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.

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

Recommended Reading:

• The Thought Process Behind Making an Offer on a Home
• Making an Offer on a Home: Behind the Scenes
• Emotions in Real Estate: From Fear to Elation
• Silicon Valley Housing Market Information
• Download the Silicon Valley Home Buyers Book
  

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.  (See The Silicon Valley Home Buyers Book.)  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. 

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

Recommended Reading:

• Silicon Valley Home Prices and Housing Market Information
• Making an Offer on a Home: Behind the Scenes
• The Thought Process Behind Making an Offer on a Home
• Information on Silicon Valley Schools

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.

It was coming towards the day when offers — we anticipated several — would be presented to the seller.  We'd already walked the home both during the work hours and at night, on a weekday and on a weekend, to see what the neighbors were like and experience what the character of this house was during different times. 

But that sentence was taken out of context.   During our search, we'd seen numerous homes throughout Silicon Valley's Peninsula and South Bay. 

One had a loft-style upstairs work area, where he began to rattle off everything from how he'd arrange his bookshelves to where his PC would go.  Another had a combined living and dining area, which he paced back-and-forth for about twenty minutes mentally replacing the staged furniture with his.

He liked this home enough to come back several few times, but he never talked about the inside, only the neighborhood (which we both knew he coveted).  And after a few questions, he realized the truth: he really didn't like the home itself all that much. 

If that's the case, should he make the offer to win, given multiple offers on this Silicon Valley home?  The real questions are: How much do you really want it and how much are you willing to pay for it — especially when buying a home is inherently emotional?

Determining Revealed Preference and Reservation Price

Fancy economics terms for straightforward concepts, but they're also the keys to deciding whether to make an offer on a Silicon Valley house and how much you should pay for it.

When you go to Target, or Costco, or your favorite store to buy laundry detergent, you show your revealed preference every time.  Let's say you like Tide and always buy it for a conveniently round $10 per bottle even though the same-sized bottle of Wisk is the same price.  You have a revealed preference for Tide because it gives you greater "happiness" (economists call this "utility") at the same price.

Sunday comes, and with it, the coupon section of your favorite Silicon Valley paper, complete with a $1.00 off Wisk.  Meh.  You put the coupon away revealing a preference for Tide that can't be overcome by 10% off.  It's not looking good for the manufacturers of Wisk.

But laundry days have come and gone and that empty bottle of Tide isn't cleaning your clothes.  So you head over to the store only to discover that Tide is now 10% more at $11!  You close your eyes for a second hoping to divine the Wisk coupon into your hands from the kitchen table, but bite the bullet and reluctantly carry a $10 bottle of Wisk to the checkout line.  You've shown your reservation price for Tide and Wisk to be no more than $10.

What Your Reservation Price Tells You About Your Home Search

A few weeks before, we ran across an interesting townhome complex that had a slightly lower price than many of the others in its class.  It happened to be unseasonably warm that day when we pulled into one of the carport slots reserved for visitors.  Walking towards the townhome, with the sun beating down, we realized what the difference was: no garages.

This home met all his criteria, but that one point was a dealbreaker for him.  He elegantly quantified it by saying, "If they knocked $100,000 off the list price, I'd probably buy it."  His reservation price for this townhome was 12% lower than the asking price.

Not all cases are as extreme as dealbreakers.  Here are some tips I recommend to my clients for determining and using their reservation price:

1)  Separate the question, "How much SHOULD I pay?" from "How much WOULD I pay?"  The latter question quantifies your gut feelings and lets you compare how much you like one property compared to another (using revealed preference below).  This leads to answering the question, "Should I make an offer?"  The former is a technical question which leads to answering the question, "How much should I offer?"  (A very different question from "How much should I pay?")

2)  "You couldn't pay me to," is the sign of a dealbreaker.  Your Silicon Valley property search will be more expedient if it eliminates properties with features that lead to statements like, "They can't pay me enough…" or "I wouldn't buy it if they…" 

3)  Telling the owner, the selling agent, or an agent at an open house your reservation price is like showing another player your cards.  You can do it, but you know what the results are going to be.  When I'm representing you as a buyer, my responsibility is to you, not the other card players.

4)  A lot of buying Silicon Valley real estate is about going through the process of self-discovery.  Your reservation price might change because you get more information, you gain experience through looking at properties, you decide you want particular things more (or less), or you discover something you didn't know about yourself!

Deciding Whether to Make an Offer Using Revealed Preference

They bubbled up to the top of the list.  We stack-ranked his favorite homes, even the ones that had above-market asking prices and the ones that were spirited away by eager buyers.  The first pass didn't include the price, just the homes themselves.

He made that realization while he was walking that path from the patio to the kitchen he was eyeing.  It wasn't this home that was his favorite thus far.  His eyes lit up when he said, "You know, I actually like the one with the loft and the other with the big living room more, even if I had to pay more for them."  That sentence alone gave us clear directions to find the right set of homes at the right price for him. 

Revealed preference cues usually come up frequently during normal conversation, so I try to highlight them to my clients when they come up, not only to confirm that I'm listening and noting their requirements, but also to let them know what they're signaling.  A lot of times people learn something about themselves during this process.

Here are some ways revealed preference affects your decision making process:

1)  Revealed preference can change how you think about your reservation price.  I brought up an example previously where my clients decided they'd rather have a hot tub than a larger yard.  Not only that, they also decided that they didn't value a larger lot over a smaller lot if both had hot tubs.  They were able to save some money this way.

2)  One way to test how much you really like (i.e. value) a home is to hypothetically change its price and see what your new revealed preference is.  My client in this story made his discovery after thinking about whether he'd offer — hypothetically — $100,000 more for the home with the large living room than the one we were sitting in.

3)  Revealed preference ensures that you're consistent in your decision-making process because it turns your gut feel about a home into something you can compare with your gut feel about other Silicon Valley homes.  This refinement helps whittle down the list of homes you need to look at and gives you a clearer sense of "the right" home when it comes up.

Reservation price and revealed preference really are fancy words for concepts you and I use everyday. 

Next in the series: using these concepts to price an offer…

Previously: Reducing Your Stress When Searching for a Home 

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

Recommended Reading:

• Not Overpaying When Buying a Home
• Investing in the Right Bay Area School District
  
• Keeping Your Sanity While Moving Up to a Larger Home
• The Price of the House Across the Street and Its Long Shadow
• Determining Your Must-Haves When Buying a Home

The couple next door stepped outside as I was opening the lockbox.  They moved stride-in-stride together and you could sense their affection for each other.  Their son would have a sister in a few months, and as we said our goodbyes, I could see my clients glance at each other knowingly.  Would their path follow the one of the couple we met?  Only time would tell.  The first thing to do was to step through the door.

Sometimes the feeling is unmistakable.  Cliches abound: real estate is about "location, location, location" and sometimes you find the right place at the right time.  It feels like that proverbial ray of light peeking through the cloud cover.  You just know.  

But despite how small of a world it’s become when it comes to communicating with other people — with email, IM, and texting joining their more staid counterparts in the telephone, fax machine, and (gasp!) the written letter — the world is a very large place when you’re someplace else from where you want to be.

These are the personal and financial reasons why location, location, location is so important when buying Silicon Valley real estate.  I’d like to share with you a number things my clients and I have talked about.  The best location in Silicon Valley is just as unique as the individuals who live here.

What Does Location Buy You?

