Silicon Valley Real Estate Blog - 1SiliconValley.com » Home Buyers

Understanding Zillow, the Zestimate, and Hidden Factors in Calculating Your Home’s Value

Alex Wang — Mon, 19 Oct 2009 19:36:55 +0000

Zillow has become a and useful tool for sellers, buyers, and real estate agents, however quite often, when I am trying to explain the market value of a home to a potential buyer or seller, I will hear the famous words: "But Zillow says … !"

Kudos to Zillow for providing a detailed video explanation on "Understanding the Zestimate". Zillow doesn’t have the last say, but is definitely a great tool that you can use when starting to evaluate a home’s value.

Next time you are evaluating the price of a home, don’t forget to check out our article on the hidden factors in calculating your home’s value.

The Real Reasons You Need a Good Real Estate Agent

Alex Wang — Wed, 17 Sep 2008 09:24:31 +0000

Too often, when people complain about the services they’re receiving — whether it’s from contractors or real estate agents — the problem arises from a misunderstanding about each person’s role in the transaction. As the famous line from Cool Hand Luke goes, “What we’ve got here is a failure to communicate.”

That’s why it’s important for agents to educate consumers about both of our roles in a real estate transaction. The Internet has more than enough information to help buyers identify neighborhoods they’re interested in exploring further, so I explain to clients that they don’t need an agent to begin the first part of their property search. From that point on, however, an experienced, professional agent is invaluable. Here’s why:

1/ The best agents are market experts, and continually renew their expertise by having their ears to the ground at all times.

Consistent tracking on the pulse of the real estate market is a trait of any good agent: we’ll provide current, sometimes up-to-the-minute, information on schools, neighborhoods, and even tracts of homes and builders. Many times it’s information you will never find on a website.

Recently had a client that had been monitoring a luxury development in Emerald Hills. Persistently keeping track of the activity in the neighborhood early and often helped my client purchase a bank-owned property before the property was put on the market — and for several hundreds of thousands dollars less than he would have paid otherwise!

2/ Agents know what makes sellers tick.

Steve Leung covered some of how you can walk in a seller’s shoes. Good agents can help you get the property you truly love at the best price possible. They can advise when to write an offer for lower than the asking price or when to be aggressive by offering at or near a property’s full listing price.

They know that by being good at selling homes, you develop the empathy to be able to make good offers to buy them. And they know how to talk to other agents of different ages and experience levels. That versatility helps you in every step of the way, particularly in the little details that need to be caught before they cost you your dream home.

3/ Agents negotiate on your behalf.

Because they have a fiduciary responsibility to protect their clients, agents will fight on your behalf over not only a property’s price but also the contract terms, which in many cases are just as important as the amount of money you offer.

Experience and negotiation are what set some agents apart from others. You can’t buy experience in this area. During a recent offer presentation to a seller, I made the decision to present an offer with my clients by my side. The competition and negotiation was not easy, but this decision ultimately helped my clients get their offer accepted and buy the property.

4/ Agents can refer you to trusted associates.

The best agents have a team of other professionals, from appraisers to lenders to home inspectors, whom they trust to make sure buyers and sellers are protected through every stage of the real estate process. Agents stake their reputation on their referrals.

Why is this important? I recently worked with buyers who ended up switching to a discount broker. First, I put introduced them to the mortgage broker I consider part of my team, who pre-qualified them and secured a good interest rate for their purchase. Then, because they were interested in a wide range of neighborhoods, I suggested they drive through those neighborhoods. Often, that helps buyers determine which they like best and which they don’t like after all. After their short driving tour, we planned to look at properties in their favorite neighborhoods.

After driving through several neighborhoods, the buyers told me they’d decided to work with a discount broker since they were already doing the legwork of touring neighborhoods to narrow their search. I wished them well, and we both moved on.

Not long after, the buyers called the mortgage broker to whom I’d referred them. They explained that their current mortgage broker couldn’t get them an interest rate as low as my teammate had provided. Could he arrange for a new loan before the closing in two days? Unfortunately, he couldn’t. The buyers ended up with a higher-price mortgage — and we’ll never know how well the discount broker negotiated on their behalf.

