Hidden Factors When Calculating a Home's Value

Statistical analysis isn't only important in calculating the value of real estate in Silicon Valley, it's integral to choosing a starting point, whether buying or selling. 

One of the metrics at our disposal which comes up frequently is the cost per square foot of a particular property.  The "per square foot" number divides the total value of the transaction by how many square feet of space within buildings was purchased or rented.  That phrase "within buildings" is important. 

This quick-and-dirty metric lets my clients compare the relative costs of properties of different sizes and shapes located in different cities around the Bay Area (or the rest of the world for that matter).  And it's useful --- to a point. 

But misinterpreting this number often causes buyers to overpay, whether it's because they offer more than a property is worth, they don't account for hidden factors, or they take for granted the seller's valuation based loosely on a per square foot calculations for the most recent, relevant comparable.  Here is what to look out for in your analysis.

Avoiding Errors When Using Cost Per Square Foot Analysis

When you go to the grocery store, you'll find an assortment of meats and produce all measured and sold by the pound.  It's useful because you can develop an intuitive understanding of how much more on-the-vine tomatoes are going to be than separated ones or how good the filet mignon looks next to the flank steak.

But even though they're both measured by the pound, comparing steak to tomatoes is really comparing apples to oranges, even though all four are foods.  There are several common ways that per square foot analysis can be accidentally misused, and these are the ways I advise my clients to steer around them.

1)  Extrapolating Home Values

Here's a real life example exaggerated for effect.  The least expensive single-family home sold recently in Sunnyvale came in at $835 per square foot.  The most expensive was 2,855 square feet.  So using this type of analysis would result in a valuation of $2,383,925.  What was the actual number?  $1,405,000.

The most common way this error results is applying the median per square foot number to the home you're looking at.  One reason why I talk about the Median Home in my market reports is so that my clients can compare the class of home they're looking at with what's in the middle of the range.

When using per square foot analysis, it's critically important to use the closest comparable --- not necessarily closest in terms of location (though it may very well be), but one that could easily and almost exactly substitute for the home in question.  This analysis leads to the second most common misuse.

2)  Treating Square Footage as an Accurate Number

Real estate pricing depends on how the land is used (.pdf) and Silicon Valley is no exception.  Real estate commands the largest figures when put to its "highest and best use."  In economic terms, you've eliminated any opportunity cost associated with the use of the land by maximizing its utility.

But not all the square footage in a home is useful and calculating that space isn't an exact science.  Some listings will provide a number from the county assessor and some sellers will dispute the assessor's estimate --- which may be based on a diagram and not an actual survey of the home.  Other listings might provide the seller's opinion on the home's size.

With this in mind, let's compare two fictitious homes at $750 per square foot, one at 1,500 square feet and another at 1,501.  Could a seller justifiably price the larger home $750 higher?  Not at this level of precision.

3)  Treating All Space Equally

Besides, real estate is valued on how you can use it.  Homes with odd angles or plus-shaped rooms mean that there's less space to put furniture or host house guests with.  Stairwells and lengthy corridors are usually included in the space estimate, but provide no real utility above and beyond connecting rooms with each other. 

Additionally, some homes just "feel" larger than others because the space is well-organized.  This means you can get the same amount of utility from less space, and many times, pay less in the process.  Understanding your must-haves in a home and a neighborhood will help ensure you get the best deal: by doing so, my clients understand what they're willing to pay for, and what they won't. 

4)  Not Accounting for Land

By definition, this metric doesn't take into account the amount of land included with the property.  You might assume that the per square foot figure is lower if land isn't included.  Then again, in the calculation we did above, the most expensive home had a number of $492.  The least expensive condo (without any land) had a number of $471.  The two numbers are pretty close: what does that mean?

First, the comparison crosses levels, which means that the comparison doesn't make sense.  But let's say hypothetically that both came out to be $492.  Does that imply that the two are equally good values or that --- assuming no other information is available on these properties --- they're in the same area?  Nope, but if you knew they were both comparables, you could get some hints about what hidden, or even intangible, factors to look for.

Factors in a Home's Value That May Not Be Obvious

If all real estate factors could be boiled down to a commodity spec sheet, buying homes from Costco would be today's reality.  As it is, there are several factors that go into how much a home is worth that may not be easy to fill out in a form.  Here are some examples.

1)  Daylight.  There's no substitute.  More precisely, it would be very expensive to create your own light as bright as natural sunlight. 

2)  Privacy.  Complete transparency in real estate is a good thing, but that doesn't mean you have to live in a glass house.  People often trade-off privacy to live in an urban environment.  In a more residential area, people might live on a main road and trade-off total cost.

3)  Noise.  Road noise and trains are rarely seen as selling points when it comes to listing a property.  But when they come with public transportation or a short walk to restaurants, shopping and other things to do, the positives often overcome the negatives.

4)  Equipment Condition and Age.  Roofs, furnaces, air conditioning systems, ovens, flooring, cabinets: the list goes on.  Homes naturally decay over time and deferred maintenance is a common reason why one home doesn't sell for as much as the one next door.

5)  Easements.  Sometimes other people or companies are allowed to use portions of your property --- the electric company might have a pole on your land or there might be a driveway to a home behind yours.  These easements are documented but may interfere with what your plans are for your property.  Because it affects your freedom to use the land, it also affects the value.

What to Do If Your Offer Isn't Accepted

It can happen to anyone, no matter what number you offer or what terms you're willing to agree to.  It even happens to folks here in Silicon Valley who make above-asking offers --- actually, it happens more than you'd expect for the most in-demand homes.  So, there's nothing more risky than falling in love with a home before escrow closes. 

It's okay to show how much you want that home in your reservation price, and even in your offer if you choose to, but once that offer is made there are so many factors beyond your control.  

While you're mentally moving your furniture into the home, the owners are evaluating what's best for them, and even after a good informational interview, you still might not be aware of all the factors that go into their decision to accept, counter, or reject.

