Silicon Valley Housing Blog by Steve Leung

Rents in Silicon Valley Cities Jump More Than 10%

2007-10-19T02:01:22Z

Landlords are raising their rents to the tune of 15.9% year-over-year in Silicon Valley cities like Palo Alto knowing there will still be healthy demand for their homes. The San Jose Business Journal publishes data from RealFacts Inc. which shows dramatic increases in rent. The article covers San Jose, Sunnyvale, Mountain View, Santa Clara, Campbell, Cupertino, Palo Alto, and other cities in the area.

The Argument for Compact Fluorescent Light Bulbs

2007-10-06T21:15:30Z

Let's forget for the moment about the fact that California has a reputation for green tech. (If you've been to Yosemite, the Avenue of the Giants, Muir Woods, or other natural wonders in Northern California, you'd understand.) Or the fact that the spiraled compact fluorescent light bulbs (CFLs) consume "one-fourth the energy and produce 90% less heat."

Let's even forget the fact that they save $30 each over their lifetime according to the government and $62.95 according to Slate.

Wouldn't it be great not to have to change the burnt-out light bulb above the stairwell or in that hard-to-reach (and harder-to-light) part of your home for four-and-a-half years instead of every six months? CFLs are only a few dollars and you can get them for as little as $1.75. Some electric companies actually subsidize them too. (PG&E has even given some away here in Silicon Valley.)

CFLs are considered so important that some unnamed legislators in California are considering banning traditional light bulbs. Why let it get to that point? Traditional lights have their uses and you can tell the government that it has better things to do by replacing a few more of your regular bulbs yourself, saving money and trouble in the process.

Moffett Field and Silicon Valley

2007-10-04T03:43:46Z

Billionaires and their airplanes have been a contentious issue in Silicon Valley for years, and, recently, it was disclosed that Google billionaires Sergiy Brin and Larry Page struck a two-year, $2.6 million deal to use Moffett Field for flying and landing their 767 jet. Residents on this flight path in both Mountain View and Sunnyvale have expressed concerns about the approval process (specifically the fact that neither they, nor their city councils, were consulted).

Back when FedEx was Federal Express, the company wanted to run flights in and out of Moffett Field instead of San Jose because that airport had curfew hours preventing early morning flights. Locals weren't amused and an alliance was formed with members in Los Altos, Cupertino, Sunnyvale, and Mountain View.

Even after the plan was shelved, there were still lingering concerns. But today, aside from the occasional C-130, fighter plane, Air Force One landing, or hovering Harrier jet --- that was a sight to behold --- there isn't a lot of traffic going in and out of the former airbase.

Still, Silicon Valley owes a lot of its inspiration to Moffett Field, with its iconic airship hangars. And CNET reminds us of some of its history, starting with its construction beginning in 1930. With the nearby high-rise offices in Moffett Towers nearing completion, the area around this historic site may get its own revitalization.

From McMansion to McCottage

2007-09-11T20:49:51Z

The folks at the Wall Street Journal (subscription may be required) are talking about the trend towards downsizing. Homebuilders like KB and Toll Brothers have nationwide portfolios and have obviously been dramatically affected by regional drops in home sales across many parts of the country.

During the boom period, these homebuilders were drawn to building high-margin McMansions, large template homes that provided a lot of square footage on the inside but were very similar to others in the neighborhood.

Because many buyers in other regions are reluctant to make "big bets" on real estate (i.e. tie up a large chunk of their net worth in one investment vehicle --- even if they're living in it), these builders have started building McCottages again, smaller template homes that are more affordable.

Eichler would be proud.

Even so, there's another factor that's fueling this trend: the conforming rate. With the evaporation of the secondary market for jumbo loans, mortgages over $417,000, the money used to fund them has become expensive and that cost is passed directly to the consumer.

That difference could be a whole 1% on the loan or more, so Pulte, from the article says that "it expects its average selling price for the third quarter of this year to be $331,000, down from $335,000." Has this decrease in size happened before? You betcha: the early 80's, early 90's and today. But between, the sizes increased all over again.

Debate of Extension of Mary Avenue in Sunnyvale

2007-09-07T17:44:24Z

The Palo Alto Daily News reports about a proposal, with its accompanying environmental impact report, which talks about extending Mary Ave. over 237 and 101 with a four-lane bridge.