The moral of the story is this: real estate agents provide real value. When you try to navigate the purchase or sale of a home on your own, you may end up wishing you’d had an expert on your side.

Recommended Reading:

Picture Imperfect: Don’t Let Photos Limit Your Choices

Alex Wang — Tue, 08 Jul 2008 20:40:06 +0000

Home photos can deceive. Depending on the photography, great houses can seem ho-hum and ho-hum houses can seem great.

And though professionally-photographed homes on real estate sites aim to woo you, don’t allow oh-ah photography to limit your choices. By ruling out a house just because it’s less photogenic than the competition, you may lose out on some truly terrific finds.

For instance, a client relocating from Canada was living in corporate housing while he searched for homes, and he’d been sending web links to his wife to preview properties.

It seemed like they’d found the right house. The photos were knock-outs and really showcased the property well. Before the wife arrived, I prepared a contract so we could put in an offer right after she saw it. But the property didn’t show well. The sellers hadn’t staged it and the home wasn’t in top shape.

I recommended that we take a look at some other comparable houses that she’d seen online. Its images weren’t heart-stopping, nor did they do the home justice. They didn’t, for instance, help people to envision the space and layout.

But when the client saw the property, she loved it. For one thing, it featured 400 square feet more than the first house she’d seen. The extra square footage was ideal because the couple had two children. We ended up writing an offer on this second, larger house.

Had the client automatically eliminated this home because of iffy pictures or I, as their agent, had discouraged her from even visiting it, the family would have lost out on a spacious property that turned out to be ideal.

As you’re choosing properties to visit, do weigh the images in your decision-making process, but don’t make them the sole criteria. And be sure the agent you’re working with is open to showing you homes that may not feature the most striking photos.

Sellers’ tip: Buyers do place a premium on good photos. Sometimes you won’t get an opportunity to make a second impression, so be sure those first images wow viewers.

Winning the Bidding War

Alex Wang — Sat, 21 Jun 2008 22:41:20 +0000

It’s a sweet day when homeowners discover they’re getting multiple offers on their property. But for buyers competing for a house, it’s a nail-biter.

Over the years, I’ve developed two novel strategies to help buyers win bidding war.

First, I aim to be the last presenter. Why? I can often gauge what offers sellers have already seen and probe them to identify their concerns. Also, by that time, they’re ready to make a decision.

In addition, I always try to bring my clients when I present offers to the listing agent.

If my clients are sitting in the same room, we can often cut the negotiation time from a couple days of phone calls down to a matter of minutes”?something desirable for eager sellers. It’s an enormous strategic advantage to be able to discuss and ratify changes on the spot.

The other benefit is that buyers are humanized when sellers can meet them and talk with them.

Such was the case in a recent negotiation for a highly desirable Sunnyvale property. When I discovered there were two offers on the table, we opted for a full-price offer.

At the presentation, one offer was rejected immediately, and the listing agent let me know our competitor’s offer was better than ours. So we countered with a higher price–an additional $5,000 over the asking price–and removed our contingencies. I later learned that our competitor’s offer was still better than ours.

Yet, the sellers had met my clients, an engaged couple enthusiastic about buying their first home together. It turns out that the groom-to-be and the husband of the seller both worked for the same high-profile technology company, though neither knew one another. Nonetheless, that shared experience created something of a bond. My buyers were no longer just a generic couple. The sellers, rather than seeing just figures on a page saw faces and personalities and had some insight into the buyers’ aspirations.

The result: My clients won the bidding war. And the sellers even decided to give the house to them for a thousand dollars less than our final bid as a courtesy.

Had my buyers not been at the presentation, I’m convinced the competitor’s offer would have been accepted.

The Beautifully Staged Home: Nicely Remodeled or Cheaply Flipped

Mary Pope-Handy — Sun, 13 Apr 2008 08:48:34 +0000

Don’t be fooled! Homes in Silicon Valley come on the market in a variety of conditions from horrible to breathtaking. Some are dirty, cluttered, and perhaps even run down. I saw one this week that desperately needed exterior paint, landscaping to be tamed, and the removal of large quantities of faded plastic flowers that droop down over the living room window (all this in Los Gatos, with a million dollar price tag).