"I'd rather look at the letters than the offer sheets right now," he said.  I do my fair share of number-crunching, but as a person who tries to pay attention to people's emotions, I understood why he'd feel that way.  Their family didn't really need the money --- there'd been so much appreciation in their Silicon Valley home that they were well past the number they'd hoped for.  And since this was "back in the day", all of their incoming offers were non-contingent. 

It wasn't a matter of real estate anymore.  Remember the college admissions process?  For this family, it wasn't only about SAT scores or GPAs: who their home should go to was about the story behind the paper.  So if you've given it your best effort, in terms of both your number and non-monetary factors owners consider, and your offer wasn't accepted, what are your options? 

Did You Receive a Counter-Offer?

"Why wouldn't we get a counter?" she asked a little incredulously.  She'd purchased a few homes around the country and this was the first time she'd anyone has talked about the possibility of not receiving a counter-offer.  After all, she was my client and I'd already run the comparables: the number was perfectly reasonable. 

Once the offer is presented, though, the response is isn't under your control, and there are reasons why you might not get a response.  Here are a few.

Lower Number Than Expected

Sometimes owners don't know that they've set the bar for their homes too high.  It happens a lot in for-sale-by-owner situations, but also happens when they either go against the advice of a real estate agent or choose an agent solely based on the promise of a certain target number.

After a while, the market will usually find a way to inform them, whether it's when traffic gets slower at open houses, offers don't come in, or they come in lower than expected.

"Not worth responding," some will think, especially with a truly lowball offer.  They might even choose not to respond to future offers from the same person.  That doesn't mean a lowballing is a bad thing, it's just that the probability of it being accepted is going to be appropriate to the situation of the owner.  Walking in the shoes of the seller helps my clients gauge what the response might be. 

A listing agent isn't required to present frivolous offers to their clients.  If they were, you could imagine a cartoonish scenario where someone who didn't like a listing agent could waste a lot of their time by sending offers of $5 and $10. 

The line for "frivolous" is a judgment call, however, and some agents will try and take the decision out of their clients' hands and say, "I'm not even going to present that offer to my client."  There are ways around this.  Better agents, though, will communicate the probable reaction and what they will recommend to their clients.

If you want this property, communicate your willingness to check-in again later and possibly submit another offer. 

Multiple Offers

A property may get multiple offers "simultaneously" (i.e. more than one non-expired offer), or, it's also possible to list a property and imply to real estate agents that there's going to be a blind auction.  This explicitly sets up a multiple offer scenario. 

It isn't an eBay-style ascending-value auction where you see the other bids and compete directly against them until time expires.  What happens is the listing agent will mention on the MLS that offers will be accepted on a certain date.  When I call for more information, she'll tell me that the home is priced below what they expect to receive or that they expect multiple offers.

In this blind auction, all the bids are sealed and are submitted at the same time, the date the listing agent specified.  If there are indeed multiple offers, you might not get a counter because they'll choose one finalist to complete the negotiations with, and relegate the others to rejection or backup position.  This is generally considered the cleanest way to handle a multiple offer situation.

Yes, it is possible that the listing agent might play ping-pong with multiple offers --- negotiating with everyone who made an offer --- but this is frowned upon, particularly if it violates the sealed-bid nature of real estate offers.

If you aren't one of the parties, or the party, in negotiations, communicate your willingness to act as a backup offer should the accepted offer fall through.

Implied Counter-Offer

This scenario would usually happen before my clients present an offer, but might happen when there are multiple offers.  "We're currently countering another party, but if you hit this number, we'll sign the paperwork today." 

I've heard this several times, and many times it's true that a strong offer can help my clients get the deal if they move quickly.  This period is an inflection point, though, and during this time, it's also possible that the listing agent is using any evidence of your interest to get leverage on the other buyer. 

Another form of implied counter-offer, which my clients are usually very happy to hear, happens when the two parties are close and the listing agent wants a "couple inches" on the number or terms in order to seal the deal. 

It might be a fractional percentage above the offer, a couple of days on the contingencies, or exclusion of certain fixtures.  A response of "write it up and we'll sign it" would indicate a verbal agreement.  This is non-binding but it signals to the seller that they should take action.

New Edition of Downloadable Book

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For many of you, it's been a long wait, but we're heading into a time of the year that traditionally favors buyers.  On average, it's like that every year around this time, but with higher interest rates on jumbo loans, owners with homes on the market in several areas are beginning to see the writing on the wall.

To help my clients in their preparation, I've updated my Silicon Valley Home Buyers Book to be a step-by-step guide with insider information on every part of the process.  It's been completely reorganized to walk through what I recommend, from start to finish.

Folks who've already signed up for the book will get an email in the morning with a download link, but if you don't receive it, please feel free to contact me directly.

How to Successfully Complete Your Home Purchase

Congratulations, you're in contract.  The sellers have accepted your offer.  You've gained a lot of insight into yourself, looked at homes one-by-one after a thorough MLS search, did background research on your favorites, made a few offers, and negotiated a deal that has protections built-in for you.

This was their first home in Silicon Valley, but on their last one, they had a close call.  One that almost cost them the keys to their house.  Everything was signed and they couldn't help it.  It was such a relief to know where they were going to be living from now on that they wanted their home to be ready from day one.

They were prepared too.  All the comparison shopping had been finished weeks ago and it just so happened there was a special this week.  Too perfect.  They seized their moment knowing it would take about three weeks for delivery.  Their all new furniture would be ready when their house closed escrow.

This story came up because I feel it's important to look out for my clients.  In this case, they didn't need the advice I was about to give --- they'd already knew through experience.  

My hope when I tell these stories is that you'll gain the benefit of others' experience without having to go through it personally.  So what happened and what can you do to successfully complete your home purchase?