The intention of the new connection is to support the upcoming Moffett Towers, seven 8-story towers sporting 1.8 million square feet. Before the report, local residents had expressed opposition to the extension because of the disruption to residential areas and the adequacy of the existing thoroughfares. The public is invited to comment on this proposal until October 12, 2007.

San Jose Vacancy Rates Lowest Since 2001

2007-09-03T21:13:31Z

The website for the City of San Jose says that the San Jose rental market had a 2.7% vacancy rate in Q2 2007. The Silicon Valley Business Journal says this is the lowest vacancy rate since 2001.

It's gotten to the point where San Jose is requiring 120-day notice to be given to tenants in rent-controlled units if those tenants have lived there for longer than a year and the eviction is "no-cause".

People usually only need one place to live, so rentals and home purchases fall into what economists call "perfect substitutes" --- you buy one or the other. In San Jose, during July 2005, there were 513 on the market that month with 360 closed sales. In July this year, there were 1102 (almost double) on the market with 197 closed sales (close to half). With vacancy rates at their lowest points, there's definitely light at the end of the tunnel for sellers in San Jose.

In other areas... Back in 2001, there was a lull in Silicon Valley's home prices in general. (Foster City was a notable exception but it's median was affected in 2002.) Folks were renting (or leaving) instead of buying after the dot-com era. What's interesting, though, is this time around, the median numbers in many areas are actually still rising (though other indicators like list price are falling) partially because "good" inventory in a lot of areas is short. Buyers I've spoken to are looking at the slower fall and winter seasons as opportunities.

Ever Wonder Who Your Neighbors Are Contributing To?

2007-09-03T17:14:03Z

The new voyeurism. I once lamented that complete transparency is the new privacy. And in the age of the internet, public records aren't needles in haystacks waiting to be discovered anymore. Here's an example: a quick and easy way to get the political affiliations of your neighbors, where they work and what their title is, at the Huffington Post.

I popped in a random address, a listing that I was going to tour. A listing whose new slogan could be, "You too can live just a mile down from the Mayor of Sunnyvale." :-)

Merge this into with what you can find on ZoomInfo and Facebook, and all those federal wiretapping laws are going to seem a little antiquated. Take care of your personal info, neighbors! Once in a database, it's someone else's to publish.

How Much Home Can I Get in Mountain View, CA?

2007-09-03T16:40:00Z

Last month, homes (including condos, townhomes, and single-family homes) ranged from $317,000 to $1.85 million. In my Mountain View Housing Market Update - August 2007, I go over how much home that money will get you and how much higher the median home prices have climbed year-over-year.

Last year, most homes received almost full value on their asking prices (99.28%). How much more they received this year may surprise you, but that was in a time before higher jumbo mortgage rates.

Looking at the Expressions of Sunnyvale

2007-08-24T21:48:55Z

There aren't rough waters around the Expressions of Sunnyvale and its roads Asilomar Terrace and Alpine Terrace. ("Asilomar" means refuge from the sea.) But there are train tracks close to Asilomar. This might be a dealbreaker for some. Others who are looking at the complex's low per-square-foot cost and close proximity to Downtown Sunnyvale and Downtown Mountain View may not mind the sound.

[ Strengths | Weaknesses | Opportunities | Threats ]

Opinion on the Montebello in Cupertino

2007-08-23T03:06:47Z

As part of a continuing series for my clients, I've published my personal notes on the Montebello condominiums in Cupertino. Obviously schools (it is Cupertino, after all) were a key strength, but voters also had a lot to do with why folks might consider this complex.

[ Strengths | Weaknesses | Threats | Opportunities ]

Whole Foods Moves to New Location in Cupertino

2007-08-21T22:15:53Z

Whole Foods in Cupertino moves across the street tomorrow to its new, larger location. Their corporate press release calls it "Northern California's flagship store."

People who have been going to the old location may have also been greeted by a friendly local student who was handing out flyers redirecting people to Whole Foods in Campbell and Los Altos.

The new location at 20955 Stevens Creek Blvd. has their "bread breaking" ceremony on August 22 at 8:45am. Daily hours are normally 8am to 10pm.

The Impact of Homeowners Associations on Home Buying Decisions

2007-08-12T02:45:59Z

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

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

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

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

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

Residents to HOA: Show Me the Money

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

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

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

Examples of Services Provided by Homeowners Associations

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

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

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

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

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

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

[When this article is continued: HOAs Are Structured Like Non-Profit Companies But Also Act As Small Governments]

Recommended Reading:

What Do People Think About Before Buying a Home?

