give a lengthy explanation, I’ll just provide a quick list of things which are different from other parts of California, the U.S. or perhaps the world.

1.) The escrow account, where money is held and disbursed by a neutral third party, is ordinarily with a title company in Silicon Valley and the San Francisco Bay Area generally. In CA it’s legal for real estate brokers to have the escrow account, but that is not the custom here. By contrast, in southern Calif., there are separate companies which often do the escrow work or a real estate broker may handle the funds, called trust funds.

2.) Santa Clara County is a “seller pay county” by tradition when it comes to the escrow fee and who pays the owner’s policy of title insurance.  (Most of California is either buyer pay or split 50/50. Also, SCC is where San Jose and much of Silicon Valley is located.)

3.) Because it’s a “seller pay” county, the seller or the listing agent (the seller’s real estate agent) normally chooses the title company. Most of the time, the home owners do not have a preference and don’t  know anyone working at the nearby title companies, so usually the listing agent suggests which one to utilize. If you purchase the property with a loan, you will need to buy lender’s insurance, too – and that’s a buyer cost.

4.) While in many east coast states an attorney is involved with the home buying and selling process, here lawyers are seldom involved with real estate sales – unless there is a big problem.

5.) Surveys are not usually part of the transaction here, with exceptions if there are serious doubts about the property boundaries.

6.) Buyers are provided information on natural hazards, and usually also known environmental hazards and area tax liabilities, in most cases via a professional disclosure company such as JCP Disclosures. Things such as 100 year flood plains, liquifaction zones, earthquake fault lines, underground water contamination will be revealed, if known, in most cases.

7.) In some parts of the world, buyers do not have their own real estate professionals for guidance and advocacy, but here they do. Most of the time, in the San Jose and Peninsula area buyers have their own real estate agent working on their behalf. Usually the buyers’ agents are paid by the sellers – but they do not represent the sellers. Dual agency is legal in California as long as it is disclosed (and dual agency can mean either the same person or brokerage).

8.) In recent years, it has become the norm to get pre-approved with a lender or bank prior to writing a purchase offer on a house, condo or other home. (If you meet with a Realtor, getting you set up with a reputable lender will be one of the first things he or she asks you to do.) Also it’s pretty normal to have to provide “proof of funds” to demonstrate that you have the down payment available. Sometimes our international clients are surprised at the documentation required here, so it’s good if you are aware of it upfront.

9.) It usually takes 30-45 days to close escrow on a property here (from the time the sellers accept your contract to the time you actually own it).

 

Finally, it should be noted that the cost of housing in Silicon Valley is truly exorbitant. Most people know that Silicon Valley houses are very expensive, but until they get out and see what things cost, they really don’t understand how extreme it is. Often I tell people to expect to pay twice as much and to get half as much. Unless you are coming from a pricey locale, such as London, Tokyo, Paris, Manhattan or Boston, you may still find yourself in “sticker shock.” A half million dollars buys a fairly small, modest home here, in an average area. A million dollars is better – you can get into a better area and better house.  The “luxury market” starts somewhere between 1.5 and 2.5 million, depending on which area you’re considering.

What does it take to buy a home in Silicon Valley?

Graphic of people running to an open houseYou’ve probably heard that buying a home in Silicon Valley is a bit like purchasing real estate in Manhattan, London, Tokyo, Paris, or other regions where the prices are in the stratosphere.  It’s true. It’s a strong seller’s market.

And yet, every day, homes are bought and sold in the San Jose – Palo Alto – Foster City area.  They aren’t all cash; perhaps 20-30% are bought without any loan or mortgage, but the rest of the properties are sold with some sort of financing.

Here’s a quick summary of what is needed to buy a house, condominium, or townhouse in Silicon Valley (this list applies MOST of the time and with few exceptions):

  1. A large down payment is needed – usually 25% or more – to win in the multiple offer situations which are the norm right now.
  2. Nerves of steel: it’s scary to buy a house, but here, many homes are purchased without the normal contingencies for loan, appraisal or inspection.  (But home sellers do provide a full battery of inspections that you can review before making your offer in most cases.)
  3. The ability to move quickly and decisively as the best homes sell very, very fast – often in a week to nine days.  In the last 30 days, there were 385 houses which sold and closed in the city of San Jose.  Of those, 282 went under contract and became pending sales in 14 days or less.   That’s 73%.    In Sunnyvale the numbers were 47 and 47, so 79%.  Here you need to be 110% sure.  If you give off signals that you are hesitant, your offer is unlikely to be accepted.
  4. It’s a big help if you have a really good Realtor who’s known, liked and respected in the local real estate community.  Listing agents will prefer to work with an agent who’s trusted. In some areas, like Palo Alto, many homes sell “off market” and then the full inventory tends to be known only by those local and trusted agents.
  5. A strong lender, especially if you are coming from abroad, who’s experienced in tracking work history, credit, etc. in other countries (and in some cases other languages). Don’t just walk into a bank and pick someone.  Get a good recommendation, either from someone at your company who’s had a similar experience or from your Realtor, who should be used to working with international home buyers.
  6. Being clear on priorities and being able to put them in order is crucially important.  It’s usually not possible to get everything on the wish list and also get it in budget.  So decide which is most valuable to you: schools, commute time, home type (perhaps you can get what you want, where you want – but only if you buy a condo?), commute time or?