Getting an Offer Accepted Begins the Next Phase

In general, buyers get their keys at the close of escrow.  (Sometimes the seller will negotiate a rent back period where they continue to occupy the home for a period of time.)  During the escrow period, a trusted third-party "holds the keys" to the home while both the buyer and seller fulfill their ends of the bargain.  Escrow closes when both sides agree that the other has fulfilled their responsibilities under the contract. 

Buyers have two basic responsibilities during the escrow period.  The first is to do the work and information gathering needed to lift their contingencies, and the second is to pay for the home.

Lifting Contingencies

In Silicon Valley, you have to explicitly lift your contingencies using a signed document.  After you've done so, you can't back out of the contract without losing your earnest money.

The selling agent isn't likely to let your buyer agent forget about lifting your contingencies and will want to know as soon as possible if there are any issues, at which point there may be some additional negotiation involved for issues to be corrected or for a credit to be applied to the cost of the home. 

Since it's not the high point of a seller's day to have to re-list the home --- a process that sometimes causes them to lose money --- many sellers will negotiate reasonably on issues found during the contingency period.  It's also why sellers value non-contingent offers, which are actually pretty common in Silicon Valley.  (See the article Tools for Protecting Yourself During a Home Purchase.)  Here are the most common steps in lifting your contingencies.

1)  Inspection Contingency

Most homes in Silicon Valley will come with an inspection report (from a licensed property inspector) in the disclosure packet.  (See the article Why the Perfect House Wasn't So Perfect.)  It's often reassuring to get your own inspection done to see how the reports compare and what varying opinions are on any issues that come up. 

For some properties, particularly older ones, you might choose to contract a structural engineer or get an additional pest inspection before committing to complete the home purchase.  This additional information will help you determine if (or confirm that) there are additional repairs needed and how much they will cost.  Credits, or the repairs themselves, may be negotiated before lifting the contingencies.

2)  Financing Contingency

A loan pre-approval letter from a lender is usually included in the offer packet for a Silicon Valley home.  (See the article Preparing Your Money for Buying a Home.)  This doesn't guarantee funding, but it does mean that a lender has looked at factors like the buyer's credit history.  They uses these factors to determine if they'd be willing provide a mortgage to the buyer under the right conditions.

The loan contingency allows you, as the buyer, a period of time to obtain a commitment from a lender to finance the purchase of your home.  You can shop around during this period.  While the rate, payment terms, and costs are obviously important, the lender needs to be able to fund the loan two business days before escrow closes.  Without this ability, the best rate in the world won't secure the keys to the house.

You'd lift the financing contingency when already have or you're sure you can secure a commitment from a lender to finance your home before (preferably two business days before) the escrow period ends.

3)  Appraisal Contingency

After you choose a loan product from a lender, they will send out an appraiser to determine the "actual" value of the home.  The appraisal contingency and the loan contingency are often tied together --- it's important to build in time for the appraiser to be scheduled and to finish his or her report.

If the appraiser's opinion is that the value of the home is in line with the loan amount, this contingency can be lifted.  If not, there is a good chance the loan won't go through with that appraisal.  Why appraisals fall short could be a topic all to itself, but an area without recent comparables or one that's unfamiliar to the appraiser sent to do the review could contribute to a surprisingly low value.  Additional information can be provided to the appraiser, which they may use to update their report.

Paying For Your Home 

It was a big house and the amount of furniture they bought matched its scale.  Being financially savvy people, they took advantage of the no-interest long-term financing offer the furniture store offered them for opening a line of credit with them.  They went home, looked over the receipt, and diagrammed where each piece of furniture would go.

The hit their credit score took was from the amount and type of financing.  They didn't remember whether it was just after they signed their paperwork or just before the appraiser was sent out --- they just remember the phone call.  They'd gone below the magic 720 number and the lender couldn't give them the loan product they'd applied for.  (See the article Empowering Yourself Through Your Credit Rating.)  This time was different, though, and they were going to wait until escrow closed before doing any major purchases.

The article Preparing Your Money for Buying a Home covers what to do with your down payment and closing costs.  The same two business day rule applies to when your loan should fund (i.e. when the lender wires the money into escrow). 

As an agent, I work with the loan broker to make sure that the funding is set and that the appraisal scheduling are all in order, but as a client, it's a good idea to keep tabs on how the loan and underwriting process is going so that you can handle any issues as they come up, without being surprised.

Considering One HOA Versus Another

There it was.  The orange house.  The bright orange house.  The newly-painted bright orange house.  The neighbors stood aghast as they watched each stroke cover more of the nondescript color, the one nobody could remember now.  That lost color may as well have been green because they couldn't imagine themselves living next to the Great Pumpkin, much less convincing someone else to pay for the privilege.

This story doesn't happen to come from Silicon Valley's real estate circle but it's an illustration of individual property rights.  Whose, though?  As you can see, the story is different if you're the painter or the onlooker --- and because Silicon Valley has such limited space geographically, what one person does with their property often affects many others positively or negatively.

When you purchase a home in a homeowners association (HOA), you get a set of benefits in exchange for your monthly HOA fee.  (See the article The Impact of Homeowners Associations on Purchasing Decisions.)  But you also explicitly agree to play by the set of rules established by the HOA, in the cryptically-named CC&Rs: it's covenants, conditions and restrictions.

For many people, judging an HOA by benefits versus the monthly dues is sufficient.  Others prefer to pay a lower HOA fee for fewer services.  It's a topic deep enough for there to be companies that specialize in evaluating homeowners associations, but with an hour or two of scanning and reading HOA documents, usually included a home's disclosure packet, you can evaluate how well an HOA will work for you.

What Are the HOAs Rules?

Most HOAs aren't like this one.  People in this community of eight condominiums would walk past the empty garden window and look into his kitchen through the blinds.  Human nature and curiosity being what it is, he understood the effects of having the sidewalk unit closest to the main entrance, but being the live dishwasher in his own version of the Truman Show wasn't his aspiration in life.  