The infinite expanse.  The very dry infinite expanse, plus underbrush thrown in.  It can be yours, all 100 acres of it for the paltry sum of $22,105 on eBay.  I will state upfront that the head of a pin would be generous land for my knowledge of that area of New Mexico, so there is a non-zero probability that this could be a great deal.  After all, real estate bargains often result from having more knowledge and skill in implementing the "highest and best use" application for that real estate — one that others can’t do as quickly, easily, or efficiently.

From an uninformed perspective, the logical questions come to mind.  What would you do with it?  How do you get there?  Who’d want to be there and would you have to compensate people (or compensate people more) to do that?  How does the local government feel towards land improvement?  

Obviously, buying real estate in Silicon Valley has different dynamics than buying large parcels of residentially-zoned, but ostensibly empty, land in rural New Mexico.  But when you look at a purchasing decision from an outsider’s perspective, you can better challenge your own assumptions about what you’re looking for in a real estate location. 

I want to ensure that, when my clients put up all that money to buy a house, they get what they really need and want.  I also want to ensure that my clients selling homes understand what buyers say they want and why they sometimes change their minds.  Location can buy you any of these things; the question is, what’s the motivation behind it?  Here are some of the most important ones my clients have shared with me.

Schools

Far and away.  And from people who don’t have kids.  This is the number one criteria I hear when it comes time to search for a home in Silicon Valley.  A good school system has halo effects on the homes in that area which may outweigh the actual schools themselves when home buyers make their decisions.

1)  Land Value.  Areas with good school districts hold their values better in a downturn and increase sooner during an upturn.  Buyers considering the investment value of their homes use schools as the fastest and easiest criteria to narrow their search.  Some communities like Cupertino that have available land for development "highly encourage" developers to contribute back to the school system for the additional children those properties will bring.  This creates a virtuous cycle where schools bring land value, which brings better schools and around again.

2)  Prestige.  Having a great school system or California Distinguished Schools is a source of pride for the entire community and word gets out quickly.  In my article Determining Your Must-Haves When Buying a Home, I mention prestige as a home search parameter that people don’t like to talk about.  I often remind my clients that they need to be honest and non-judgmental about their needs and wants.  Schools play a significant role in civic pride.

3)  Good Schools.  Why is this last in the list about schools and why am I pulling out the back of an envelope?  The difference in the median single-family home in Sunnyvale (some great, but generally okay schools) and Cupertino (all elite schools) was $325,000 in April 2007 — let’s call it $300,000.  A private school like Challenger (this assumes perfect substitution; I’m not making a value judgment for your family) is about $10,000 per year after discounts.  If you have two children who go through K-8, that’s $180,000, a $120,000 nominal savings excluding interest differences.  That’s why I sometimes suggest that a buying in "too good" of a school district may be a trap for some families.

Convenience

A very personal question.  "Where have you thought about living?" sounds like a basic question, and when you go to a web site to look at properties, it is.  Pick a search radius around a certain place on a map and go.  It’s essential to a good home search so I include a map-based property finder on my blog.

While many people are willing to trade distance for money, my clients tell me (implicitly) that convenience is a matter of priorities.  At one extreme, I knew a gentleman who commuted in from Lake Tahoe and stayed at a local extended stay hotel in the Bay Area on weekdays. 

Doing a radius search on a web site for properties is helpful to see what’s available, though it doesn’t go into the depth needed to understand what your needs are, nor does it have the expertise to let you know all the areas where your needs could be better met, sometimes at less cost or distance.

So the question about where you’ve thought about living really becomes, "What matters most to you?"

1)  Commute.  A while ago, I mentioned someone I knew who liked a long commute so that he could decompress before coming home.  For others, commuting takes away time from the things they’d rather be doing.  This opportunity cost can also be measured in dollars which I’ve illustrated in the chart pulled from the original article.

Commute time doesn’t necessarily mean the beeline distance from work either.  Some people imagine being able to get onto the highway in only one or two traffic lights with a smile on their faces.  Others like to know that the school they can drop little Timmy off to is on the way to work.

2)  Activities.  Splash!  He was determined.  The wind was low today and it was difficult to keep upright.  But there was definitely incentive.  Even though the sun gleamed overhead, the water was a crisp penalty for failing to keep the board level.  Every weekend, he would carry his sailboard from his patio into the water in his backyard and give it another go.  He doubted he’d have the same beginner’s enthusiasm for being dunked in cold water after strapping it to the top of his car.  Still, that’s why he moved there.

3)  Making the Routine Easier.  She liked the fresh vegetables and low prices there.  It was like a farmers market everyday, open in the evenings.  So hers was the perfect place.  What she liked was how happy it made her to be able to drop by there anytime her epicurean impulses brought her in a new direction — or at least beyond what she had in her refrigerator.  

Good Community 

How do you define what a great place to live is?  I walked up and down the streets of this neighborhood carefully observing how they reacted to it.  It’s those details that are important.  After all, there’s a double-edged sword here early on in an agent-client relationship: most clients recognize the effort I put into a property tour, which I appreciate, but sometimes they’ll pad what they think of an area because they don’t want to say "bad things" about an effort.   Searching for a great home is about refinement: the fastest way for me to optimize our search for what you’re looking for is to be honest, with both me and yourself. 

1)  Personality Fit.  It was a nice place.  It just wasn’t for them.  With all the things going on in their lives, they needed a place that was a little quieter and a little more serene.  It’s the difference between Santana Row and Campbell, between downtown San Mateo or Mountain View and Foster City.  After a long day at work, what do you want to come home to, where do you see your family living, and where do you want to start your weekends from?  Some people need activity, others need serenity; you can find both in Silicon Valley.

2)  Safety.  The trips.  It wasn’t the jet-set lifestyle but he was always flying back and forth between Silicon Valley and Asia.  Sometimes Korea, sometimes Taiwan, sometimes China.  It’s the life when you’re head up marketing for silicon.  He thinks about what his wife and baby are doing when he’s on the plane.  She’s extremely capable but he wants to make sure that she’s never in a position where she has to be a hero.  

3)  Government Regulations, Planning and Zoning.  No one (who’s not a land developer) ever asks for this upfront, but the benefit to land and home prices is extensive.  Given land prices here in the Bay Area, if governments relaxed their height regulations, developers would quickly build structures that maximize their use of airspace.  City governments also require details like a certain number of parking spaces per housing structure so that other land owners aren’t affected by the additional street parking that would be caused.  Every home has an impact on the homes next to it and a well-planned city holds its value, often resulting in a neighborhood that "feels" better than others.

A simple way of understanding your priorities is to ask yourself, "Would I pay more for it if it had…?" and see what you say.  Sometimes the answers are surprising.  That’s why I ask so many questions.

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

Recommended Reading:

• How a Win-Win Saved My Client $25,000
• Determining Your Must-Haves When Buying a Home
• Why the Perfect House Wasn’t So Perfect
• Silicon Valley School System Bang-for-the-Buck

"I hate paying someone else’s mortgage," he says revealing the tip of the iceberg. The chord I struck continues through the screen door and the oven, both of which he’d gladly fix himself if this were his castle. But what sticks in his craw the most is that he doesn’t feel like he’s given his family the ability to set roots between the uncertainty of rents or whether the landlord will move back into the house.

He doesn’t think he can afford a house of the size he wants in the Bay Area. Exotic loans are out of the question: while the law may not hold me responsible, my conscience does. Plus, I believe he’s too savvy to be led into one by an unscrupulous mortgage officer.