2007-07-31T04:16:08Z

Hi all, this is a cross-post on thinking about and preparing for a home search from my personal blog.

---

Not prejudging. Some things are pretty easy to quantify: number of bedrooms, number of bathrooms, price range, and cities. Then when you plug those parameters into a home search, you can usually find a pretty long laundry list of homes that meet the criteria you put in. What's difficult (actually, impossible) to tell the real estate search engine is why you chose those parameters.

What's key is that you have reasons that are important to you. It might be that you need the extra bedroom as a home office, or that you'd prefer another master bedroom because you have a lot of house guests. It might be that when you come home from work, you want to feel like you're in a completely different world, but actually have only a ten minute Silicon Valley commute. It might be that your child has special needs and that school district provides an exceptional environment. It might be that you need a prestigious address in order to maintain or establish your status in your profession.

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

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

Is a Piece of Your Story Here?

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

On Being Ready to Own a Home

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

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

3) "Why haven't I chosen to do this sooner?" It's a big step with a lot of moving parts and life-changing ramifications. It's reasonable to have some reservations --- for a number of reasons --- but many people who've overcome them never look back. (See the article Emotions in Real Estate: From Fear to Elation.)

Money

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

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

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

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

Deciding on a Home Search

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

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

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

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

Recommended Reading:

Cupertino Housing Market Update - July 2007

2007-07-26T17:47:24Z

It's not world famous for it's homes or real estate. Folks outside Silicon Valley know it as the birthplace of the iPhone. Apple, Symantec, and a very large portion of HP --- to name a few --- call it home. To locals, Cupertino is synonymous with the school system. The Cupertino Union School District has 24 elementary and middle schools, 19 of which are ranked by the California Department of Education as 10 out of 10 statewide.

And that doesn't account for the elite Monta Vista High School, as well as Lynbrook High School or Homestead High School (as part of the Fremont Union High School District shared with Sunnyvale and other cities) which all rate 10 out of 10 statewide as well.

So, it's not surprising that real estate in the Cupertino part of Silicon Valley would command a premium. How much? The darker lines on the chart show what the median price of condos and townhomes, and single-family homes in Cupertino. The faded lines show what the median home prices are in Santa Clara County as a whole.

The difference between the two types of lines is the premium you pay in housing prices to live in Cupertino. How much is that premium and how has it changed over the last decade?

Cupertino Home Prices Commanding Consistent Premiums

Steady state. Or at least as steady as real estate gets in June. Over the month of June in past five years, Cupertino home prices have remained consistently above Santa Clara County prices, to the point where it's almost a flat line. For my clients who are home owners in Cupertino, that's good because it means land values have basically increased at the same rate as the rest of the county. And because the numbers are larger, the amount of money gained is greater. This stability is actually a good indicator for my clients who are home buyers as well.

Given the talk in the news about home market collapses around the country, many home buyers are risk averse, preferring to minimize the amount of their potential loss rather than maximize their potential gain. A vast majority of people in this part of the Silicon Valley market cycle fall into this category.

I tell my clients who are looking for a home that the Cupertino housing market can be characterized right now as competitive but stable, evidenced by the consistency of growth in home prices over the last half-decade and its relatively low inventory levels.

(My clients will contrast this with my article in April when I said Cupertino townhomes and condos were a "steal" at a median price of $650,000 vs. $683,500 in June. I also mentioned there would be some pricing pressure in single-family homes towards the end of the school year. In April 2007, the median single-family home price was $1.225M; during May, dipped to $1.172M; when the school year let out in June, it was $1.206M.)

Demand for high-quality townhomes, condominiums and houses in Cupertino has not been completely met because of a strong decrease in homes available over the last year. Inventory, arguably, is at levels not seen as low since 2000, and multiple offers on good properties are still common. The number of days-on-market for a good property

For my clients who want the strongest schools for their children, Cupertino makes an equally strong case. For my clients who want a solid foundation for their real estate investment, Cupertino --- with its steady indicators and foundation in education --- represents a safe decision.

[The raw data about area home prices is supplied by the local MLS, RE InfoLink. The analysis is my proprietary work.]

Recommended Reading:

Cupertino Housing Market Update - July 2007

Silicon Valley Housing Market Update - July 2007

2007-07-26T05:40:58Z

It's all about proximity. This month, I took a look at the semi-annual statistics aggregated for the first-half of the year so that my clients can get a good look at the overall trends, as opposed to the bumps in the road.