Most homes, though, are better prepared for sale, as they should be. Savvy homeowners and agents know that the old adage is true: "you only get one chance to make a first impression". The home needs to be clean, uncrowded, and appealing from the day it goes on the market to maximize the seller’s return. You want to make the right changes to improve the bottom line when selling, without over-improving such that the return begins to diminish.

In addition to that range of conditions in which homes are sold by their long term owners, we have to consider the "flipped house". A flipped house is one in which an investor has recently purchased a home, often from an original or long-time owner, usually in solid condition but with a dated, tired appearance. What should buyers be on the lookout for?

From the Flipper’s Perspective

The idea is to buy the home cheaply, do some primarily cosmetic improvements, and sell it at a tremendous profit quickly.

Here are a few things that a flipper is likely to do in preparing a home for sale:

remove all curtains or windowcoverings (you may not notice that they are missing, and replacing them is a "hidden cost" to buying the home) – it makes the house seem light & bright
pull up the old carpet and refinish the floors (good idea for most sellers)
freshen up the landscaping, and possibly the driveway, for great curb appeal (also a good idea for most sellers) – often includes sod and colorful annuals near the front door – maybe add sprinklers
new front door, or at least repaint door and polish or replace hardware
replace interior doors, lighting, countertop surfaces in the bathrooms and kitchen (often with granite)
new pulls on cabinets
fresh paint inside and out
new windows and exterior doors
new mailbox, doormat
powerwash the outside patio, exterior of home
polish and clean anything old that remains

And here are a few things most flippers won’t do:

replace the furnace
replace the roof
replace the water heater
improve the electrical system
repipe the house
provide a pest clearance
drainage work, if needed
repair fencing
foundation repairs (if there are a lot of them, it’s unlikely the flipper would have bought the house)
get permits and finals (some will, but many won’t, and will deny that they are needed)

Forwarned Is Forarmed

When you buy a home that has been updated or remodeled by the owner, for the owner’s use, you will often find sensible improvements done to important structural elements of the property. That may not be the case with a flipped home. Let’s look at an example where a long term owner and a flipper might do things differently.

Take the case of a bathroom remodel and the plumbing that services it. As you may know, many of our tract homes here in Silicon Valley were built with galvanized steel pipes. That type of plumbing lasts somewhere between 35 and 45 years in most cases. If a 35 + year old home gets a bathroom facelift that includes removing the old vanity and installing a new one, in most cases, the resident homeowner will replace the plumbing in the wall behind the vanity at that time so that when the home eventually is repiped, that cabinetry won’t need to be removed and the wall won’t have to be torn open. A resident homeowner will do it while it’s easy.

An investor, a flipper often skips this important option. Recently I showed a home in San Jose in which that was the case. The kitchen and bathrooms looked good, but the plumbing hadn’t been touched – and the pipes were showing symptoms that it was time to repipe. And replacing those pipes now is going to be a bear!

What Can Consumers Do to Not Be Fooled?

First, when you visit homes, take along a checklist, if you need one, to make sure you aren’t so dazzled by floorcoverings and countertops and canned lights that you forget to check the furnace, roof, and structural elements (most homes have presale inspections – I’m not advocating that you visit the crawl space) such as the foundation, roof, electrical systems, and so on. Read the inspections carefully, being sure you understand what is and isn’t done, before deciding to write an offer.

Second, there are a number of websites that will tell you when the home last transferred title. Find out when, and find out how much the current owner paid. If you are working with a real estate professional, ask your agent (hopefully a Realtor, who abides by a code of ethics beyond what a real estate licensee promises to do).

Third, ask about permits and finals. In Santa Clara County, permits are needed for most improvements. Some agents are mistaken in thinking that if an item is simply replaced, it doesn’t need a permit.

Not true. What needs permits? Roof, water heater, retaining walls more than 4′ high, new kitchen cabinets, you name it. It may vary a little from city to city and town to town but by and large, if you replace something, you probably need a permit. It’s easy to find out online as the county and each town/city has this information easily available. Do not take the agent’s word for it that a permit and final is not required! Many simply don’t know. Find out.

