Not Overpaying When Buying a Home

Image of Trial BalloonCome on, admit it.  We've all done it.  There have been times when you've been tempted to throw money at the problem.   Maybe you got tired of circling around for parking?  Maybe you could have waited and mail-ordered that part for less --- even after shipping --- but went to pick it up at Fry's anyway?  Maybe you paid a little extra to book that plane ticket one week instead of 21 days in advance?

But with Silicon Valley real estate, the stakes are higher.  Folks in Silicon Valley are busy and in a fast-moving real estate market, like the one we have in the Bay Area, it's easy to get caught overpaying for a property.  My job as a buyers agent is to alert you before that happens.

In this case, my buyer tour took us to a newer development in Burlingame, off Burlingame Avenue.   People who move to Silicon Valley often talk about how suburban it feels here compared to transit-friendly cities in the "old world" like Boston or even Chicago, so metropolitan-style developments walking distance from shopping centers or downtown areas are in high-demand.

The staging in this model home was near to opulent and the depth of the rosewood furnishings against the contemporary Asian paintings in the background were only accentuated by the ornate mirror that gave space to an otherwise compact living room.  Compact beds, not quite queen, not quite twin, occupied the bedrooms so that there would be ample room for the mahogany-style dressers. 

So with the weaknesses obfuscated by a good staging company (sellers, note that!), would townhomes here really sell for $100,000 more than comparable properties in the area? 

Yes, but not to anyone I represent.

The Inside of a Property Only Tells Half the Story

The model was open on this semi-clear Sunday and several families with their babies in tow were touring what was an exciting new opening in the area.  There was a lot of buzz in the air and the rep definitely had his hands full that day.

If you picked up the townhomes with a giant crane and put them on a blank sheet of paper, next to other similar properties in the area, you could probably justify the extra money --- maybe not the whole $100K, but somewhere in that ballpark. 

After all, the fixtures were high-quality and there were upgrades everywhere, from granite and marble in the kitchen (along with enthusiast-level cooking equipment), down to little details like the flourishes on the handrails leading up to the bedrooms.

Looking at Immediate Surroundings

But real estate in Silicon Valley, and most other places, doesn't exist in a vacuum.  This property was over-developed for the area (remember that lobster on the McDonalds value menu analogy I've been using?).

Here are some things I look for on the outside of a property.  I use these, as a buyers agent, to give my clients indications about the upside potential of the home their considering.

1/  Proximity to Rental Properties 

In my article, Determining Your Must-Haves When Buying a Home, I mentioned a personal story about how renters treat the property they live in (and its surrounding neighborhood) differently than owners do.  In this case, the challenge wasn't proximity to rentals, per se; it was how close this Silicon Valley complex was to below-median price rentals --- which leads to the next indication...

2/  Neighbors and Their Guests

I saw an extreme example when I was touring Austin looking at investment properties.  A neighbor next to a property for sale had left a trampoline in the front yard --- not just any trampoline: one tipped over on its side with two broken legs and obvious stains on the mat.  I think I left my checkbook in another pair of pants that day.

Back here in the Bay Area, it was around 7pm and a client and I were touring a strong property in San Carlos.  Or at least we thought it was a strong property until the guy in the house across the street pulled up in his convertible, parked his Benz on the street, and cranked up his car stereo so he could listen to his hip-hop while he went inside.  He might as well have gone on the tree in front of his house.

The style and model of cars, along with how densely-packed they are on the street, can sometimes indicate how your neighbors view the neighborhood.  And in this case, it wasn't just the stereotypical image of beat-up junkers that told the tale.

3/  Deferred External Maintenance in Surrounding Buildings

Here's a cartoon example: when was the last time you wanted to buy a Silicon Valley-priced home next to a crack house? 

Now move it up a few notches: next to a derelict house, a structurally-unsound house, a run-down house, a house with chipping paint, a house painted an ugly color, a house you think is okay don't like personally, a house you aspire to buy, a house you're in awe of?  Where is the line at which you'd feel comfortable buying a neighboring property? 

That's the same evaluation your future buyers are doing, except they call it a "gut feel."

For my clients, I would argue that the halo effect of an expensive property is overshadowed by the negative effect of a poorly-maintained one.  Also, I remind some of my clients who are under a lot of stress at work that, in an area without a homeowners association (HOA), your only recourse against a stubborn property owner who is affecting your market value through deferred external maintenance may be to sue.

4/  Vacancies

If you lived next to an apartment complex that had a lot of vacancies, would it be reasonable to worry about whether the management company would lower their requirements?  Of course.  Would it also be difficult to remove any borderline tenants they might have taken on --- the ones that are annoying but not dangerous?  Absolutely.