The empty wine bottles were from expensive brands, even if he did get them at Costco, and he washed them thoroughly then trimmed the metal foil to look presentable.  Lined up one next to another, they were actually both a good visual barrier and were arranged somewhat artistically.

The knock on the door the next day, though, meant the others in the complex didn't share that sentiment.  The president of the HOA delivered the news of complaints, and the bottles were removed.  But several months later, the neighbor in the unit above did something similar but, because there weren't any complaints, it remains to this day --- or at least the last time I visited the property.

HOAs Are Small Governments

This isn't different from living in a non-HOA community.  Neighbors can and should talk with their neighbors when disagreements arise.  The difference is that an HOA has a governing body which (1) gives members a voice in matters that impact the overall community and, (2) can assess fines for violations of the CC&Rs and enforce their authority through a property lien.  Yes, not paying a fine is like not paying your mortgage.

And, just like any other community, the smaller the constituency, the more individual personalities and relationships come into play.   But the key to remember is that people from different families and different walks of life join together in an HOA to secure services that they wouldn't necessarily be able to afford on their own.  As part of the community, home owners agree to follow the CC&Rs and the areas its rules cover.  Here are some examples.

Consistency

What one person does with their property has a direct impact on the property value of the non-orange houses around them.  This consistency is designed to increase property values and usually includes any area outside the "four walls" of the home.

For example, outdoor fixtures like lamps, doors, window frames and garage doors are almost always standardized by the HOA.And most HOAs have common sense rules about outdoor decorations, plants, fences and patio furniture.

But most HOAs regularly consider exceptions to the CC&Rs based on need and common sense.  My clients who are concerned about CC&Rs can read some tips on going through disclosure packets and looking for specific rules that would keep them from using their homes the way they want to.  (See the article Why the Perfect House Wasn't So Perfect.)

Number of People Living in the Property

Rules limiting the number of people (and often, the number of adults) who can reside full-time in an HOA-affiliated home are fairly common.  While no one would ever say this directly, the net effect of these rules is to require a certain ballpark level of income in order to live in the association.  Higher incomes means higher property values.

Rentals

Some HOAs go a little further, particularly smaller ones.  They might have rules requiring owner-occupancy of the property, or for rental (and sometimes the renters) of that home to be approved by the HOA's governing body.  The rationale is that renters become neighbors too and some treat the neighborhood better than others.  (See the article Not Overpaying When Buying a Home.)

How people feel about this issue clearly depends on whether they want the freedom to renting out the property or the security of knowing who your neighbors are. 

Noise and Appliance Usage

It's not necessarily noise from neighbors or members of the association.  HOAs may also write into their by-laws that construction, repairs, and maintenance (especially using those omnipresent leaf blowers) will only be done during certain hours.

In addition, like some apartment complexes, a few HOAs will request that major appliances like dishwashers or washer-dryer units not be used during certain hours.  In one complex in Palo Alto, the main water line actually ran through one of the units so that anytime someone ran their washer, the rush of water would create a train-like roaring sound in one of the bedrooms.  The merits of this design not-withstanding, a rule was created so that the owner of that unit could sleep more soundly.

Saving for a Rainy Day

Where does that HOA fee go?  Sometimes you pay the same amount as your neighbor next door; other times, you pay based on the size of the unit you're occupying.  Obviously you have to pay for the services and amenities the HOA provides its members, but in most cases --- at least for well-run HOAs --- some of that money goes into a reserve fund.

The reserve fund is a pool of money saved by the HOA board for major repairs and unexpected events.  HOAs pay good money to consulting companies to tell them exactly how much money they'll need when and what proportion of their HOA dues to allocate to this savings.

There is a total target number based on the anticipated capital expenditures, with a risk factor and insurance coverage sometimes built-in, with a graduated increase in reserves each year until the target is met. 

But the management summary is that a "fully-funded" or "well-funded" reserve fund means less risk to you.  After all, if the roofs need repairs but there isn't enough money in the HOA reserve fund to pay for it, the repairs either go undone, or a special assessment is levied on each of the owners.  

The Impact of Homeowners Associations on Purchasing Decisions

When is a $900,000 home more expensive than a million dollar home?  When the $900,000 home comes with a $533 per month HOA fee.  

If you bought a one million dollar home in Silicon Valley using a 30-year fixed-rate principal and interest mortgage with a 7% interest rate and 20% down payment, your monthly payment would be $5,322.  The same terms on a $900,000 Silicon Valley home would be $4,790.  The difference per month? $532.

The HOA provides a number of conveniences and economies of scale to its members but it's also important to remember that payment itself is important.  (Like your mortgage, if you don't pay your homeowners association dues, you can lose your home, so the HOA payment can be thought of as just as important as your mortgage payment.  Though unlike mortgage interest, these HOA dues aren't tax deductible.)

This has two implications for my clients.  The first is clear: you can afford a numerically more expensive home if it has a lower HOA fee than one that does, or conversely a home is less affordable if it has a higher HOA fee; the trade-off is that you'll have to pay for the services the HOA would have provided.  The second is that the HOA has a real impact on the resale of your home (a good HOA is a plus) so it's important to evaluate the services an HOA provides relative to the HOA's monthly dues.

After all, HOA fees vary from association to association, from a nominal $25 to over $800 in some parts of the Bay Area, and the different homeowners associations provide different services (at different efficiency levels) to their members.  For my clients, the key questions are, where is your money going, do you value it enough to pay for it, and will it be worth it to the folks you hope to resell your home to?

Residents to HOA: Show Me the Money

This was one end of the Silicon Valley real estate spectrum.  It happened to be in Burlingame and it wasn't a surprise given that higher HOA dues are much more prevalent in and around the San Mateo area.  Still, $750 is a mortgage payment in some parts of the country and it's not like this complex had a doorman or other special amenities.