In San Jose, you can check the permit records* online: https://www.sjpermits.org/permits/permits/general/generalquery.asp

Buying a flipped home can be a good move if there are not hidden or partially concealed defects which will be difficult and expensive to repair once you move in. In younger homes, there may be no issues to worry about at all!

Older homes, though, could present serious areas of concern. Upgrading the electrical work, for instance, could mean tearing up walls, and later needing big patches or new sheetrock, wall texturing and paint. It’s messy and disruptive. If you have computers, it’s likely that the electrical system will matter to you a great deal. So find out before you write the offer whether the home that looks so good is simply gussied up, or if it’s in great shape structurally as well.

*Disclaimer on the murkiness of permit records: There are many incomplete permit records so the fact that the county or a city doesn’t have it on file does not mean that it wasn’t permitted and finalled. The city of Saratoga, for instance, was only incorporated about a half century ago, and many buildings predate that time. When it went from being under the jurisdiction of Santa Clara County to that of the City of Saratoga, many files were simply lost in transition. Sometimes the whole file isn’t lost, but part of it is. Generally, if there’s an addition and the homeowner is paying property taxes on it and the size is reflected in the county records, it’s most likely been permitted and finalled. I’ve sold homes in San Jose where that was the case, and we were able to prove that the work was done with all the right authorization etc. even if the paperwork was missing. All of this, of course, is for old permit history – not recent work done by a homeowner or investor.

So homeowners, keep your own file of what’s been done, permitted and finalled. Do not rely on the town, city, or county to keep accurate records – even though they usually do.

Related Reading

Why Your Real Estate Contract Choice Matters in Silicon Valley

Mary Pope-Handy — Wed, 02 Apr 2008 21:49:08 +0000

In most of California, the purchase agreement form used when writing an offer to buy residential real estate is the California Association of Realtors form, the Residential Purchase Agreement. Along the San Francisco Peninsula and in Silicon Valley, though, often we use another form, the Peninsula Regional Data Service purchase agreement (PRDS contract).

Does it matter which one you use? It certainly does!

While anything in the boilerplate can be modified (deleted or added to), the basic text is not identical from one to the next, and neither are the ramifications to buyer and seller. Here are a few examples:

- Property condition: one is an ?”as is”? contract and the other requires that the property be delivered with a warrantee of condition (no leaks, no cracked glass, no structural defects in chimneys, all systems operational, etc.)

- Repairs in escrow: one says that repairs must be by a licensed contractor, the other that repairs must be done in workmanlike manner (can be done by anyone)

- Defaulting: one contract has more ?”teeth”? with buyer or seller defaults than the other

There are pros and cons to each of these two forms. A skilled agent is ?”bilingual”? in both, understands the strengths and weaknesses of each one, and can modify as needed the form to benefit the client. Let’s look at some examples of why it matters.

Subtleties Behind CAR and PRDS Contracts

There are many issues to consider, but let’s just think about property condition for a moment. If you’re a buyer, you may prefer the PRDS form because it requires the home to be delivered with all systems being operative (heater, water heater, appliances, electrical systems etc.), and it requires a licensed contractor to do the repairs.

The CAR form, on the other hand, is ?”As Is”? and the seller or a handyman could do the repairs. With the AS IS form, you can still request repairs, but the seller is not obligated to do them. If you are buying a home and use the PRDS contract, though, and you discover leaks in the roof, at the shower enclosure, or elsewhere, for instance, the seller must pay to repair these items, and the seller must hire a licensed contractor to do them. It’s not a request, it’s already been agreed upon.

Areas to Note as a Seller

As a seller, there are good and bad things in both contracts for you too. Many sellers will be happy to use the PRDS contract if they can make it ?”As Is”? because there are other provisions in that form that are favorable to the seller.

One such area is the appraisal. In the CAR contract, making the appraisal a contingency (the home must appraise to purchase price) is part of the boilerplate and needs only to be checked to be included. In the PRDS form, it’s not mentioned at all “? it is simply absent. (Buyers – it can be written in, of course. But will most agents ask you about it and offer to write it in?)