Those are the key ingredients.  Perhaps the hardest one, when getting started, is the last one.  Let’s talk about that.

Priorities list: pick any 2 out of 3

A request I often get is to find a nice sized home and yard in good shape with good schools and a commute to Palo Alto that’s under an hour.  So far, so good.  Then comes the desired price tag: under $1,200,000 or under $1,500,000.    You can get the home, yard, schools, and commute, but it won’t be under $1.5 million for a good sized, remodeled house and a big yard with better schools.   The price tag fitting that description is probably closer to $2 million due to our clogged commute routes.

One of the best areas in terms of schools and pricing is Cambrian, which is a part of San Jose, with either the Union School District or the Cambrian School District.  You can get a Cambrian home with good schools for under $1.4 million and it will have a decent sized lot, be in good condition, etc.  But the morning commute to Palo Alto will likely be a little more than an hour, and the evening commute perhaps 80-90 minutes, depending on where in PA or Cambrian you’re going and what time it is.  A nice house in east Los Gatos with the same schools but more house and yard will probably run around $1,700,000 to $1,800,000 for 2500 SF on a 10,000 SF lot.

Cupertino has great schools but the houses there tend to start at around 1.5 million – so if you are ok with a townhouse or condo, that might work.

The upset as reality sinks in

Most home buyers, even if they’ve studied the market here intensely before arriving, go through some strong emotional stages as they learn the real estate ropes and what their budget can and cannot buy.   Sometimes the main shock hits before arriving, though.  Recently I got an email from someone moving here from the south, who lamented the situation with a question along these lines:  “can you explain to me why home prices in Silicon Valley are 5-6 times more than they are in Atlanta?”  It is that bad, yes, and I am sorry.  It is upsetting.  The faster you can move through the shock and upset, the sooner you’ll be able to clear the emotional clutter and buy that next home and really settle in.

Focus on the positive

The good news is, aside from the cost of housing and the traffic, San Jose – Sunnyvale – Los Gatos and whole Silicon Valley region really is a wonderful place to live.  We enjoy 300 sunny days a year on average.  San Jose has often been named the best place to raise kids.  The intellectual climate cannot be beat as we have great minds from all over the world here.  The coast is close, and so is San Francisco.   If you do buy a home, appreciation may be substantial, far more than in most of the U.S., if you can “buy and hold“. (We’ve had a lot of real estate corrections and downturns since the 1940s, but look at some old Los Gatos real estate home prices then and see the buy and hold value at its best.)

Silicon Valley housing prices and the emotional stages they’ll put you through

Stages of Silicon Valley real estate sticker shockGetting over Silicon Valley real estate sticker shock happens in stages.

First there is disbelief or denial.  “It cannot be that bad – people are exaggerating.”  That’s followed quickly by “I thought it was bad where I used to live!”

Then there may be outrage (anger is too mild a word): “Why would anyone pay that to live there?”

Next, a little bargaining: “What’s the work around? Are there any bank owned homes?  How about something older – I don’t mind a 15 year old house…” (To us, that’s a young house, by the way.) “What about buying a lot and building?”  Or the commute negotiation “I thought I had to be within 15 minutes, but I could go 30.”  A typical commute might be 30 minutes in the morning, but 45 in the evening.  Many people have worse than typical, though, as they want a bigger, nicer home, better schools, quieter location, etc.

Depression soon follows suit.  This may be accompanied by “We just cannot do it” or “We are not willing to do that” (until they see that rents are $4000 for a smallish house in an only OK area and $6000 per month for a decent sized home in a good area.)

Acceptance comes at last.  It may lead people to decide to go all in, bite the bullet, and buy locally.  It may lead them to move way out of the immediate area and embrace an hourlong commute – or to take the Apple or Google bus to work, if applicable.  It could lead them to move to Seattle, Orange County or somewhere a little less overwhelming in terms of housing costs.

Prices are up 30 from 2 years agoSometimes people think they are at “acceptance” as they write offers which are habitually 5-15% too low.  In reality, they are actually still in the “bargaining” phase, hoping for a good deal amidst our raging seller’s market.  That doesn’t usually happen, so writing a lot of unsuccessful offers frequently leads to depression (and sometimes blaming their agent for their offers not going through, even when it’s clear at closing that their offer price or terms were the issue).