And we both know that Silicon Valley real estate is expensive. He did the reverse move from a place where a lot of folks go to lower their cost of living, and since the market there isn’t strong, he’s biding his time on his previous house. He’s gutting out the pain so that he’ll be able to make good long-term personal and financial decisions.

That’s why I’m on a mission. It involves one extra question at an open house, that one extra phone call, another drive into the neighborhood to uncover the right opportunity. The cumulation of single drops of water that form the falls — perhaps not at Niagra — but somewhere he can call home.

He needs to stop renting — not like people need food, or clothing, or other people. He needs to stop renting because he believes it’s integral to helping his family lead better lives. People have different reasons; the question becomes how to make it happen.

The Powder Keg

Jet black and brand new. You could see this car from all the way on the other end of the garage. It was never well-lighted in this Silicon Valley complex but you could still see the Cadillac’s moonlit reflection, like a soft white halo. There was talk about added security, getting the lock on the gate fixed, getting those broken fluorescents fixed, maybe even putting in a camera system. But talk was talk and the management company of this apartment complex knew how to walk the line between meaningless gestures and expensive corrective measures.

That is, until the morning. The neighbors only found out when she knocked on their doors with a petition in hand and a copy of the police report. Her pride and joy had been stolen that very night. The petition? It was what had been asked for all along, and it came with a 10% rent increase plus an 50% increase in parking fees.

My clients tell me stories like this all the time and they give me many good reasons why they’d rather buy a house than continue to rent.

What Not Renting Buys You

1) Financial Control

They hated the anticipation. One year and the increase, not to mention being at their mercy on a month-to-month basis. How much was it going to be? It’s rare the person who negotiates the rent down in Silicon Valley and they weren’t getting anywhere since vacancies were filling up. Management companies know that moving is an enormous hassle and given the choice, people would usually rather eat a rent increase than uproot themselves.

Their payments were higher now after they’d bought their home, but they knew what the payments were going to be for the next 30 years. It’s true, they were part of an HOA and those rates can go up. But I mentioned my HOA, which, because it was well-managed and properly-funded, actually had a rate decrease one year. That isn’t common so planning for increases is prudent. But if they do increase, it’s a much smaller hit than a rent increase usually is.

2) Ability to Make Improvements

The porcelain this sink was made of had seen better days, to the point where even most modest amounts of leftover food created something far short of modern art in its scratches. Maybe the wallpaper was tolerable, the refrigerator was inefficient but usable, and there was enough but not a lot of hot water — it was death by a thousand tolerable things, all of which could have been solved with not more than ten thousand dollars, and gilded with twenty.

For a homeowner, those improvements are a small price to pay and a tiny percentage of the overall value of their Silicon Valley property. And people simply feel better the more they like where they live. For a management company, the metrics are different and involve keeping you happy enough to stay there for another month.

3) Neighborhood Ownership

It was always someone else’s problem. Someone put a cardboard box in the trash chute and the second floor became the lobby for all things refuse in the building. That spill in the elevator didn’t clean itself up in time and got tracked through the hallways. And don’t bother using the third dryer from the right: it’s all show. "Does anyone here care?" he asked himself.

In my article, Determining Your Must-Haves When Buying a Home, I mentioned a story about how renters treat the neighborhood differently from owners, where sometimes the answer is, "not really."

4) Stability

Good planning. The 30-year fixed-rates for real estate weren’t all the much more expensive than adjustable rates and there was no difference in interest payments between the principal and interest loan versus the interest-only loan. He planned to pay both but for the next 15 years it was his decision whether to do that or invest that money to greater advantage elsewhere.

If he keeps up his payments, they’ll never change and he’ll never have to move until the time is right for him and his family. While everyone’s plan is different, what I’ll strive for with you is the same result: that you will never have to move from your home until it’s right for you.

5) Equity

As I mentioned in my article, "What Are Interest Rates Going to Do?" I would rather see your money go back into your own pocket than into a lender’s — or a landlord’s, for that matter. Yes, in this market, you’ll probably pay more monthly for your own home than renting. But my clients have outlined several reasons, which I’ve shared with you, about what not renting buys them.

During most market cycles, even in Bay Area real estate, equity is not a lottery ticket. The past couple years have made that notion seem quaint. Equity is just the difference between what you owe and how much your home is worth. And measured over several years, it usually increases steadily based on your home’s increasing value and any principal you pay on your mortgage.

I share many reasons why people are afraid to buy homes in my article, Emotions in Real Estate: From Fear to Elation. Many people are afraid of getting priced out of the market too. One of the most effective ways of not getting priced out of the real estate market is to choose a strong property for the price point you’re looking at and build equity in it.

Beginning Your Next Phase

It wasn’t analysis paralysis that was stopping him. There was always something at work that came up, whether it was that presentation to the executive staff or visiting the field in far-flung places like Poland. It was good to feel needed, even if it was for work, and there’s a certain comfort to hitting the snooze button on the rest of your life.

The outcome of change is, after all, uncertain. And some folks take to uncertainty better than others. But his is not the only story. For many, the hardest part of leaving the rental world for Silicon Valley real estate is understanding how to take the first step.

Getting Started Stopping Renting

1) Know Why

In Silicon Valley real estate, you spend a lot of money any way you slice it. Some people pay cash and buy something below their means. Others put up a straight 20% and buy conservatively. Still others put down less on their real estate with the confidence they can put their money to greater advantage elsewhere. But in each and every case, I treat your investment as a lot of money when we talk — because it is.

And because your investment is important to me, it’s also important to for both you and I to understand why you’re making it. Everyone has their own reasons and the key is to be truthful to yourself about them. Some reasons are harder to say out loud than others and I outline some of them, as well as a system for prioritization, in my article Determining Your Must-Haves When Buying a Home.

2) Look Ahead

None of us has a crystal ball. We do our best to see which way the winds are blowing based on what we know today, but you and I know we can’t predict the future. But that doesn’t mean we aren’t in control. With careful planning, you can avoid being trapped in a bad situation and ride out unforeseen events.

I want people to be deliriously happy after buying a home — not stressed because something unforeseen can force them to sell it on terms they don’t like — so I feel it’s important to let people know about situations when they should wait before buying a house. You won’t need a crystal ball to see any of these situations, but if you need a guide as to what to look for, I’ll be there for you with upfront answers.

3) Budget

Numbers. Some people see numbers and what they mean the same way people see colors or feel the texture of a piece of paper. Fortunately, you don’t have to have that gift in order to buy a house. What you need is an understanding of yourself: how much you’re willing to spend per month on housing, what lenders are looking for from you, and how you can empower yourself using your credit rating.

In general, a lender won’t be your conscience: they’ll let you get into as much debt as you’re willing to sign papers for, so it’s up to you to determine how much debt you’re willing to take on. Once you’ve decided, you can get a pre-approval letter from your lender which will give you the power and confidence to make strong offers (remember, there are other ways besides money to make a strong offer) quickly. In the Silicon Valley real estate market, being able to move quickly is essential to getting the best properties. I can point you to several mortgage brokers whom I’d trust with my own loan.

4) Understand Your Target Silicon Valley Market

The Silicon Valley real estate market is broken up into a number of micro-climates, each of which has its own nuances. That’s why I not only publish analyses of the aggregate Santa Clara County and San Mateo County markets, but I also breakdown the markets in various cities like Cupertino, Sunnyvale, Campbell, San Mateo, and Foster City, among others — the ones you see in the navigation bar to the right.

I do this analysis not only from an economic level but also using my experience continually visiting available properties and speaking to other real estate agents in Silicon Valley. This high- and street-level approach takes more time, but I feel it’s essential when it comes to representing my clients, particularly when it’s time to price out a property.