Sure, everyone paid for the electricity that flowed through the dimly lit hallways and the gas that kept them warm in the mild Northern California winters.  And looking at the MLS listing, it generously listed that landscaping and gardening were paid for even if caring for the relatively sparse flora (or was it fauna) was included in the fee as well.  The security cameras were located in all the right areas and presumably someone was watching them. 

But $750.  I can't prove that it's the primary cause, but one element that's common between a lot of complexes with high HOA fees (not counting mismanagement) is a shared boiler.  The HOA for this complex included not only water, but hot water, which is completely different matter because it's expensive to produce and easy to take for granted when it's "free".  How long could a shower last if the hot water never ran out?  The dishwasher?  A choice between cold and hot water when running the in-unit washer-dryer?

Examples of Services Provided by Homeowners Associations

Each HOA provides a set of services that were agreed upon by the members of its community, voted upon according to the association's governing rules.  Here are some examples of services an HOA may choose to extend to its membership.

1)  External Building Maintenance.  One of the main benefits to an HOA is joining together to gain economies of scale for services that are expensive and sometimes impractical to procure on your own.  Homeowners associations often include roof repairs and replacement; paint and siding upkeep; deck and patio maintenance; and, many times, all other external building work with their association fees.

2)  Landscaping and Gardening.  A key responsibility of the HOA is the maintaining and improving the appearance of its neighborhood and that extends not only to the buildings but to the plants and trees that help make up the community's character.  This might show up as anything from running an automatic sprinkler system, trimming the shrubs, and providing spring plantings, to lawn care and maintenance in communities with duplexes and single-family homes.

3)  Common Area Maintenance and Utilities.  The pool, spa, clubhouse and tennis court are clear examples of common areas whose maintenance is often funded by the homeowners association, but services like sweeping the sidewalks, changing the light bulbs, and ensuring the corridors are heated (or cooled) have more of an everyday impact.

4)  Garbage Collection and Recycling.  Obviously trash pickup is a critical component to any healthy community.  Some HOAs provide additional services to make recycling easier, reducing the amount of pre-sorting required or providing more bins in convenient locations.

5)  Insurance.  Homeowners associations most often take out various levels of insurance, primarily to cover the external structure that makes up the building and its foundation.  Some will go the extra mile and provide earthquake insurance.  But, even when the HOA provides insurance, a separate homeowners policy is required to cover your personal property and any gaps the general policy doesn't cover.  These gaps may include the fixtures within the unit you own, including cabinets, sinks, tubs, etc.

What People Think About Before Looking for a Home

Not prejudging.  Some things are pretty easy to quantify: number of bedrooms, number of bathrooms, price range, and cities.  Then when you plug those parameters into a home search, you can usually find a pretty long laundry list of homes that meet the criteria you put in.  What's difficult (actually, impossible) to tell the real estate search engine is why you chose those parameters. You have reasons that are important.  It might be that you need the extra bedroom as a home office, or that you'd prefer another master bedroom because you have a lot of house guests.  It might be that when you come home from work, you want to feel like you're in a completely different world, but actually have only a ten minute Silicon Valley commute.  It might be that your child has special needs and that school district provides an exceptional environment.  It might be that you need a prestigious address in order to maintain or establish your status in your profession.

Some reasons are easier for my clients to talk about than others.  (See the article Determining Your Must-Haves When Buying a Home.)  And that's the reason why I feel it's critically important to look at your home search from your perspective, without bias or judgment.  After all, ensuring your goals are met (and that delirious happiness that I'm always referring to happens) first requires a discovery phase of sorts to develop a true understanding of the issues at hand.

My clients often ask themselves a number of questions before they contact me and I'd like to share with you some of their thought process.

Is a Piece of Your Story Here?

No two family's searches are the same.  Every individual brings their own experiences, desires, motivations, biases, expressions, and aspirations to their Silicon Valley home search.  There are some recurring themes, though, and I've written articles to help my clients think through their situations.

On Being Ready to Own a Home

1)  "Do I want to stop renting?" Many of my clients own homes and are looking to upgrade.  Many rent.  There are emotional and financial reasons why people choose to buy a home, and most make that transition from renting.  Some don't like the thought of "paying someone else's mortgage".  Others want more control over their home, the terms by which they live there, and what changes they can make.  There is a premium for land ownership in Silicon Valley.  That premium comes with a number of benefits which you may or may not value at this stage in your life.  (See the article Reasons People Stop Renting and How to Get Started.)

2)  "What are things I should get settled before starting my home search?" The easy financing boom of the past few years resulted in people, particularly those who weren't careful with their finances or were overly-aggressive without a backup plan, getting in trouble on their mortgages.  (See the articles When Not to Buy a House and How to Lose Your House.)

3)  "Do I feel it's the right time to do this?" It's a big step with a lot of moving parts and life-changing ramifications.  It's reasonable to have some reservations --- for a number of reasons --- but many people who've overcome them never look back.  (See the article Emotions in Real Estate: From Fear to Elation.)

Money

1)  "Can I afford to buy a home in Silicon Valley?" Many of my clients have gone through the exercise of determining how much they can afford, financially and psychologically, and how much they're willing to spend, then comparing it to the inventory available in Silicon Valley.  (See the articles How Much House Can I Afford Financially? and The Thought Process Behind Making an Offer on a Home.)

2)  "When is a good time to buy a home in the Bay Area?" For some, the summer is the best time because it allows them to move without relocating their kids during the school year.  For others, it means trading off available choices for potential bargains on homes that have been on the market for a while.  (See the article The Yearly Cycles Behind the Silicon Valley Real Estate Market.)

3)  "What are the local markets doing in Silicon Valley?" I do research by analyzing raw data, hitting the road, talking with agents, and executing my own transactions.  And I have opinions which are based on that experience.  While I don't have a crystal ball, I do make my best effort to answer questions directly, openly, and tactfully --- using good sources and many times representing both sides of the argument.  Your opinion and the final decision, as always, is up to you. 