The story isn't about the median prices, which are charted further down in this article; what's interesting is the consolidation of pricing power around the center of Silicon Valley. I alluded to this increase last month, but the half-year figures distinctly highlight this strength, with the epicenter squarely in Mountain View.

In the first-half of 2006, an average single-family home sale would command 101.98% of the list price --- about 2% over the asking price --- but in the first-half of 2007, that percentage jumped to 104.56%. The increase in Mountain View's neighbors Palo Alto, Los Altos and Sunnyvale, is less drastic, but still pronounced, as illustrated below.

In fact, inventory of single-family homes in Mountain View and Los Altos is at its lowest point in ten years, with Mountain View equaling the low it reached in 2005 (lower than any other point since 1998).

What's Happening Further Out?

Cupertino has seen a similar increase in pricing power the first-half of 2007, but cities further out like Saratoga, Santa Clara, San Jose, Milpitas and --- to a lesser extent --- Campbell all experienced some erosion in pricing power, as measured by the percent of list price homes received. But prices have remained relatively strong: the median home prices in all of those cities except Milpitas have increased since 2006.

Silicon Valley as a whole remains strong with a 6% increase in the median price of townhomes and condominiums plus a 6.9% increase in the median price of single-family homes.

New inventory entering the market is down 12% year-over-year between the first-half of 2006 and 2007, helping to balance out the 17% increase in available inventory during the same period. The number of new home listings is actually at its lowest point since 2000, which in addition to Silicon Valley job growth (.pdf), helps explain why prices have risen steadily in the midst of less optimistic news from around the country.

[The raw data about area home prices is supplied by the local MLS, RE InfoLink. The analysis is my proprietary work.]

Recommended Reading:

Silicon Valley Housing Market Update - July 2007

Preparing Money For Buying a Home

2007-07-24T00:02:16Z

"That's a lot sooner than I expected," she said as we walked out of the open house towards my car. He nodded and I mentally went back over my notes about their priorities. We hadn't seen that many homes so I wanted to ask a few gentle questions to make sure they were getting what they wanted before putting in an offer.

This wasn't their first time buying a home. Their family had done it a couple times before, here in Silicon Valley and in a different state. But each time, there was a mad dash. "It was never clear when we needed the money," she intimated after taking a sip from her water bottle. She and her husband looked at each other with a knowing glance and he chimed in, "We lost a couple places because of liquidity before."

There are a lot of moving parts in buying real estate, but for the buyer, the lynchpin for the transaction --- and the greatest source of stress --- is getting money to the right place at the right time. I want to ensure that my clients have a transaction that's as stress-free as possible, and part of that is reducing the uncertainty in the process.

Here are some of the tips I provide my clients on how to prepare their money for buying a home and they impact the strength of their purchase offers.

Liquid Money for Your Deposit

Your deposit is up to 3% of your offer price, included with your offer as a check made out to the title company being used. If your offer is rejected or countered, your check is returned to you uncashed.

In California, 3% is the maximum amount the seller is allowed to hold as earnest money for the purchase of a house (up to a four-plex). I don't recommend my clients offer less than that because tells the seller one of two things: (1) that you aren't confident the deal with go through, or (2) you aren't really serious about purchasing the house.

Why Sellers Like Larger Deposits

Obviously, neither of those implications strengthens your offer. After all, sellers like larger deposits because it mitigates their risk. Many folks believe that it's because the seller wants "free money" if the deal falls through.

It's true that they get to keep your earnest money if you back out of the deal (and the more the better), but having their home boomerang back onto the market is something most sellers would rather avoid --- putting a home back on the market may reduce the amount the seller can get for it. Sellers like larger deposits simply because, the more money you offer in earnest, the less likely you are to break the purchase contract.

What Happens to Your Deposit If Your Offer Is Accepted

If your offer is accepted, your check is given to the title company, to be cashed immediately, with its funds held in escrow.

Technically the word "immediately" is imprecise because the law actually requires that the check be delivered to escrow within 3 business days of when the offer is accepted. But the reason why I use I chose "immediately" is because I work with people who have some latency in funding their liquid accounts. (I see this a lot with high-interest online savings accounts and stock sales.)

They ask whether they can use this "extra" time to account for that latency. I handle this on a case-by-case basis, but, in general, I recommend against it. The implication of presenting the check along with the offer is that it's a fully-funded check, and your ability to gain concessions from the seller after your offer is accepted --- and sometimes even to complete the transaction --- depends on your working relationship with them. In the big picture, any marginal benefit from the extra couple days is, in most cases, offset by unnecessary red flags if or when this fact is raised with the sellers and their agent.