I share this analysis freely because I want my clients, and potential clients, to be well-informed. But I also have clients who don’t have time to dig into the details, and for them, I publish this information so that they can refer what I’ve said to them in person. Once you’ve had a look at what the various Silicon Valley real estate markets are doing, have a look at Bay Area homes in your price range.

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

Recommended Reading:

• Housing Market Updates From Around Silicon Valley
• When Not to Buy a House
• Emotions in Real Estate: From Fear to Elation
• What Are Interest Rates Going to Do?

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

Recommended Reading:

• Silicon Valley Housing Market Update
• How a Win-Win Saved My Client $25,000
• Why Some Houses Don't Sell: A Buyer's Perspective
• Determining Your Must-Haves When Buying a Home
• Silicon Valley School Information

This wasn't the first offer during our search.  We'd made an offer on a townhome in San Mateo knowing that the chances of getting that property were really pretty low.  This was a two-year-old development in an up-and-coming part of the downtown area.  It was a cross between San Francisco warehouse lofts, each with wide-open spaces, and an opulent hotel, complete with luxurious appliances, plush carpeting, and high-quality fixtures.

My client hadn't asked yet but I anticipated a couple concerns about crime in the area, which were quickly allayed with some research and a call to the local police station — they yielded nothing out of the ordinary.  My real concern for my client, though, was the three lockboxes in this townhome's oven.

I want to make sure they're getting a good deal going in and can sell at a quality price later on.  It's the part of being a Silicon Valley buyer's agent that's more important than making the deal itself, but it involves a lot more research than just taking the asking price and knocking 5% off it.

When the Asking Price Doesn't Matter to Buyer's Agents

Three lockboxes.  That was just the tip of the iceberg.  Added to the two outside there were five.  I didn't expect to find anything on the MLS but I actually found five listings there too.  It was interesting that properties in the same building were listed in both Redwood City and San Mateo.  That would be a pretty big building.

Three of the MLS listings I couldn't match to lockboxes, so that meant that out of 50 units in the complex, at least eight were available in this two-year-old new development.  Probably more after speaking with some of the people living there.

Why do I do all this?  To figure out what the right price is.  Because the seller sure isn't going to tell you.  (The agent might tell another agent.  Maybe, maybe not.  But buyer-to-seller, even if the seller told you the truth as to what price they wanted, would you believe them or would you think they're bargaining?  Therein lies the Catch-22 of living life outside a Saturn dealership.)

There are even times when the asking price doesn't matter at all.  Here are a few:

1/  Recent Comparable Sale.  The last sale price of Silicon Valley real estate that's reasonably similar to the one we're looking at trumps the list price because it's the new "market value."

2/  Excess Inventory.  While some developers try to artificially reduce inventory, the fact remains that for a period of time, anyone trying to sell in that complex will have to compete with a national corporation and their brand new units — and that corporation doesn't have to make money on every deal.

3/  Emotionally-Attached Seller.  This happens a lot with for-sale-by-owner (FSBO) properties.  Owners sometimes overprice based on good memories or how they believe everyone will love the way they've done the wallpaper.  While these quirks may be valuable to the owner, a buyer's agent shouldn't encourage a client to pay for them.

4/  Over-Improved Property.  Would you pay extra for a lobster at McDonald's?  Right there, sitting next to the McNuggets on the value menu?  Probably not — you're probably wondering how good of a lobster can end up next to the Filet-o-Fish.  It's the same with houses.  The neighborhood and condition of the houses in it dictate the upper-bound on pricing a house.

5/  When My Clients Don't Want To Pay That Price.  If the price is justified, I'll happily make the argument to my clients.  But if it has features that other people will pay for but aren't valuable to my clients, then why try to waste their money?

In this case, the developer wasn't a mega-corporation but a Silicon Valley business owner and the property was wildly-overpriced for all of the above reasons.

We were okay with making a low offer because I could rattle off the list of comparables from a similarly-featured complex nearby, plus illustrate the amount of inventory they had leftover.  There was no downside for my buyer: if we waited or were rejected, there'd still be plenty of units left.  And do you think they'd tell us never to come back again after we were serious enough to write paper for them?

Getting to Win-Win 

It takes some extra effort as a buyer's agent but I like to go over properties that have been on the market a long time (ones that have racked up lots of days-on-market, DOM).  There is a lot of background work involved in due diligence, phone calls, researching comparables, and checking facts.  It's actually quite challenging because there is a lot of asynchronous communication required.

There are a number of reasons why properties sit for a while, some of which are dealbreakers.  Some are just "bad luck" and can benefit my buyer.

Reasons Why Properties Have High DOM Numbers 

1/  Pricing.  It's so important that I have several articles on the topic.  This problem is correctable, but not always easily.

2/  Physical Condition.  Sometimes there really is something wrong with the property.  I toured a property in San Carlos where the floor of the house was parallel with the slope of the hill it was on!  It was like walking into an M.C. Escher cartoon.  The price of the property included the house, but, really, the price should have been the land minus demolition costs. 

3/  Location.  The average DOM for East Palo Alto in March 2007 was 114.  The average DOM for Palo Alto was 40.

4/  Difficult Showings.  I understand that everyone in Silicon Valley has their own needs and schedules but I got this response the other day, "The owner will only show the property on Thursday and Friday before 5pm and Saturday 1-4, but no open houses."  That effectively limited anyone with a job to three hours per week of viewing.  How would a store owner do if those were the shop's hours?

5/  Back on the Market.  This is the rest of our story.

Closing in on Good Real Estate

When a contract falls through for a property, the seller loses not only time but momentum.  Properties newly listed on the MLS generate email alerts, become topics of conversation and get real estate agent tours.  After they go pending with an accepted offer, they disappear off a lot of radar screens.

If that sale doesn't go through, there's usually no fanfare when it comes back.  All the eyeballs have gone elsewhere.

In this case, the property was priced for an "auction."  It really is just like eBay where you set the price low and then hope for so many offers that the price goes over what you expected.  With no fanfare to call buyers back, the auction wouldn't go as high.  It's like the second bounce after hitting a tennis ball.

That's one reason why I recommended this property to my client. 

I read the disclosures closely for him.  The worst thing on the inspection report was some cracking in the caulk in the guest shower.  The HOA was strong and well-funded.  The termite report came back blank, which wasn't surprising.  There was a little trouble with one of the switches on the oven, but we could get a credit for that easily.  This was a clean property, unlike others that have bad news in their disclosures. 

What happened was the previous buyers had to pull out for reasons I won't go into here.  And they had to forfeit their deposit.  Another client asked me whether I felt bad for them.  My responsibility to my clients is no burden at all, but I'm not Atlas, and the weight of the entire world is more than I can carry alone.  Cheesy?  Yes, but true also.

We got the house minus a discount for the deposit money the sellers already received.  The sellers got their price because the total money was the same. 

My client's savings?  $25,000.

Actually, I only saved my client $24,000 because we set out to beat other competing bids by just enough — there ended up being several. 

My client thought it was the best $1,000 he's ever spent.  And to celebrate, I completely surprised him with a new $1,000 refrigerator.

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

Recommended Reading:

• Determining Your Must-Haves When Buying a Home
• Why the Perfect House Wasn't So Perfect
• Why You Need Real Estate Agents and Why You Don't Trust Them
• Silicon Valley School System Bang-for-the-Buck

Theoretically, he loved the place, from location to square-footage, to the deep auburn color of the hardwood floors.  Then, out of nowhere he exclaimed, "What in the world [ed. he didn't use that word] am I supposed to do with the loft?!"