4)  "What money do I need where to buy a home?" Fortunately or unfortunately, the Silicon Valley housing market moves quickly and a strong offer often depends on being able to execute an offer, in an organized fashion, just as quickly.  Having the right amount of money in the right place for making an offer, and subsequently, a down payment, is the first step.  (See the article Preparing Money For Buying a Home.)

Deciding on a Home Search

1)  "Are schools important to me and my family?" Many people want the best school districts in Silicon Valley for their children.  (See the section Silicon Valley schools.)  Others believe that a good school system is the key to increasing property values.  (See the article Investing in the Right Bay Area School District.)  And some want the best school district for their price range.  (See the article Silicon Valley School System Bang-for-the-Buck.)

2)  "What do I truly want in my next home?" The truth.  If you allow yourself to say aloud , that's the first step in being able to get it.  The next step is understanding what you're willing to trade-off.  (See the article Determining Your Must Haves When Buying a Home.)  These trade-offs are critical to understand because you may otherwise spend a lot of time tilting windmills for a perfect home that may just be an illusion.  (See the article Why the Perfect Home Wasn't So Perfect.)

3)  "How to I upgrade from one home to another?" Moving up from one home to a larger home poses some logistical challenges, but they can be mitigated with some planning.  The key is to know what you're going to do in each of the multiple scenarios that can occur when going from one home to another.  (See the article Keeping Your Sanity While Moving Up to a Larger Home.  It also applies to people relocating.)

4)  "How do I go about starting my search for a home?" People who live in the Bay Area will obviously have an easier time getting started than people who don't.  And some families have to juggle schedules in order to make time for the entire family to look for a home.  But there are techniques you and I can use to make your home search easier.  (See the article Reducing Your Stress When Searching for a Home.)

Tools for Protecting Yourself During a Home Purchase

It's not the tone of their voices or any perceptible shifting in their seats.  My clients are pretty good at what they do and there's a certain confidence that comes from that.  But no matter how many times you've done it before, it's still a big step. 

There's the unknown: you may never meet the sellers to understand how they've always made sure to grease the garage door or kept the bathroom tiles consistently dry.  You might not even be from the area and have a clear picture of how different Palo Alto and East Palo Alto are, much less whether Cupertino, Saratoga or Portola Valley would be a better fit for your family.  

Plus, there are the large numbers involved.  Silicon Valley real estate has high prices compared to most places in the U.S.  It's the price homeowners pay for the combination of the opportunity, the weather, the culture, and being a road trip away from the Pacific, San Francisco, Napa, Lake Tahoe, Yosemite, and even Los Angeles.

Just add public speaking, heights and spiders to the unknown and large numbers, and you've probably rounded out the top five list of people's biggest fears.  Some are so afraid that it keeps them from making decisions they know will make them happy.  (See the article Emotions in Real Estate: From Fear to Elation.)

I believe an important part of my job is empowering people to make good decisions --- ones that help them achieve their goals and aspirations --- in the face of stressful situations.  And, here, preparation is key.  My clients can help by ensuring their finances are prepared.  (See the article Preparing Money for Buying a Home.)

But another way of becoming empowered to make choices that help you achieve your goals is to understand some of the tools which we can use to help protect you in the process and what value you can expect in return if you decide to waive their use.

Contingencies: A Buyer's Money-Back Guarantee?  Not Exactly.

Let's say you've found a home that you really like and we've worked together to figure out how much you'd pay for it.  (See the article The Thought Process Behind Making an Offer on a Home.)  Then we walk in the seller's shoes to understand how much they may want.

Now you're considering non-monetary ways of strengthening an offer.  (See the second-half of the article Not Overpaying When Buying a Home.) 

When you make an offer on a home, you have the right to ask for certain conditions to be met after the offer is accepted and before you agree to complete the purchase.  These conditions are known as contingencies, and the period of time in which those conditions must be met is known as a contingency period.

Buyers have to explicitly lift contingencies in order for the sale to proceed, so if the seller accepts a contingent offer, they're also agreeing to allow the buyers to back out of a purchase --- without losing their earnest money --- during the contingency period.

Sellers obviously dislike contingencies because they have to take their home off the market once in contract, then risk having to re-list their homes if the buyers don't lift any one of the contingencies in the contract.  The shorter the contingency periods, the stronger the offer.

Inspection Contingency

The inspection contingency is the most common type of contingency period and allows you to investigate the desirability and condition of the property to your satisfaction.  You might, for example, get a professional inspection, hire a structural engineer, obtain estimates on any repairs or upgrades you'd like to do during this period, or thoroughly read the disclosure packet.  (See the article Why the Perfect House Wasn't So Perfect.)

This is effectively your due diligence period, and it's one way of protecting yourself when purchasing a home.  Buyers get to look at the property without rose-colored glasses and then negotiate compensation or repairs from the seller for any items that weren't accounted for in the offer.  This is the way I recommend my clients look at inspection contingency periods.  

In extreme cases, this contingency provides a grace period when buyers can either confirm that they want to complete the purchase or back out without losing their earnest money (deposit).  There is a cost for doing this, however, as the buyer's reputation may be damaged if the rationale for backing out of the purchase is weak and there was no attempt to negotiate a solution.

Offers with no inspection contingency, or no contingencies at all --- called non-contingent offers --- are very common in Silicon Valley.  Most sellers will pay for a professional property inspection to be included in their disclosure packets, and better agents will provide a complete set of disclosures online for easy access.  This allows buyers to do their due diligence before submitting an offer.  In fact, many inspectors will allow prospective buyers to call them with questions before making an offer.

Given two offers with the same price, the offer without contingencies is always better.  And there are cases where a seller would rather take a non-contingent offer than an offer with a higher price and one or more contingency clauses.  That's because all contingencies, no matter how benign sounding, have equal power (since all have to be lifted before the sale can proceed).  The inspection contingency, however, is the one most frequently requested. 