Loan Pre-Approval Letter

"My credit history, income, and collateral have been examined closely and I qualify for a mortgage large enough to reliably purchase this house." That's what you tell the seller when you submit a loan pre-approval letter along with your offer. In many parts of the country, getting a pre-approval letter from your mortgage broker is optional, but in Silicon Valley, it's standard practice because of the number of highly-qualified buyers in the area.

It's important to note that a pre-approval is stronger than a pre-qualification, which is essentially a back-of-the-envelope calculation of your debt-to-income ratio --- you take your income, subtract your expenses, and compare the resulting number to your monthly mortgage payment.

Pre-approval isn't a loan commitment or a promise to lend you the amount of money you need to purchase the house. Even if everything is in order with your finances, the loan is still subject to the home you're purchasing appraising for an amount acceptable to the bank making the loan. After all, the house is the collateral for the loan, and the bank doesn't want to be at risk for $1,000,000 if the collateral is worth much less than that. The loan will also be subject to a clean title report, where it is obvious who has owned the property over its history and how that ownership has been transferred.

Tips for Your Pre-Approval Letter

I coordinate closely with my clients' mortgage brokers on tailoring pre-approval letters for each of my clients' offers. Pre-approval letters generally have the amount of the mortgage and some nice words about the buyer (e.g. clean credit history, stable employment, verified funds, etc.).

Most pre-approval letters are customized so that the amount of the mortgage plus the down payment matches the amount of money offered. Traditionally, that is thought to help in negotiations because it keeps the seller from knowing exactly how much money a buyer is approved for.

In highly competitive markets, I prefer a different approach. When sellers gets multiple offers, the sellers and their agents often choose to negotiate with one potential buyer at a time instead of playing ping-pong with more than one party. When I anticipate multiple offers, I'll recommend to my clients that we submit a pre-approval letter that signals our willingness to negotiate by giving the letter a slightly higher number than our offer. Then, during the offer presentation, I'll draw the seller's attention to why there's a difference. Sometimes our initial number will come in lower than another offer, but because the upper-bound we've signaled is higher, my clients are chosen for counter-offers.

Sometimes pre-approval letters will also include a line about how the funds being used for the down payment have been verified. I often note to my clients that wily listing agents will often call the mortgage broker to double-check the amount that has actually been verified. A gentle reminder keeps less experienced mortgage brokers from being caught off-guard by this thoroughness.

Cash for Your Down Payment

You will need to wire or provide a cashiers check with the money for your down payment to the title company handling escrow two days before closing (close-of-escrow), the day you are supposed to get the keys to your home.

The reason why I say two days is because all sorts of random things out of your control can happen that can keep you from getting the keys to your house. For example, a surprising amount of real estate business gets done by courier. Since it basically takes one business day for a cashiers check to clear, my client was driving up to the title company from work that day before closing to drop off his deposit before the end of business --- as he was instructed to do by the escrow officer.

My client was well on his way when the escrow officer called me in a panic. "Our bank courier showed up an hour early and he's about to leave. Where is your client and the check?" There wasn't any reason to worry since I knew my client was on his way, but it illustrates a close call out of our control which could have caused us to scramble, and --- at worst --- prevented my client from taking possession of the house on time.

I recommend my clients apply the same caution when it comes to the date their mortgage will fund for the same reasons.

I also recommend that my clients not choose a closing date which lands on a Friday or the day before a holiday. After all, if something does go wrong, there will be no way to fix it until after a very stressful and potentially ruined weekend or holiday. Also, the close of business before a weekend or holiday tends to come a little sooner than it usually would on other days. Real estate is a business of details.

Recommended Reading:

Preparing Money for Buying a Home

Silicon Valley Housing Market Update - July 2007

2007-07-23T23:53:47Z

Continue Reading: Silicon Valley Housing Market Update - July 2007

Treating Each Home Showing Like a Job Interview

2007-07-21T16:46:03Z

It's a job interview, for a position that lasts for anywhere from the next few years to decades into the future. And there are hundreds, if not thousands, of candidates eager to be the chosen one. Some candidates don't make the cut because they're too far from work or they don't have the right school system.