Ah, the loft.  We had talked about it for ten minutes, bouncing ideas around, before deciding to take another look around.  I'd been mulling it over but was distracted by the plus-shaped guest room, one where the only way a queen-sized bed could fit would be diagonally.  This room would probably need to be a study.

There was another "study" though, a second plus-shaped bedroom, with inward folding corners and all.  Any bed that would fit either of these rooms would mean a very uncomfortable night for two, like my client's parents! 

For his purposes, he was right about the loft.  The master bedroom had a tall, quixotic spiral staircase next to the bathroom, winding its way up to a loft that was larger than the master bedroom itself — larger than the other bedrooms put together too.

It would have been the perfect place for a pool table, but that would have made the master suite the corridor for any guests to get there. 

Why do buyers walk away…?

Reasons Why Buyers Walk Away

We kept on brainstorming: wall it off, knock down the wall to the staircase, use it as the master sleeping area, get a ping-pong and pool table, make it a very large office and workshop.  There was only so much Tetris we could play with the other two bedrooms before it became clear.  He really loved the place, but we had to.  Here are some possibilities as to why buyers walk away.

1/  Lack of Usefulness.  His expression said the same thing, but I vocalized it: "This place is almost a million dollars and 400 square feet [ed. 20%] isn't usable for you."   He looked at me square and said that the space that was the loft could have been — should have been — a large, functional guest bedroom or den. 

2/  Too Much Work.  And, while he could have renovated this home any way he wanted to, for a million dollars, do you blame him for wanting something plug-and-play?  When you're the seller, there is a fine balance between making your house "sellable" and doing so much work that you never make back your money (negative ROI).  As a buyer, if you've got a day job, family, friends, and hobbies that already take 28 hours in a day, how excited are you about taking on a home renovation project — one that can disrupt your life?  There are buyers who get excited about putting their own touch on a home, but this excitement sometimes fades quickly once they quantify the effort involved.

3/  Lack of Resale Possibilities.  "We made the effort and spent half-an-hour trying to figure out what to do with this space?  When you go to sell this place, do you think other folks are going to do the same thing?" The answer came two months later when the listing was withdrawn for lack of interest at levels near the asking price. 

4/  Image.  In order to consider buying a house, a buyer has to see themselves living in it.  My client definitely envisioned himself in this property, but there was one in Willow Glen that fared a little differently…

5/  Smell.  Some say that the smell of freshly-baked cookies or warm pie helps a home sell faster by helping buyers associate something good with the house they're looking at.  Smells have been proven to trigger memories, but what some people enjoy may be offensive to others.  Incense, chemically-scented candles, and burnt baked goods have been known to get both good and bad reactions.  In general, the best smell for a house to have is nothing noticeable and there are smells that keep houses from selling faster.

Reasons Why Buyers Don't Come At All

The Willow Glen charmer.  We were in the area and it was near to the end of our day.  This one was for-sale-by-owner property and it technically met all of my client's criteria, but I moved it to the end of our tour just in case. 

"It's purple," I said wryly. 

"Why not?"

Curiosity got the better of us and we parked across the street to take a look.  It wasn't a shy house, with its royal coloring and white picket fence.  We stepped under the wooden archway leading to the front door and peered into the dimly lit living room.

The owner was a kind and gentle woman with two boys, and when she let us in, it felt as if we'd taken the red pill from Silicon Valley to Wonderland.  The pattern of black-and-white checkered tiles in the kitchen, from floors to ceiling, was occasionally offset by faded but proud tiles with handwritten recipes from years past.  The antique piano leaned against the wall under an ornate wooden frame which guarded the still of an ancestor from times long ago.  It was a 1920s parlor, a genealogical study, her life's story, all at once.

This was her house and there were reminders everywhere that its personality could never be truly separated from our Alice.  It was branded: what could a buyer do to make it their own?

I would hazard a guess, from our conversation at her house, that most people never got so far as to experience her graceful hospitality. 

Characteristics That Scare People Away From Viewing a House

1/  Paint Color.  This house was imperial purple.  It's definitely possible to repaint a house, but when people judge books by covers, the color of a house signals the quality, upkeep and styling of the interior as well as its appliances and fixtures.  In this case it was an accurate signal to the quality and styling, though the upkeep was good.  This also triggers thoughts of "too much work."

2/  Overpricing.  This happened to be a for-sale-by-owner home.  Owner sales are notorious for being overpriced because the owner imposes their wants and needs on the price of a house versus what the market will bear.  Agents do this too, but indirectly.  They may present, "I can get that price for you," then convince the owner to lower the price later.  This strategy can sometimes backfire for owners; here's another example.  In other cases, less ethical (and arguably less successful long-term) agents hope for someone who isn't well informed to come along, but with Internet research being the norm, those odds are becoming longer every day.

3/  Functional Obsolescence.  In the Bay Area, it's very common for homes over forty years old to have one bathroom for two, three, even four bedrooms.  Clients I've seen perusing these listings all have the same question, "What am I going to do when guests come over?"  This is a signal of functional obsolescence, where the house doesn't meet the needs, market expectations or uses envisioned for it.  Functional obsolescence often requires remodeling or revised expectations in pricing.

4/  Put Off by Adjectives.  Would it surprise you to know that, in studies, some of the most common adjectives used by real estate agents actually put people off?  There's a quote from the book Freakonomics in this article.

5/  Lack of Pictures and Bad Pictures.  Blind dates.  You hear about nerves, trepidation, and even jokes on Friends about seeing the person you're supposed to be meeting on the blind date and then leaving without them knowing.  You may go on the date, but would it cross your mind that you might be wasting your time?  Houses have bad picture days too, especially the sky might be overcast leading to less ambient light.  Would you want to go to a property that marketed itself as "dark and musty"?

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

Recommended Reading:

• Silicon Valley School System Bang-for-the-Buck
• Determining Your Must-Haves When Buying a Home
• Search MLS for Silicon Valley Homes
• How Identical Properties Are Apples and Oranges, or Just Apples
• The Price of the Home Across the Street and Its Long Shadow

To them, it would probably seem like nitpicking, and in most normal cases, it would be: their property wasn't a two-bedroom but a one-bedroom loft with a den.  The distinction seems trivial but I'd been studying comparables in this complex for a while, and in this prestigious building with only four different floorplans, true two-bedroom units (where the second bedroom is walled off) were scarce and commanded a premium.

Nope, after pulling up their MLS listing, the photos showed their property was just like every other apple in the cart, a one-bedroom loft with a den — only priced $150,000 higher!  I had to find out what their thought process was.

Does the Unit's Pricing Strategy Depend on Someone Uninformed Coming Along? 

A red flag.  They were just doing what they thought was best for their client.  "We're impressed with the knowledge of the local agents but we think this unit is unique," was the listing agent's reply before we parted our separate ways.  Maybe they promised the client they would get that price?  Maybe they believed they would price high and negotiate down?  Either way, I had to do what was best for my client.

I placed the phone back into its base station and tapped my stylus on the desk a few times as I prepared to make some phone calls and recheck the comparables in the complex.  There was a recent private sale and another property coming on the market at a price about $150,000 lower than our story's unique condo. 

But even if I had three lifetimes, I never would have predicted what our story subsequently did with his listing.