Financing Contingency

A loan contingency period allows you time to obtain a commitment from a lender to finance your home purchase.  In Silicon Valley, it's not unheard of to have "all-cash" offers where the buyer funds the entire home purchase, making this contingency irrelevant. 

More frequently, buyers need to obtain a mortgage.  The strongest offers will include a pre-approval letter.  (See the article Preparing Money for Buying a Home.)  This pre-approval letter isn't necessarily a commitment since that can only be obtained after the mortgage lender's underwriting department has given their consent.  But it does indicate that the chances of getting a mortgage are very good.

Not including a financing contingency is a show of financial strength.  Even though money from you and money from a lender all has the same value, sellers obviously prefer financially strong buyers because it reduces the risk of anything going wrong while their home is in contract. 

You can signal your strength through your down payment, your pre-approval letter, and removing the financing contingency.  Removing the financing contingency won't significantly strengthen your offer if you've included other contingencies, but signaling your strength as a strong buyer can only move your offer in the right direction.

Appraisal Contingency

This contingency goes hand-in-hand with the financing contingency.  In order for a mortgage to be approved, a lender's underwriting division has to agree to carry the risk of the loan.  One key component in this assessment is how much the property is worth.  If the property doesn't appraise for at least the amount of the loan, the lender may decide that the loan is not worth making because they are giving out more money than they have collateral to recover.

The appraisal contingency requires that the property appraise for at least the purchase price.  If it doesn't, the buyer can back out without losing the earnest money deposit.  The appraisal contingency and the loan contingency are often tied together --- it's important to build in time for the appraiser to be scheduled and to finish his or her report.

Sale Contingency

People relocating or moving up to a larger home often want a sale contingency which makes the purchase of their new home contingent on the sale of their previous home.  (See the second-half of the article Keeping Your Sanity While Moving Up to a Larger Home.)  This is possibly the riskiest contingency for a seller to agree to and many sellers would rather wait for cleaner offers than agree to one which would tie their sale to the sale of your home.

Where the Market Winds Are Blowing: Comparative Market Analysis (CMA)

I mentioned before that real estate is highly symmetric and that understanding how sellers make their decisions will help buyers make better offers.  (See the article How Buyers Can Walk in the Shoes of Sellers and Listing Agents.)

Buyers who are serious about making an offer can learn a lot from a comparative market analysis of properties that have recently sold in the area, as well as any properties that have recently been withdrawn from the market.  

My clients gain a lot of insight when we compare "the most relevant" comparables chosen by the seller with the ones we choose as the most relevant.  I recently listened patiently to an agent justify a higher price using a home with a larger lot in a more prestigious neighborhood as their closest comparable, when an almost identical property with similar upgrades, just down the sidewalk, commanded a price much lower than their asking price.  We negotiated for a little while, and I understood his position --- his clients had a number in mind --- but I was happy my clients could make a good decision using the "right" facts.

Buyer Agents vs. Double Agents

And the "right" facts in the "right" hands are important in real estate.  We're fortunate to be in a time when we've mostly moved beyond sub-agency, where an agent who actually represents and has fiduciary responsibility to the seller finds a buyer and helps facilitate that sale.  The buyer might tell the sub-agent the most they're willing to pay for the home thinking that the agent represents them.  In reality, that agent actually works for the seller's best interest and tells them that information, which, not surprisingly, leads to the buyer paying more than they have to.

Dual agency is more subtle and it can happen when you walk into an open house and you're approached by the friendly and knowledgeable real estate agent sitting at the dining room table.  (See the article Is Your Real Estate Agent a Double Agent?)  You're very interested in the house and he says that he can represent you in the transaction.  If you agree, you could be giving up your right to a buyer agent who solely represents your interests.  Would you go to court using your opponent's lawyer?

How Buyers Can Walk in the Shoes of Sellers and Listing Agents

It was Starbucks today.  Sometimes it's a living room.  Other times it's their favorite restaurant for lunch.  Real estate, especially with prices like we have here in Silicon Valley, involves some critical decisions that are sometimes stressful to think about, so I try to help my clients feel more at ease any way I can.

That means sitting outside with a cup of java, for example, isn't all that unusual.  There's something about being across a desk or meeting in a conference room under florescent lighting that makes people more tense than less. 

Today was an especially important day.  We were submitting her offer tomorrow.  We anticipated multiple offers but didn't know how many there'd be.  This home was in an extremely popular downtown area and the last offer we'd submitted here wasn't the one out of six. 

Obviously, she was a little disappointed, but we talked about how much she was willing to pay, and the possibility that someone else would just be willing to pay more for that piece of Silicon Valley.  You can't predict or control what other people are going to do, but she was satisfied that she gave it her best effort based on our preparations and analysis.

Since we wouldn't know how many offers there'd be until tomorrow, I prepared two different offers for her to sign.  We'd submit the one with a higher price if there were three or more other offers.  She knew the answer to, "How much would I pay?" --- we'd done the research, analyzed the comparables, and decided what was really important to her ---  but the answer to "How much should I pay?" could only be found by walking in the shoes of the seller and their listing agent.

Getting Information From the Outside, Even If It's Imperfect

It's a question almost as common as saying hello and many times it's just as informative.  The answer may be simple, but you might hear different takes on the same situation.  One time, I figured out the answer was, "The seller's business hasn't been doing that well since his biggest customer standardized on another vendor, so instead of taking a second mortgage, he's going to sell his home and buy a smaller one" --- when the answer I got was, "The family is upgrading to a home in a different neighborhood."  

A listing agent's responsibility is to the seller and no matter how straight-forward that agent is, volunteering details that hurt their client (unless its disclosure is required by law) is not on their priority list.  My clients understand how that works, so I think of the question, "Why is the seller selling?" as an icebreaker.  But if the listing agent is signaling the terms they want by giving us more detail than they "have to," I recommend my clients see if this answer is consistent with their other answers.