Others get first interviews, with the traffic that new resumes tend to attract on the MLS, but they get few callbacks and what offers drop in are filed where they belong. The proud parents: they tap their feet anxiously as they shift uncomfortably on the increasingly hard bench in the waiting room, wondering why.

I knew her Silicon Valley home wouldn't be like that. Hers was the second on the market and the two weren't apples and oranges. We spoke at length about the alternative home in the neighborhood, and the analysis was pretty simple because, while this was a prestigious subdivision, there were precious few differences between the floorplans of any of these Silicon Valley homes. The appliances, the granite in the kitchen, the marble in the bathrooms --- all were included upgrades at the same quality, if not the same color.

But she felt the very thought of it was insane. "That home has been sitting on the market for weeks now. I went to an empty open house there just last week. How are we supposed to get a better price than the other one without upgrading everything?" The devil is in the details.

Getting an Edge When Selling a Home Using Small Details

Empathy. We stepped outside for the moment to envision how our interview candidate would look to prospective buyers. Over the years, she'd gotten used to the loose handle on the front door and always liked to tell the story about an obscure dark stain on the well-used living room carpet. Her fondness for her home reflected in her eyes as she recalled the story about how her two-year old had managed to knock the lid off a safety mug.

She looked at me quizzically as I removed my shoes before opening the door lock, but she followed suit quickly realizing that she preferred anyone seeing the home to do the same. We could see the children next door playing tag in the living room, but we hadn't heard them from the inside because of the quality of the materials shielding the two homes from each other.

I turned to her and smiled. "It would be a shame if people didn't know how well your home is constructed," I whispered as I turned the key and, with only a gentle touch, rattled the handle making an ugly clanking sound as its screws rattled against their sockets. Fortunately, the screwdriver on my Swiss Army Knife was just small enough to solve the issue.

It was one more step towards her goal of getting the home on the market as quickly as possible, minimizing any out-of-pocket expenses required to do so, and enticing people to want her home more than anyone else's virtually identical home in this Silicon Valley neighborhood.

The Extra Polish for the Interview

How much more confident would you be paying more for a well-constructed duplex or condominium than a hastily thrown-together apartment conversion? It sounds trivial, but when a rattling door handle can obscure the quality of a well-constructed home, how much money and time on the market could that cost?

There is a clause that makes things easier, but there was no guarantee we'd get one. It's a common contingency waiver in Silicon Valley, but a lot of buyers are reluctant to sign as-is clauses on the purchase of a home. And even as-is, the buyer could still negotiate some items (read: money) back if there were an inspection contingency in the offer. Besides, savvy real estate buyers will often say they'll ignore the little nits that bother them, but then price them into the offer. The disparity is that a collection of little $50 nits turns into an offer 1 or 2 percent lower than it could have been.

Of course, a squeaky hinge or loose doorknob is no big deal. But, in the scheme of things, neither is a typo. Would you email your resume with one on it? Perception trumps any semblance of reality and there are a number of common areas (beyond the traditional cleaning) that have a great impact but can be improved at only an incremental cost.

1) Tubs and Showers

Ewww. You could eat off the floor in her kitchen. Every crevice glistened in the sunlight coming in from the patio. But while the cleanliness of the kitchen could literally inspire medieval bards to song, the bathrooms weighed down the home with rusty water stains lining the edges of all the tubs. They made the home feel old and used, and the cleaning service she used didn't remove the stains. Fortunately, a Clorox bleach pen whitens those hard-to-clean areas very conveniently.

2) Carpets

Nothing kills a showing faster than smells and, over time, most scents get trapped in the carpet, even when after regular vacuuming. And frankly, after years of living in the same home, the carpet generally takes on the scent of the people living there (something completely unnoticeable to most sellers).

The issue is psychological: buyers need to be able to envision your house as their own, and they can't do that as easily if their instincts tell them they're in someone else's house. Getting a professional carpet cleaning can help a carpet look "younger" and eliminate any non-neutral scents in the house. Folex carpet spray works wonders on eliminating individual spot stains.

3) Light Bulbs

Obviously broken ones need to be replaced, but why replace perfectly good light bulbs? Whether it's because of the large oak in the front yard or the office building across the street, some homes just don't get that much light, even during the day. This raises a red flag with a lot of folks. Replacing light bulbs with ones rated for the highest wattage safe and suitable for that outlet will subtly increase the brightness and appeal of your home.