Comparing and contrasting the purchase agreements in use in Silicon Valley could easily be a multiple day course as there are many points to evaluate and juxtapose.

What is important to know, as a consumer, is whether your best interests are being represented when the form selection is made, and whether there are modifications that should be done to best protect you, such as an as-is addendum if you’re the seller (and it’s a PRDS contract) or writing in an appraisal contingency or a leak-free roof warrantee (if you’re a buyer).

A good Realtor will be able to discuss the strengths and weaknesses of each form relative to your position at the bargaining table, and will add, delete, or change things as needed to give you the best representation and negotiation possible.

Recommended Reading:

Creating a Better Standard of Living For Your Family

Alex Wang — Mon, 24 Mar 2008 02:45:47 +0000

"The kids miss you." Those weren’t the words he expected to hear that night but it didn’t come as a complete shock. After all, he was gearing up for his commute tomorrow and it was going to be the same as it always was on Monday mornings.

"Besides, what if there’s an emergency?" she said. He passed the commute time listening talk radio and audio books, and he’d learned enough French to get him through his last business trip without accidentally ordering snails at local restaurants. (See the article How Long Will My Silicon Valley Commute Take?) But he knew that when the tide flowed anytime after 3pm, there was no such thing as a person in a hurry: there were just kindred spirits parked on the highway.

They could afford it now and the extra time would help better their standard of living. She knew he had work-a-holic tendencies and had a freelance job herself. So it just made sense to move — but not only because of the extra time. While this part of Silicon Valley was closer to other opportunities for both of them, she also said off-hand that she liked that it was a more prestigious neighborhood with stronger schools and less cars parked along the street.

We talked earlier about the logistics of moving up to another home. (See the article Keeping Your Sanity While Moving Up to a Larger Home.) Because it’s such an important decision both financially and emotionally, it’s important to understand what you’re getting when you upgrade. (Also see the article Emotions in Real Estate: From Fear to Elation.) Here are some of the factors to look for.

What a Zip Code Buys You

From their family room, we looked across the street. "That’s really not a good thing for when we go to sell your home," I said. He looked at me a little quizzically but he and his girlfriend looked at each other for a second and got the drift.

This was a quiet neighborhood of single-family homes. There are some neighborhoods in Silicon Valley where I joke that you can staple hundred dollar bills to your jacket and still walk down the street feeling safe. And now that his options had vested and the two of them were engaged, they wanted to move to one of those zip codes.

"Yeah, the owners across the street rented out their home. Now the new guy has a lot of guests over and it’s never the same cars twice," he’d said. Experienced property managers have seen this before, but that’s a story for another day. Ironically, this was actually a statistically safe neighborhood.

Peace of Mind

Detail-oriented real estate agents not only do research to understand the numbers, they also have an earned understanding of "how safe" a neighborhood is. After all, agents who list properties in a neighborhood spend a lot of time there. Families, especially those with young children, or parents who travel a lot, are acutely aware that how safe they feel affects how well they live.

Whether the home is seven- or six-figures, on behalf of clients, I’ll often call the local police department to see what law enforcement thinks of an area and if there’s anything my buyers should know about. Usually, it’s pretty straight-forward because most of the areas that have a reputation for being safe are actually safe.

One time, though, I heard some rumors. Then the beat cop told me that she wasn’t allowed to give out any opinions because some real estate agents had gotten angry and reported what she said to her supervisor. At that point, I wondered aloud why anyone would try to buy a home without their own representation: I was representing the buyer at the time and that was information I wanted for my clients.

After some convincing, we dug into the details. Three blocks over in a commercial zone, there was a cluster of local banks, each of which had been robbed in the last few months. Because the highway was in the opposite direction of the homes in question, each time the robbers fled the neighborhood away from any residences.

I’m obviously not saying that I would have recommended this home to my clients based on this information. But when I did my duty and presented it to them, it was a non-factor in their decision because it didn’t affect the residential area. If this information were hidden, they would have assumed the worst and never would have sacrificed their standard of living and peace of mind on the neighborhood.