How fast can you get to acceptance and write a realistic purchase offer?  For people who could have bought 12 months ago but are still shopping now, that wait has cost them about 10% of their home price in many cases.  For those looking 2 years, it’s easily double that, and in some cases prices are up a full 30%.  That’s like setting a match to your entire down payment.

If you want to be a successful home buyer in this crazy Silicon Valley real estate market, you will need to get onboard quickly, because the longer you take to get to acceptance, the more expensive your final home will cost when the market isappreciating, as it has been for about 3 years now.  Time is money and nowhere is that more true than in the San Jose, Silicon Valley, or South Bay real estate market.

 

 

Looking for more Silicon Valley real estate resources?  Here are a few of my other sites, blogs, and market stats tooks:

popehandy.rereport.com – real estate statics for San Mateo County, Santa Clara County, and Santa Cruz County

popehandy.com – Silicon Valley real estate, Los Gatos real estate, info on many areas of the realty market in Santa Clara and San Mateo counties

SanJoseRealEstateLosGatosHomes.com – Santa Clara County real estate, special focus on San Jose areas of Almaden & Cambrian and also Los Gatos with info on the real estate market, neighborhoods, and more

LiveInLosGatosBlog – Los Gatos real estate, neighborhoods, events, businesses, parks. Many photos and neighborhood or subdivision profiles.

The Crazy Silicon Valley Real Estate Market

There is most always a big shock when folks relocate to Silicon Valley and start to learn how far their money goes – or doesn’t go – here.  This has been the case for a very long time, since long before I got into the business 20 years ago.   Prior to to looking online, you may hear that it’s bad, but you don’t really know what people are talking about until you get into a car with a Realtor and go see what $500,000 or a million or more will buy you here.

And now, too add to the already high home prices, the real estate market is overheated due to a severe inventory shortage of homes for sale in the San Jose and “South Bay” areas, too.   Most properties are selling over list price – and that was high to start with, particularly for out of state or global buyers.

In most parts of the U.S., a half a million dollars will buy you a great home.  Here, not so much.  A million dollars will buy you a nice home in a decent area, but it won’t be fancy, and you’re unlikely to have a large lot unless your commute is huge and you’re on the outskirts of the valley. It’s more than a million to have a really nicely remodeled home with great schools; that price point seems to start at about 1.2 million in most parts of the valley. Have a look at the median and average sales prices for houses in Santa Clara County – this will give you a sense of how the market has been behaving, but also of the cost to purchase homes generally.

Santa Clara County (Silicon Valley - San Jose area) Prices and Sales Feb 2013

Santa Clara County (Silicon Valley – San Jose area) Prices and Sales Feb 2013

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Buying a home in 2013? Cash is king!

Cash is KingEach January, would-be home owners roll up their sleeves and make plans to buy a house, townhouse or condo.  This year, like most, I’m getting contacted by Silicon Valley home buyers new to me as well as those who played with the idea in the past but ended up putting off the purchase. (Recently I learned that nationally, only about 50% of interested home buyers actually do purchase during the year that they think they will.)

Right now it is a very deep seller’s market in Santa Clara County as well as nearby areas of Silicon Valley.  There is more demand than supply, the majority of “regular sale” properties under $ 1 million or so are getting multiple offers and the sales prices are averaging over the list price in almost all neighborhoods.  The months supply of inventory is less than one month in Santa Clara County right now.

There are a lot of strategies you can employ when competing in multiple offer situations, but very few things can trump cash.  A 20% down payment is considered a minimum for most of the valley.  It is extremely difficult for a home buyer with FHA backed financing to buy a home in most cases.

This morning I looked at the sales of houses in San Jose over the last 30 days (meaning those which closed escrow).  There were 368 houses that sold & closed. Of those 268 had conventional loans, 77 were all cash, 10 were FHA, 6 were conventional 1st and 2nd, 1 was a VA loan and none were “owner carry”.   In other words, the vast majority had 20% down or more, and only a tiny handful came to the table with a small down payment.

That doesn’t mean that FHA buyers are never successful or that they aren’t trying.  But the odds of success are about 3%.

Looking for another option?  There are conventional 1st and second loans available – of course not many of those either but they are usually viewed more favorably than an FHA offer, especially if the house is older or needs work.

Another strategy may be to cosign with a relative who puts up a 2nd mortgage for you.

Nothing can really beat cash, and for most buyers, that means saving for years to pull together that elusive 20%.  Up against an all cash bid, even 20% will look weak, but to increase your odds of success, 20% should be your minimum target in today’s market.