In this part of Burlingame, there were also many commercial vacancies nearby.  Unfortunately, one of the draws for this complex was its location (which includes nearby restaurants and shops).  With more stores closing, in addition to the already abundant vacancies, there would be a lot of bleeding to stop before the area regained its strength.

5/  Ambient Noise

Raise your hand if you prefer having more road noise.  I have to admit that I like to hear the occasional car go by to break a dead silence, but living near a busy street does impact the number of people who will be interested in any home you buy there.  The same goes for schools, hospitals, fire stations, police stations, and even some post offices.

However, ambient noise is expected in an urban setting.  There, people are looking to have a lot of shops, bars and restaurants nearby.  In those cases, I recommend my clients look to avoid noise from trash pickups, abnormally frequent street cleaning, drunken patrons, poorly lit alleys where people gather, and parking lots.

Optimizing An Offer for You

Negotiating with a developer that has a lot of positive buzz around their properties is challenging at best.  And when they're offering something that my client doesn't value, the best thing I can do as a Silicon Valley buyers agent is find other properties that give my client more for the money.  In this case, we quickly moved on. 

Many buyers assume before working with me that money is the only variable they can play with in the offer.  Obviously a seller is going to want as much money as possible, but given equal monetary offers, there are ways a savvy buyers agent can work with you to tip the scales in your favor.  The key is to find out what the seller really needs.

What Many Sellers Look For Besides the Offer Price 

1/  Closing

Most sellers, especially in Silicon Valley, want as short of a closing period as the buyer can handle reliably and for most deals, I'll speak with both my client and their choice of lender to coordinate how quickly we can mobilize the funds needed to offer a shorter close.  The faster the close, the faster the sellers can get on with their life after selling.

But I've also worked with cases where the Bay Area seller actually wants a longer close.  I worked with on seller on Santana Row who would only sell their townhome based on the purchase of a larger villa.  These contingency sellers often want time to identify and close on another transaction before selling the property you're interested in. 

People participating in a 1031 Exchange often want longer closes too because it gives them more time to identify a list of properties they can use to defer the taxes on their real estate profits.

2/  Contingencies

Let's look at contingencies from a seller's perspective.  If you had a house to sell, and I said to you, "Hey, take your house off the market for the next 17 days so I can decide whether to buy it.  If I decide not to buy it, don't forget to give me my deposit check back..." what would your response be?

Well, if you signed a standard California Association of Realtors purchase agreement, your answer would be, "Sure thing!" 

That's why sellers want the contingency period to be as short as possible.  In fact, they'd prefer no contingency period because it means that they get to keep your deposit if you back out of the deal.  Otherwise, you can cancel the deal during the contingency period without risking your deposit.  The shorter we make your contingency period, the less risk there is to the seller. 

During the contingency period, as the buyer, the ball is in our court and we have control over our risk.  Plus, I only work with people (like loan officers and home inspectors) who can reliably perform within short contingency periods because --- once my clients identify a property they want --- we need to move quickly in this Silicon Valley market.  We'll discuss as-is contingencies in another article because it's a different strategy.

3/  Reliability 

Some buyers pull out of a purchase contract during the contingency period and still others have to forfeit their deposit.  Sellers, particularly those who've heard of or experienced this dreaded "return to market," become very concerned with the probability of their contracts going through.  After all, the second bounce in interest (which corresponds with price) usually isn't as high as the first and the third one will almost definitely land with a resounding thud! 

Having a high credit score, an established job, strong lending pre-approval, and a well-written letter of introduction from your agent help paint you as the "best candidate" for buying the home.

4/  Lender Approval

While this is less common in more desirable or affluent parts of Silicon Valley, the sale of a home may be subject to the lien holder's approval.  This usually happens with short sales, where a lender allows the sale of a house instead of going into foreclosure.  (Whether or not the short sale is a good deal is the topic of another article: it's a very mixed bag.) 

Nonetheless, the lender sets their requirements and ultimately gets to decide if the offer is acceptable.  They are negotiable and vary based on the situation.

5/  Small Differences in Price

I've worked with clients to win deals by pricing over the competition by as little as $1,000.  This minimal difference, which in this case was 0.125% of the real estate's price, is sometimes enough to tip the scale in your favor. 

By adjusting your offer to provide what the seller really values at minimal cost to you, you can get your offer on a home accepted without overpaying.

(c) Steve Leung for the Silicon Valley Real Estate Blog at 1SiliconValley.com

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