Pride of Ownership

People who’ve invested time, effort and money into owning and living in a home will tend to take care of that investment and want the people around them to do the same. People who haven’t may not have that same mentality, and while safety is more important to standard of living than pride of ownership, your family’s comfort with the neighbors has a day-to-day impact on how well you live.

Financially, if there are two identical homes and one is closer to rental properties and the other is surrounded by other single-family homes, in general, the latter will be more valuable and the mentality of the neighbors will be slanted more towards maintaining property values. If you pay the same for the former, you should consider that an implicit increase in cost. (See the article Not Overpaying When Buying a Home.) The most prestigious neighborhoods generally have high owner-occupancy.

Prestige

Many buyers are a little sheepish when they talk about prestige for fear that they think others will judge them. (See the article Determining Your Must-Haves When Buying a Home.) But it’s important to understand that the branding of a high-end neighborhood often helps their homes’ market values weather tough times in a way no other factor can. Just look at the difference between Milpitas and Palo Alto in 2007.

In fact, there are tangible reasons why these areas feel "nicer" than others, and some of those reasons are government or neighborhood regulated. For example, neighborhoods with HOAs, often restrict the number of people who can live in one home, how or whether cars can be parked curbside, and where to put garbage, among other things. While there is a trade-off in flexibility under these rules, the difference between these neighborhoods and ones nearby without some common agreement is often obvious.

And almost all cities have zoning laws that regulate minimum lot sizes and setbacks so that homes have ample spacing between them. It’s no coincidence that more prestigious and expensive cities have stricter requirements, and hence, larger lots.

This in turn keeps property values up, increasing the tax base and allowing for more services. Palo Alto, for example, provides its own electricity. But more often these services often show up as more ample trees and parks, safer streets, better fire protection, and higher-quality schools.

Schools

Speaking of quality schools, here’s a thought experiment. Whose elementary schools are better than the ones in Cupertino or Palo Alto? Or Los Altos or Saratoga? The article is a little dated but the relative numbers are about the same. The most expensive and prestigious cities unsurprisingly have the highest test scores. (See the article Silicon Valley School System Bang-for-the-Buck.)

The article mentions that there are better values and individual schools scattered around various cities in the Bay Area, but people know which cities are associated with good schools because of the branding prestige provides.

Schools, unsurprisingly, are so important that many people move specifically to an area for them. My clients with more than one child often do the math and decide that moving to an area with a better school district is much less expensive than sending their children to private schools.

Some of my clients would rather choose a good district as a whole instead of move to one school’s neighborhood because it shows a regional commitment to education. Others would actually like to move up, but have less competitive schools because they measure standard of living by how happy or well-adjusted their children are. And others want to find a window where they live in a less prestigious city that feeds into a great school district.

It’s not only important for real estate agents in Silicon Valley to understand what goes on in the minds of sellers (see the article How Buyers Can Walk in the Shoes of Sellers and Their Listing Agents), it’s important to do so to best represent buyers as well.

Recommended Reading:

Consumer Rights When Purchasing New Homes

Alex Wang — Thu, 28 Feb 2008 08:49:48 +0000

It wasn’t so much about the squirrels. This Silicon Valley development was advertised as brand new — which is technically true because no one had lived in these homes for sale. But the first proverbial "for sale" sign had been put up almost two years ago and the developer still had leftover inventory.

The first to move in, though, weren’t the people who had signed their contracts. The first occupants were actually a set of long-tailed friends using the attic as a roost.

Indeed, uninvited guests in the attic are annoying, but there was a good chance they wouldn’t have been more than an irritating nuisance to be taken care of "soon". Except they brought their own uninvited passengers, which were so great in number that they fell from the ceiling.

The owners were obviously unhappy with an indoor rain made up of mites landing on the bed, couch and kitchen table — especially in their new home. And you can bet that the threat of a lawsuit was broached more than once.

Prevention is the best cure and knowing your rights when buying a new home will help you sidestep major headaches down the road.

Working the Bugs Out of New Homes Before Moving In

In a project as large as a home, with hundreds of homes being built in a subdivision, there are bound to be mistakes. So the home builder almost always offers a modest warranty to buyers.

For example, Pulte offers a one year warranty on materials and workmanship and two years of coverage for heating, A/C and electrical for its Bedford Square subdivision in Mountain View. (The videos in the link are still good, but we have updated numbers.)

Warranties Are Obviously Good, But…

Typical home buyers, though, will plan to live in the development longer than a year or two: if they don’t, they risk completing with the builder when they go to sell.

Not only that, the warranty only covers buyers against minor risk. After all, a warranty doesn’t provide entitlement: every claim will need to be negotiated with the builder, and larger claims are more difficult.

Consumers have the right to their own detailed home inspection where the construction of and systems in the home are professionally evaluated. That way, you know about the home’s risks and defects before they become your problems. Savvy real estate agents always know a good (read: thorough) home inspector.

Negotiation and Comparison Shopping

Incomplete information. Buyers who tour all the new homes in an area still don’t have the complete picture of what they can get for their money. Sometimes it takes a secret handshake. Sometimes you need to think outside the box. Sometimes the easiest path is the most expensive.

Consumer advocates are usually pretty difficult to find in the sales office of a builder. It makes sense: the agents there have a fiduciary duty to their employer, so it’d be reasonable to expect them to give you only information advantageous to the powers that be. Not so good for the buyer. Buyers have a right to the complete picture and their own advocate who looks out for their goals and needs.

Comparative Market Analysis (CMA) for Buyers

CMAs are typically run before putting a home on the market. The analysis includes how the cost, value and features of the home in question compare to others in the area. This information (when it’s objective) is also extremely useful for buyers because it can uncover exactly what the premium is for purchasing "new" relative to homes that might be under a decade old. Buyers have the right to have the best market information possible before making such a life-altering decision.

Thorough real estate agents not only provide this information and analysis but arrange for tours of comparable properties. Both are typically best done with agents because the freshest sales information is accessible to members of the local MLS (no matter what we might think of their policies) and owners are more comfortable opening their homes to someone licensed and accountable.

Incentives and Financing

Sometimes asking isn’t enough. The CMA is also occasionally useful for teasing out incentives that a builder wouldn’t have offered otherwise and getting "in-kind" incentives like upgrades is usually easier than negotiating cash discounts.

But more often than not, there are incentives tied to using the financing options provided by one of the builder’s partners. Sometimes, it turns out to be a pretty good deal. Other times, the terms are structured in a way that buyers pay for the incentives they get through the financing they sign up for.

Silicon Valley consumers have the right to independent opinions (and options) for financing their home purchase, without the conflict of interest generated by partnered builders and lenders. Connected real estate agents know lending experts and, as consumer advocates, can often provide incentives not offered upfront by real estate developers.

Recommended Reading:

Hidden Factors When Calculating a Home’s Value

Alex Wang — Fri, 28 Sep 2007 08:51:40 +0000

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

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

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

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

Avoiding Errors When Using Cost Per Square Foot Analysis

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

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

1) Extrapolating Home Values

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

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

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

2) Treating Square Footage as an Accurate Number

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

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

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

3) Treating All Space Equally

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

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

4) Not Accounting for Land

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

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

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

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

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

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

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

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

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

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What to Do If Your Offer Isn’t Accepted

Alex Wang — Sat, 15 Sep 2007 07:07:49 +0000

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

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

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

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

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

Did You Receive a Counter-Offer?

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

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

Lower Number Than Expected

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

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

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

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

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

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

Multiple Offers

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

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

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

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

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

Implied Counter-Offer

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

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

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

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

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New Edition of Downloadable Book

Alex Wang — Mon, 03 Sep 2007 08:55:17 +0000

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

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

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

How to Successfully Complete Your Home Purchase

Alex Wang — Sat, 25 Aug 2007 00:25:24 +0000

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

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

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

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

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

Getting an Offer Accepted Begins the Next Phase

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

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

Lifting Contingencies

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

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

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

1) Inspection Contingency

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

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

2) Financing Contingency

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

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

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

3) Appraisal Contingency

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

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

Paying For Your Home

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

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

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

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

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