Some Simple Questions That Get Straight-Forward Answers

1)  "What is the seller looking for?"  Simple and to the point.  I know I'm working with an agent who's done their homework when they can tell me what their seller values and how their seller prioritizes price, contingencies, closing, and other options like rent-backs.  With this information, my clients can more easily see whether their willingness and abilities match the seller's wants.

2)  "Is there anything I should know when talking to my client about your listing?"  Most agents are very forthcoming with important facts like whether they're related to the sellers or if there is something abnormal about the property, like an easement or damage.  Sometimes the agent will say to read the disclosure packet at this point.  Reasons for this vary.  (See the article Why the Perfect House Wasn't So Perfect.)

3)  "As the listing agent, if you could change one thing about the property, what would it be?"  Many agents take a moment to let me into their thought process.  Some mentioned they wished the seller would have staged the home, others have talked about how the skylight reflects off the mirror in the hallway blinding people at open houses.  Some say with confidence, "Absolutely nothing."  The irony is that --- most buyers being risk averse --- it's easier to assign a higher price to a home whose flaws (and nitpicks) are known than to one which has question marks.  

4)  "Are you representing any offers yourself?"  Surprise and righteous indignation to a quietly formed, "yes".  Answers range the gamut, but if the listing agent or their company is also representing offers, my clients may need to compete with an offer price that's artificially higher because of a dual agency discount.

Walking in the Seller's Shoes

Some information, though, doesn't depend on points-of-view or whose side is being represented.  There is an art and a science when it comes to determining offer prices, and by walking in the seller's shoes --- and combining that information with our analysis of how this Silicon Valley home meets their needs and what they're willing to pay --- my clients gain a better understanding of what to offer and how the offer will be received.

Factors Both the Buyer and Seller Consider

1)  How Much the Seller Paid.  When a seller wants to turn over real estate not long after they purchased it, the key factor in their pricing decision is how much they paid, what their frictional transaction costs are going to be, and if they can recoup any of their taxes and mortgage costs.  That doesn't mean my clients should consider the sum of those factors to be the price.  After all, the seller could have overpaid.  It does mean that the seller would be more willing to part with the property if those factors are considered.

2)  Comparables.  It's not a surprise that real estate is highly symmetric.  Sellers who understand how buyers operate will sell their homes faster and for more money.  Likewise, I do a comparative market analysis (CMA) on properties where my clients are considering an offer.  My clients get a good idea of where the sellers are coming from (and how realistic their pricing is) by comparing the Silicon Valley real estate we believe to be most relevant to the examples the listing agent believes are the most relevant.  Being on the same page is a good sign.

3)  Driving the Neighborhood.  Take two identical homes.  Put one across the street from low-rent apartments and the other in the middle of similarly-priced houses.  It's not hard to see that external factors have an enormous influence on housing prices.  When using comparables, it's easy to just look at square footage and miss comparing neighborhoods.  And many sellers are so used to the "quirks" in the area, they don't even notice them and expect their home to be priced like more attractive ones.  I drive the neighborhood with my clients, many times to check comparables, so we have a context of what the "right" price is.  (See the article Not Overpaying When Buying a Home.)

4)  Asking Price.  The asking price is a signal, not a starting point --- it's an opinion that the seller provides as to how my clients should think about making an offer.  In parts of Silicon Valley, it's a tool that, when effectively manipulated, produces multiple offers above the asking price itself.  It can be a smokescreen that gets people to compare properties that really aren't on the same level.  (See the articles The Price of the House Across the Street and Its Long Shadow and How Identical Properties Are Apples and Oranges, or Just Apples.)

My clients can act with confidence and without regrets because we know their reservation price --- how much they're willing to pay --- then adjust their offer terms based on the analysis we've done and situation at hand.  "How much should I pay?"  That's why we had two offer packets. 

Making an Offer on a Home: Behind the Scenes

"I believe we'll want to work with your clients," she said as I stood up from the conference table and extended her a firm handshake.  Those were the code words I was looking for and I knew my Silicon Valley client would be a very happy woman in a few hours, especially since she paid less than her reservation price!

There were two other offer packets in her hand, one had been faxed in, its sheets arranged haphazardly in a manila envelope.  The other was presented earlier in the day, stapled into a standard company folder by that buyers agent.  The listing agent put the other offers down on the table, flipped through my binder again, and smiled.  "I'll touch base with you this evening."

I want to give my clients every possible advantage and I waited until the last possible moment to present the offer.  Waiting is a common, but not always widely-used tactic, on the day when offers are being presented.  It's especially useful if the listing agent has you on their radar but doesn't proactively call to tell you how many offers they have.

It wasn't the waiting that was our advantage, though.  As I sat in this Silicon Valley brokerage's reception area, I thought about the listing agent's offer to let me fax our packet in.  Sure it would have been faster but I wouldn't be able to look her in the eye and explain our case when she first read the offer.  I double-checked the two offer binders in my case while my mind quickly flashed back from the ad slogan about never getting a second chance to make a first impression.  Smiled a little, wondering where that came from.

My clients and I had already gone over what our plan was but I had the second binder just in case.  We knew they had priced this Silicon Valley home "well" because its asking price was slightly below the relevant comparable sales (of similar quality real estate) within a half-mile radius.  We had to be prepared to compete with multiple offers: the question was, "How many?"

I pulled out the binder we were going to use.  If my client's offer were presented this morning, we may not have known about the faxed offer.  If my client's offer were presented an hour ago, we may not have known for sure about the second one.  The reason why I wait isn't to surprise the other party, it's to get as much information as possible for my client to make better decisions.

So how did we choose how much to offer in each binder?  And why was the thought process different from how we figured out the maximum she was willing to pay?  My clients and I walk in the shoes of the seller and their listing agent.