4) Insects

Owners are usually extremely conscientious of getting rid of cobwebs and ants inside the home knowing that buyers don't want to see insects. After all, many people have a very strong innate reaction to things that crawl or buzz around. But they often don't check for trails of ants marching their way into a home through cracks from the outside, or mosquitoes hovering around a porch lamp at night, or even wasps that have made their home in a nondescript corner of an overhang.

There are a number of natural remedies for ants and you can often keep flying insects of the porch using a special outdoor light bulb that generates light invisible to bugs. Eliminating wasp nests is potentially dangerous but there are techniques for differentiating them from bees nests then eliminating any threat.

5) Doors

Imagine being at a car dealership and walking up to what you really hope is going to be your next car, but as you're about to get into the driver's seat, you can't get the door open. In fact, you have to lean your weight back and give it a good pull before it begins to budge, and when it finally does you're thrown backwards in surprise.

That happens all the time in houses for sale. Sometimes a stuck door is an indication of structural changes in the house and that the foundation needs to be checked. Silicon Valley is earthquake country and mild settling occurs frequently; humidity and moisture variation, among other things, can also cause this issue. But often times, the problem can be fixed simply by tightening or replacing the door's hinges. The most drastic measure is planing the door by sanding or cutting it to allow smooth operation. Opinions on when to plane doors vary.

6) Wood

Particularly on kitchen cabinets but often in bathrooms as well. Having cabinets that glow from their cleanliness before a showing helps improve the overall appearance of your home and there are some relatively simple recommendations for fixing minor cosmetic problems. Even a simple treatment with a cleaner like Cabinet Magic or Pledge can give many wood cabinets or fireplace mantles a deeper, richer, much improved look that lasts for a few days.

7) Scuff Marks on Floors and Paint

Everyone understands there are going to be scuff marks. What happens, though, particularly with dark scuffs, is that they tend to take the focus away from the more important aspects of your house. And, on the other extreme, some buyers envision themselves putting a lot of work into removing these marks and are less than about the idea. This type of buyer values the ability to move in trouble-free.

Advice on removing scuffs on walls and floors varies, but the general consensus is that minor stains can be eliminated pretty easily --- and you can help buyers focus on how great the condition of your home is.

Recommended Reading:

Why Your Home Will Sell Faster, For More Than the One Next Door

Availability for Showings Is "Everything" When Selling Your Home

2007-07-21T16:35:51Z

It was the undiscovered country. The downtown market in this Silicon Valley city was heating up and even homes that were structurally sound but had serious functional flaws were selling quickly --- and for well over the asking price. Their schedule was clear, though. No showings on weekends, only Monday through Thursday between 9:30 and 5pm. No exceptions.

I had to feel for the listing agent because our story had to have been typical. Like everyone else in Silicon Valley, particularly the tech industry, my client really wanted to see homes in Sunday, maybe Saturday if the home was right enough. Weekdays during the day were out of the question, even during lunch because it just wasn't practical to drive all that way, see a place, eat something and get back to work in an hour.

I did see the place myself. It's one thing for me to preview the property, send video, and document my opinions on a property, but this was where my client was going to be living as his primary residence and I didn't feel comfortable with him making an offer on a first home he hadn't seen.

After four months on the market, at a reasonable price for the area, the listing was cancelled. They obviously didn't want any intrusion onto their personal lives. It could have been that the property owners weren't serious about selling; it could have been that they valued their time with their newborn more than upgrading to a new place.

From a business standpoint, the comparables would have supported offers over the asking price, but given the difficult showings and lack on online disclosures, there was no convenient way to make an informed offer. This was an extreme case, but it's a clear illustration of what can happen if buyers can't see the product they're putting anywhere between a few hundred thousand and several million dollars on.

Putting Your Best Foot Forward to Sell Faster and For More

There's a reason why developers use model homes to entice people to buy homes in their communities. To ensure a faster sale, it is generally best to have moved out of the home. Professional staging helps paint a better picture than a vacant home, but vacancy does have the advantage (and disadvantage) of allowing a closer look at the property itself, without being colored by furniture. This isn't always practical so here are some subtle ways to help your home sell if you need to live in the home you're selling.

1) Vigilance

Opportunities present themselves to people who are ready for them. Agents and their clients sometimes have to act within tight windows of time, whether it's during a quick lunch break or a lull because their daughter's soccer game ran long. Either way, it's a last-minute call. Is it a scramble or do you know that your toothbrush isn't on the bathroom counter and that the bathrooms are all presentable? I know it's an imposition, but if --- while you're both living in and selling it --- you treat your home as if it didn't have curtains, you'll sell it faster.