Sometimes You Compare Apples to Apples

In this complex, lofts were truly commodities — basically all of the ones in this story were identical in floorplan and construction — but there was some price fluctuation between comparable units.  Why?

1/  Condition (or the perception of good condition).  Making quick fixes to a home often helps the property sell faster and at a higher price.  But more often than not, condition is more a matter of perception than what you get from a formal inspection.  One property in this complex was shown with a dirty futon mattress in the loft and surface stains in the bathroom.  How well do you think this property competed with the clean and empty, but otherwise identical, unit down the hall?

2/  Upgrades.  Compare key items.  Kitchen: cabinets, drawers, countertops, appliances, faucets, sinks and flooring.  Bathroom: counters, showers, tubs, tiling, faucets, sinks, toilets and seats.  Floors: carpets, hardwood vs. laminate, tiles.  Walls: wallpaper, paint, moulding.  Stairs: railings, banisters.  

3/  Location.  Real estate isn't about location, location, location.  It's about what the location, location, location provides for you.  Penthouse and corner units provide less noise and traffic and are generally regarded as desirable or prestigious.  How desirable is the unit by the elevator when it's Saturday night in an active complex?  Is the convenience worth the trade-off in noise?  Now what about penthouse or corner units?  Would you pay more for that?

Using these three factors, you could compare most properties in this complex.  On the other side of Silicon Valley, however, there were "identical" properties that needed a little more investigation. 

Sometimes Apples Should Actually Be Treated Like Oranges 

The personalities of the two properties here were completely different.  This property was bright and sunny with the daylight shining through the enclosed patio of the condominium and reflecting off the entryway mirror: the polar opposite of the one we had just visited.

It wasn't a long drive and, actually, I felt a little guilty about driving the less-than-two blocks inside the same complex to get to this other townhome, but it had been a pretty long day — this being our fifth out of eight properties today — and I wanted my client to take a load off his feet, even for a couple minutes.

But it's funny how light is like a breath of fresh air.  We'd just waded through the darkness of a brightly lit Sunday afternoon cloistered away by a property that just didn't know better.  The carpet wasn't doing anything to help what little light managed to meander its way through the overcast sky of trees.

No, these weren't comparable properties.  Yes, they're in the same complex and you would put the two side-by-side on a competitive market analysis (CMA), going over the features that each one had line-by-line and probably drawing an identical pricing strategy.  But after visiting during two points in the day and seeing the properties' personalities, there was no apples-to-apples comparison.  

Light you can see.  There are a number of other hidden factors you need to ask about which change the character of "identical" properties.

Hidden Factors That Affect "Identical" Properties

1/  Plumbing.  One property we saw was the lead in to the primary water mane, so every time someone ran their washer, the roar of a burst of water would fill the living room.  To make living in this unit more tolerable, the HOA limits the times washing machines are allowed to be used.

2/  Neighbors.  Another property had a unit upstairs with hardwood floors and lots of young children.  They're fun and friendly but the ensuing stampede during the mad rush for school in the mornings was inevitable.

3/  Garbage Pick-Up.  An earthquake.  The crash of bottles during hours normally reserved for slumber.  The two are surprisingly similar but one happens every week.

4/  Service and Delivery Entrances.  The beep large delivery trucks make as they back into the delivery entrances is designed to get as much attention as possible. 

5/  Gated Entrance Traffic.  The beeping of dial tones.  The ring and ring and ring followed by a casual exchange of greetings and the buzz which grants entrance.  The crash of the gate as it closes.  Bam.  Sometimes it feels like you're greeting everyone in the complex!

Sometimes Apples Fall Off the Truck 

"Well, these are two adjacent units and you can combine them into a four-bedroom place," he'd said.  Yes, it wasn't one loft he had listed, but two.  And each had been priced at over $800,000 — overpriced by about $150,000.

After about a month without any takers on either property, the two were combined as a package and were now selling for over $1,700,000, truly subscribing to the philosophy of the whole being greater than the sum of its parts.

Since that property was listed, eight other properties in the same complex have been sold on have gone into contract.  Now the two lofts are listed as two one-bedroom units with a den but they're still priced over market. 

The listing agent has a one year agreement and with rents for those units averaging $2,500 per month, the owners lose $5,000 in opportunity cost each month that goes by (for $20,000 now).

My client bought an "identical" property, including the same upgrades, relative location, etc. for $150,000 less. 

If you have an apple, what happens when you price it like a truffle?

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

Recommended Reading:

• Why the Perfect House Wasn't So Perfect
• The Price of the Home Across the Street and Its Long Shadow
• Determining Your Must-Haves When Buying a Home
• Silicon Valley Real Estate Buyers Guide
• Search MLS for Silicon Valley Homes

Technorati Tags: Silicon Valley, Real Estate, Comparables

I thought the top-level townhome was in pristine condition considering they had a Cujo, until I peered into the room and saw a tiny 10-pound pug sitting attentively in front of the television!

There were network connections wired into every room, and this being Silicon Valley, we asked the owner if it was standard CAT-5 or CAT-5e.  The gentleman, in his decidedly French accent, said with a bit of sheepishness, "You know, I'm not sure."  (He was a little redfaced because we'd talked about his job at Cisco.) 

So I asked whether he had a wireless network and his face lit up.  He hopped over to the storage closet in the entryway and eagerly showed off the router, neatly and carefully wired into the connectivity panel.  He didn't check for CAT-5e because he didn't need it.

The network drops were a "nice-to-have" for my client who does a lot with multimedia.  They weren't a dealmaker (and as he discovered not a dealbreaker) but given that this was the first home he'd seen as a potential buyer, he was eager to get some experience looking at houses under his belt so that he could really experience firsthand what his requirements feel like.

In the back of people's minds, most people start off with a list of requirements that I rank order informally using the "MoSCoW" method:

• Must: What they know they want
• Should: What they think they want
• Could: What they don't have strong feelings about
• Won't: What they don't want

For any number of reasons, what people say they want doesn't always line up with what they really want in their minds and hearts. 

A lot of times that's because of the difference between theory and application: being able to actually drive the commute or experience how many flights of stairs there are gives people a clearer picture of "could" vs. "won't".

The tricky part is separating the borderline "must-haves" from the "shoulds."  And with my client in the early stages of his home search, we needed to setup a stable foundation so that we'd learn those differences from every property he would see on the rest of his search.

You Can Learn a Great Deal From a Rant

I sat in the office of another client, across from him and his dustless mahogany desk.  I briefly peered out towards the Silicon Valley hills through the shades of the window behind him before he lifted his brow from thought.  He muttered cautiously, "That's a good question…" and placed his chin on his hand in the universal position for "I don't have an answer for that yet."

He wanted to tell me something but the way his eyes focused into the distance, you could see a little fear, as if to say, "People will think less of me for saying what I'm really thinking."   

I'm not judgmental and I don't remember saying anything at that point, just tilting my head to the side a little.  But what I got back, I never would have expected from this formal and staid lawyer.

"I WANT A HOUSE!" he exclaimed.  "I want a place where the neighbors respect where we live.  If they see trash on the ground, they pick it up because they feel ownership.  I want to live in a place where I don't have to be ashamed to say, 'I live here.'  I want my neighbors and I to be peers and for them not to look at my car and go, 'Who does he think he is?'  I want my wife and kids to feel important.  I want to be able to carry on a meaningful educated conversation with the people living around me.  I WANT A [ed. deleted] HOUSE!"

That joke one of my clients made about me being an iceman must be partially true because with a hint of a smile in my expression, I winked a little and asked in an ironic, almost dry manner, "So, what did you want again?"

Home Search Criteria People Don't Like to Say Out Loud

I wanted to share this conversation because it's critically important when buying a house.  There are things people never say they're looking for during a house search, but actually really need.  This gentleman was brave enough to share some with me:

1/  Prestige.  This is a really sensitive subject.  On the one hand many people want to be regarded and respected.  On the other hand, people fear that by wanting to be regarded and respected, that people will actually think less of them.  But the root cause is that sometimes people judge others based on a mental picture of where they live.  What do you think of when I say New Jersey or Alabama?  Or East Palo Alto?  (I'm from Louisiana: insert stereotype here!)  If prestige is important to you, then that should be included as a criteria in your home search without emotional prejudice.

2/  Owner's Mentality.  I have a personal story here, all this over a simple piece of paper.  I lived in a large apartment complex that was in a good location, was kept in decent condition, and had below market rents so I could save money and buy a house.  I stepped out of the elevator next to the trash chute and noticed a crumpled piece of paper lying there on the ground.  As a renter, my first instinct was, "Oh, the maintenance people will take care of it."  I eventually did throw that paper away but it left me wondering whether I would have thought twice if it were in front of the home I lived in.

3/  Neighborhood Pride.  Have you ever been to a sleepy old manufacturing town whose plant closed long ago?  Where people can't wait to find a way out?  Or a town that's languishing under the weight of its own lack of culture.  The transient nature of people living there is much different than the sense of community an identity engenders. 

4/  Belonging.  Whether it's being close to the culture of your parents or your parent's parents, to feeling like you can relate to your neighbors, that sense of belonging can be very important to your enjoyment of your home.  Sometimes it doesn't even boil down to culture.  If you're single, living in a family community with lots of kids around may not be preferable to being closer to other singles whom you can relate to.  And being a movie junkie with a huge home theater system (read: speakers) in the middle of a complex of semi-retirees might not make you any friends.

5/  Less competitive schools.  Some parents, even though they care about their children's education, don't want to put that much competitive pressure on their kids.  This is one I hear with increasing frequency. 

Common Trade-Offs

After we left the top-floor townhouse owned by the gentleman at Cisco, I told my client that, yes, you can have your dream house, but only if you know what's really important to you.  After all, since homes are so expensive, you don't want to have to pay for amenities and benefits that mean nothing to you.  Why would you spend your hard-earned money on something you don't need or want?

Here in Silicon Valley, people make trade-offs every day when buying real estate but it takes a lot of self-reflection and some experience actually going through the home search process for those priorities to really become clear. 

Single-Family vs. Multi-Family Properties

"Maintaining the lawn just sounds like work.  If I'm going to be doing work, it may as well be for work!" he said.  The land you get on a single-family house is valuable but if it hurts your lifestyle, then what are you paying for? 

According to RE InfoLink, in February 2007, the difference between buying the median townhome or condominium and the median single-family is between $200,000 and $300,000 in both Santa Clara County and San Mateo County. 

My client in this article chose to look for townhouses and condominiums because he can get more square footage inside the home for the same money and minimize the responsibility he has for maintaining the property.  He doesn't have any kids or need room for a swing set, but if he can get a small yard or patio for entertaining, that would be perfect.

Schools

Ever hear the advice, "You should always buy a home where there are good schools?"  There are advantages to this because these are neighborhoods which are (in general) the last ones to decline and the first ones to appreciate, but remember that if the neighborhood has a reputation for good schools, that reputation is already priced into the house. 

My client used the words, "I'm single and this isn't my last house.  Why would I want to pay for a good school district?" 

If you have school-age children, you may save money by buying in a less expensive neighborhood and sending your kids to private schools.  You will get more house for your money if you don't have to pay for the school district's reputation.  And you may get more upside from an ascending school district which is building a great reputation than one that's maintaining its high scores.  When the best kept secret in the area comes out, people will be looking for that good value.

Cupertino and Palo Alto, among other cities in the Bay Area, have prestigious school districts.  How do the median prices for single-family homes compare with other cities around Silicon Valley?  The chart of figures from February 2007 speaks for itself.  What are the best kept secrets in Silicon Valley?  That's a whole 'nother article.

Commute

I had a client say that he enjoyed a reasonable commute time to be able to "switch modes" and another wanted to catch up on reading while on the train.  I'd argue that most people consider commuting a necessary evil based on where they live and work.

Time is money, right?  Well, almost, because no matter where you were born, what your parents have, or what your opportunities are, everyone starts off with 24 hours in a day.

You can measure the value of your time in two ways.  Economists measure the value of time in terms of opportunity cost, the amount of money you can make with your time at its highest and best use.  Most people measure it in exactly the same way except with things they can be doing: activities like spending time with the family, and reading a book, to taking a second honeymoon. 

You'll have to help me determine the value of your second honeymoon, but I can show you the cost of your commute.  Let's say you've live in your home for five years and take the same commute each day.  You earn a conveniently round number $100,000 and work 50 weeks out of the year for 5 days a week.  Here's what your commute costs:

At only half-an-hour each way, the commute costs $62,500 over that period and $125,000 if your commute is an hour (two hours a day) each way! 

There's no value judgment behind these numbers.  Some people want to save money to keep their families fed, happy and well-educated so they will trade more commute time for cash savings.  Others prioritize spending more quality time doing other things and choose to allocate more resources to the problem. 

The beauty is that the choice is up to you and experiencing a house search with an expert is an effective way of truly understanding what you want and what you're willing to trade-off.

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

Recommended Reading:

• The Price of the Home Across the Street and Its Long Shadow
• Why the Perfect House Wasn't So Perfect
• Why You Need Real Estate Agents and Why You Don't Trust Them
• Silicon Valley Real Estate Buyers Guide
• Search MLS for Silicon Valley Homes

After all, it had everything he wanted: from an outdoor, ground-floor patio for his barbecue to the connected living and dining areas he could use as a large home theater (60" plasma), plus it was within walking distance of his favorite places in the Bay Area and was in his price range even with competitive bidding. 

Sure, he would have preferred a loft-style unit, but this two-story townhouse had relatively high ceilings and that patio — more than making up for it!  (In Silicon Valley, homes with lofts aren't that common: they're out there but if you're hinging your search on them, you might consider commuting from San Francisco.  I did see a couple in Los Gatos and San Mateo, but that's for another day.)

I joked about being numbed by novacaine from that dentist appointment and he ribbed me with a comment about Asian guys being icemen.  That was a pretty good shot, and I was caught a little (okay, a lot) off-guard, so I only managed a "Touché!" as my witty response.

Actually, I really was happy for him but there was an air of deferred maintenance around the building.  Yes, the roof had recently been replaced and both the unit and complex were dressed in a new coat of paint but I wanted to check it out make sure everything was in order before he got his hopes too high.  

Besides, I try not to get too excited about a place until I read the disclosure packet (is your agent selling or protecting?), and it was time to mine this 212-page tome for gold.  What I found was just as valuable.

Obscurity by Disclosure 

As much as I advocate personal responsibility, some things in life need effective warning labels to help educate people of dangers that may not be obvious.  I'm going to pick on cigarettes because they illustrate my point. 

Why Disclosure Packets Are Important 

Cigarettes take years and sometimes decades to kill and some people can smoke three packs a day since they were 16 and still not have any obvious health issues.  But that's exactly why they need warning labels: the effects happen at a point well beyond the time of purchase and use.

It's the same deal with homes because of what you can't see.  After your offer is accepted, your property and termite inspection will turn up a lot of things but, at that point, you're out-of-pocket and may feel that because you've invested some money and so much emotional energy, that moving forward is the best thing to do.  (Economists call that investment a sunk cost, and you shouldn't use sunk costs to color your future decisions.)

Before that, you get a disclosure packet which is supposed to detail any material facts that would affect the market value or use of the home in question.  In a way, it's like a warning label that alerts you to areas that require more investigation.

What Disclosure Packets Can Become

Besides being mandatory, disclosure packets help prevent lawsuits (or arbitrations in most cases) since the disclosing party can always say, "Well, I told you about this before you made an offer."

This is technically true, but anyone who's ever seen your credit card terms of service or skipped through the EULA on a software agreement knows that the fine print can last endlessly and usually isn't that much fun to read.  Seriously, when was the last time you curled up in bed with a good CC&R binder?

Some disclosure packets have become so long that they literally create the haystack around the needle. 

Do people do this on purpose?  This isn't a relevant question because it is what it is — and always caveat emptor— but the answer is… yes, but because agents want to prevent getting hauled into court (or arbitration, or a license hearing) over not disclosing.  After all, there's a reputation hit that comes as a side dish. 

The Agent Behind the Disclosures

Here's why I don't think they're purposefully obscure.  Before I make a first pass reading the disclosure docs, I always ask the listing agent, "Is there anything I should know about before getting into details with my client about this property?" 

And 6 out of 10 times, I get a usable and straightforward answer. This answer won't have everything, but that's not the reason why I ask.  I really want to see what the agent's working style is.

Sometimes the answer will be, "Have a look at the disclosure packet and let me know if you have any questions."  This often happens when:

1/  This agent is busy at that moment.  They're happy to talk if you call back later.

2/  The agent is signaling (maybe not on purpose) that there is already much stronger interest in the property.  The better agents will just tell me.  If I believe this is the case, I'll let my clients know that we need to act with more strength and urgency should this property be of interest. 

3/  They haven't looked at the packet themselves.  The documents take time to prepare so this isn't unreasonable, but if they're online, there are occasions when I know more about the property than they do.  Yay for our side!

4/  That agent is juggling too many listings to pay detailed attention to that one.  Good for them but not their clients.  I've never understood how you can take on a client for the sake of volume and not because you know you'll do a great job.

5/  An agent is more concerned with the number of people interested than any one.  Even serious buyers kick tires.  I'm asking about disclosures because my clients want the next level of detail.  That's one positive step towards a successful transaction.

Cynics will ask, "Why should they say anything at all?"  Easy.  Because it moves the possibility of a deal forward and it's a really, really small world.

Personally, I don't ask about disclosures because I want to throw rocks at the property or the agent.  It's my job to judge the property relative to the needs and risk profile of my client — and unlike the countertops in kitchen or stains in the carpet, the items in the disclosure packet can't often be seen for themselves.  Plus, understanding the listing agent will help us tailor our messages in future negotiations, if needed.

How to Read the Disclosure Packet

Reading that much volume — in this case 212 pages — takes time, but because I've been thorough about understanding what my client needs and wants, I read the disclosure packets in three different passes.

1/  Scan for showstoppers.  This client wants to barbecue on the porch.  If the HOA doesn't allow grilling, that's a showstopper and we move on to the next property.  Scanning is much easier when the disclosures are provided as text-based PDFs — not photocopies scanned into PDF, but the actual original electronic documents.  That way, you can search using Acrobat Reader or any other PDF tool.  Ask and you may (may) receive.

2/  Scan for things that may irritate my client.  Having to fix termite damage or not being able to run your in-unit washer-dryer after 9pm may not kill a deal, but you may not want to get into those situations.  After all, buying a home is about improving your quality of life.

3/  Read it, but quickly.  I recommend my clients do the same.  The key is that in the Silicon Valley market, if you've gotten this far, there are probably a number of others who are at or beyond this stage as well.  And good properties in the Bay Area still go quickly and with multiple offers.

I don't try to catch everything on the first pass — and most properties don't get beyond the second pass — but the feedback I've gotten is that it's a good balance of the time I spend seriously investigating that property vs. the time I can spend finding them a breadth of homes to choose from.

Truthfully, I'm not sure how buyer agents who juggle a lot of bodies can pay attention to the little things that you need to make a good offer and still be willing to walk away.  It's easy to say there's a pattern that makes up for it, but it's the nuance that connects a property to the client that I'm looking for.

The Hidden Costs Behind This Property 

So with the barbecue okay, my client and I talked about the washer-dryer and termite damage, determining that he'd be willing to trade these off for the location.  The washer-dryer issue was sticking under his craw (since it's more energy-conscious to run these appliances later at night, plus it's a freedom of use issue), but we decided to take another step forward.

A Hunch 

Going beyond the emotional cost of these irritations, I asked the agent about any water damage, and he seemed a little startled, but to his credit he knew this background information from years back and answered openly and honestly.  There had been some leakage but it was corrected almost half a decade ago.  This information wasn't in the disclosure packet and the issue probably wouldn't have surfaced again, but it was good to know.

HOA Finances 

That look of deferred maintenance in the building led me to read the HOA finances very closely.  The HOA dues each month were lower than market and the two didn't add up well.  In fact, individual units were responsible for maintaining portions of the front porch as well as the enclosed patio, which indicated they hadn't contracted a management company (as confirmed in the docs).

There are people who like this arrangement because it gives them more control over their costs and what they can do with the property.  But my concern was two-fold. 

First, there were the number of special assessments that would be (and had been) required if more services were needed or something unexpected happened.  This technically increases the price of the property without adding value.  (Many people dislike paying extra for something that should have been there to begin with.)

Second, my client had a high-stress job and wanted something more plug-and-play.  This property looked like it would need close involvement at the HOA-level by every owner, in addition to the fixes required for termite damage.

Since there was no HOA reserve fund and the reserve study hadn't been completed, it wouldn't be surprising to see special assessments or an increase in the monthly HOA dues significantly raise the total cost of ownership (TCO) for this property.

I emailed the HOA president about this and another issue I knew my client would have.  He's considering moving out of the country in a few years but would like to keep the home he buys as an investment.  The HOA docs mentioned restrictions on this which I won't go into.  But suffice it to say, getting clarification would definitely impact my client's decision.

This Wasn't the Perfect House… For Him 

Well, we got our answers and while this may still be the perfect house, it's just not the one for this client.  Sometimes the best choice you make is to pass on what only looks like the perfect house for you.

The fact is, the trade-offs this client wasn't willing to make could have been perfectly acceptable to another.  But my job is to assess the right price my client is willing to pay based on how well it meets his needs, and not just base it on the asking price.  After all, the buyer sets the asking price and there are five reasons why many owners overprice their homes.

We literally had this conversation.  He said, "If I make an offer on this house, we should make it to win."  To which I said, "Just because 50 other people [ed. I didn't use that word] could be willing to pay $100,000 over asking price doesn't mean you should feel obligated to beat them.  This isn't about them." 

There would be properties justifiably in high demand and we would go out and make aggressive offers, but because this one didn't meet his intrinsic requirements, there was no reason to overpay.

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

Recommended Reading:

• The Price of the Home Across the Street and Its Long Shadow
• Why You Need Real Estate Agents and Why You Don't Trust Them
• 4 Ways the Silicon Valley Real Estate Market Is Correcting
• 10 Things About Me, 9 of Them True
• Search MLS for Silicon Valley Homes