2) Absence

A lot of buyers don't mind if the owners are there. All buyers don't mind if the owners aren't there. The reason isn't personal. Buyers don't want to hurt the feelings of their hosts, the home owners, so they'll often mute their honest opinions or stay longer than they actually want to.

The unintended consequence is that, because they don't communicate what they're really thinking, it's difficult to immediately address any negative issues that arise. After all, if the carpet is dirty, most people won't want to say that within earshot of the owner --- because it's considered rude. But they'll say it without reservations to me because we'll figure out a way of solving that problem, whether through a sellers credit, price negotiation, or simply hiring a good carpet cleaner.

3) Post-It Notes

The reason why some owners want to attend showings is because they want to play up their favorite features. I usually accomplish this by adding small notes to draw attention to areas of particular quality or interest that might be missed during a casual viewing. One note per room, up to a maximum of seven per home (seven being a psychological maximum for memory in studies), prevents information overload and acts to highlight the best features of a home. After all, if every feature were a "best" feature, who would remember any one of them?

4) Livable Staging

Most furniture used in staging is meant for show and not use. Some of it is lighter so that it's easier to move. Other pieces serve no useful purpose other than decoration, or to draw the attention to or away from particular features of a home. Many professional stagers, however, can completely makeover your home using furniture and accents that you can actually use for daily living, combining the advantages of making your house look like a model home and allowing you to live there --- provided you're vigilant about keeping it in model condition.

Every showing is a job interview and by paying attention to what the condition of your home implies to buyers and how readily available the house is to show, you can help your home sell faster and for more than the one next door.

Recommended Reading:

Why Your Home Will Sell Faster, For More Than the One Next Door

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

2007-07-19T15:07:33Z

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.

Recommended Reading:

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

Making an Offer: Behind the Scenes

2007-07-19T04:20:18Z

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

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

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

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

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

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

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

Making an Offer: Behind the Scenes

The Thought Process Behind Making an Offer on a Home

2007-06-29T03:43:17Z

The words will sound like they make perfect sense: "If we make an offer, we should make it to win." Even though his eyes were scanning the path from the patio, through the living room into the kitchen, his expression was motionless as he finished his sentence.

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

Recommended Reading:

The Thought Process Behind Making an Offer on a Home

Unearthing School Gems in the Bay Area

2007-06-16T04:37:13Z

Palo Alto, Saratoga, Los Altos, Cupertino, Pleasanton. The names alone read like a Who's Who list of elite school districts, not only in Silicon Valley and the Bay Area, but across California and even nationwide.

Some of the best Bay Area school districts like Palo Alto are even opting out of the ranking game, choosing to focus on students and what's best for them, rather than on making sure students hit all the checkboxes needed for those districts to get high rankings.

And voters in cities like Cupertino protect their schools by restricting growth, and the additional load on their prestigious school district, even though there may be enough land physically to support more developments. You pay the premium in those areas.

But there are quality schools in cities that don't have the same elite reputation. For example, Moreland Elementary School District in San Jose between Cupertino, Campbell, and Saratoga has 5 elementary schools with API scores over 850, with Country Lane Elementary at 915. Sunnyvale's Cherry Chase Elementary hit 941 in 2006, with a 10 out of 10 statewide ranking; and Cumberland comes in at a more-than-respectable 865 with a 9 out of 10. Roy Cloud Elementary in Redwood City is a 9 out of 10 with an 883 API, and Redwood City's North Star magnet school rates at a 985 API and 10 out of 10.

Also, because cities overlap unified school districts, it's possible that a home in one city will be covered by a school in another city. This is particularly noticeable in Sunnyvale and Cupertino where they share the Stocklmeir Elementary and Cupertino Middle among others.

I combed through the spreadsheet I built with over 400 schools so there are too many gems to list. The reason why I put it together is to highlight schools that have increased their API scores in three years successively, so my clients know where there might be good values. The point I highlight for them is that it's the choice between buying the name of the city and buying the school. When you choose to buy the school, you may not have to pay for the name.

But there is nothing wrong with buying the name: you get similar benefits and pricing to the way people buy and resell name-brands.

Investing in the Right Bay Area School District

Treating a Home Sale Like a Job Interview

2007-06-10T00:52:02Z

Getting an Edge When Selling a Home Using Small Details

2007-06-02T19:11:55Z

Recommended Reading: