Home Truths, a quarterly report on the state of the Berkeley real estate market, is brought to you by Red Oak Realty.
When considering a home purchase in the East Bay where buyers are competing for a small number of homes for sale, one is often faced with intense competition. Chances are, when you finally find a place that suits you, you’re usually not the only one who feels that way; any bid you submit is going to compete for a seller’s attention with several other bids, possibly dozens of them. So how DO you compete for the place of your dreams in this market? Well, first and foremost, you need to understand the market you’re entering, and one of the best ways to do this is with data. Once you know what you’re up against, putting together a strategy with your agent is the next step.
“In God we trust, all others must bring data.”
According to a recent report by UBS, analysts continue to look toward the technology boom to explain the competitive housing market in the Bay Area. Using San Francisco as a guide, their data reveals a 65% increase in single-family home prices since 2012. That’s a rather daunting fact if you’re just entering the Bay Area housing market now. So what’s a buyer to do?
Learn about the market by looking at the numbers. Ask your agent for the data. Knowledge can make the difference between paying more or less for a property. For example, buyers who waited to see if the market would slow in 2016, ended up paying, on average, 9% more for their homes in 2017. The time it takes for buyers to “buy in” to this competitive market, the higher the cost of the home they eventually purchase. The chart exhibited reveals the median sales price for a single family home located in the inner East Bay (Albany, Berkeley, El Cerrito, Kensington, Oakland and Piedmont) climbing steadily over the past five years. With the lack of inventory still on the rise, prices aren’t expected to come down anytime soon.
So you’ve collected your data, and you’re ready to place an offer, now what? How do you get a seller to consider your bid? Simon Black of Red Oak Realty explained some of the common concessions that buyers are making in the East Bay to sweeten the deal.
Price still remains the single most important factor to getting an offer accepted, but Black notes that there are additional details that motivate sellers. For example, the amount of time it takes to get to closing is very important. While their home is on the market, the sellers are still paying their mortgage on the property. And in a market like the East Bay, many sellers are moving out of the home in order to stage it and free it up for showings. This often means they’re living somewhere else (and possibly storing their furniture and other belongings) or paying the mortgage on a new home while their property is on the market.
As a result, most sellers want to get their homes sold as quickly as possible. Sales price is key, of course, but if two bids come in for the same amount, or are very close, then the sellers might be persuaded one way or another if one buyer’s bid has a shorter time to close than another. This also means that East Bay sellers might not be very interested in “extras” like a longer closing process (so they can actually stay in the home longer) or a “free” month or two living back in the home. “In non-hyper-competitive markets, more of those concessions do happen,” Black explained. “But I’d estimate that 85% to 90% of the homes that are being sold in the East Bay have had the sellers already move out.” It’s important to find out what the sellers prefer, which means, once again, doing as much research ahead of your offer as possible.
Buyers also need to realize that sellers in the East Bay market usually spend a considerable amount of money preparing their home for sale. On average, 38% of Red Oak sellers invested $20,000-$40,000 on their property in preparation for sale in 2017, with 18% spending $60,000 or more. This work normally includes painting, floor refinishing, landscaping and staging, but can often include entire renovations of bathrooms and kitchens, or replacing faulty roofs or foundations. Sellers can also invest several thousand dollars in inspections and contractor bids. Buyers feel stretched on bid prices and competition, but it’s helpful to keep the seller’s perspective in mind when compiling the terms of an offer, as sellers have often done a lot of recent upgrades and work to their property just prior to listing and this is often reflected in the final listing price.
There are three major contingencies that are packaged in with most residential real estate bids. They are the loan contingency, the appraisal contingency, and the inspection contingency. These contingencies are built into the bid so the buyer has the ability to withdraw from the contract if the loan falls through, if the appraisal value doesn’t reflect the loan amount, or if an inspection reveals issues with the home.
“In the East Bay, most buyers are given a disclosure packet that gives them the full history — as much as the sellers can provide — as to what they’ve done to the house,” notes Black. “In most of the East Bay, they also get a general inspection and a pest inspection within that disclosure packet. Those things generally tell you the soup-to-nuts of any possible issues with the home, so buyers can go in with eyes wide open and know they’re purchasing a home that may need a new roof in three to five years, for example.”
The disclosure packet gives buyers a solid idea of what they’re facing with the potential new home, and it also gives them an idea of what they might be able to waive with their bid. “If the seller has a thorough disclosure packet that has the inspections, bids on work needed or work performed based on the original inspection, then the buyer’s need to keep an inspection contingency in their offer may be unnecessary, which could make their offer more attractive to the seller,” Black noted.
As far as the appraisal and loan contingencies, some local lenders with highly qualified buyers might be able to advise those buyers that an appraisal contingency or loan contingency isn’t necessary either. “A lot of that has to do with the buyer’s financials,” Black said. “If they have enough in the bank or in restricted stock, partnered with a strong financial backing, then many times they can remove the loan contingency,” he said. As far as appraisals, this is where data comes in once again. An agent can show recently closed or pending comps that help to support the amount of the offer. If an appraisal is short, some buyers can make up the difference and still consider removing the contingency in the offer. The strategy used to decide whether a loan or an appraisal contingency can be removed to increase the desirability of the offer requires considerable work before the offer is submitted. Buyers need to have their loan packet complete, have crunched their individual numbers and become familiar with the trends in the neighborhood they’re considering – all the offer date. Removing contingencies without that information could put a buyer in jeopardy of not being able to perform on the contract otherwise.
Buyers in a financial position to bring an all-cash offer to the table, or even simply more money down at contract signing, can make the offer more attractive for sellers without ever raising their bid. “If buyers are able to pay all cash, they’re usually able to close in a much shorter period of time than going with a traditional bank,” explained Black. “One thing agents need to work on with their buyers is making sure they have really strong lending that can help them close quickly,” Black concluded. “Sellers are going to be looking at how quickly they can close a transaction. The smoother this can happen, the better it is for both parties.”
Take the case of Stella and Rod (names changed for privacy), who had plans to move from San Francisco to the East Bay, both for the schools and the lifestyle. They hired a local agent to help them find a home in Rockridge towards the beginning of 2017. Despite looking at the rising numbers year over year, the couple was determined to find a deal in their dream neighborhood where they could walk to BART, restaurants and their child’s new elementary school. They started looking at homes that were listed slightly below their threshold, having heard about the market’s outrageous bidding wars. However, despite the data that showed the need to put their strongest offer forward, they decided to make their first offer just slightly more than the listing price. There were six offers on this first home, theirs was the lowest. Needless to say, they lost the home to higher bidders.
Unfortunately, Rod and Stella, although analyzing the data, ignored the overall trends of increasing price, and based their offers on the handful of negative aspects each property had, missing what the market statistics were showing. They failed to understand how the increased pace of the market pricing, coupled with the dearth of inventory, would predictably reach a threshold that would price them out. In each subsequent offer they made, they continued to hold back, feeling that the minor home deficits or cosmetic aesthetics warranted a lower than outstanding offer. And yet, despite offering more than the list price with each of their five offers over the course of the year, they lost every single bidding war.
Without considering the aggressive market trends and acting quickly with that knowledge, they were eventually priced out of Rockridge over that twelve-month period as the median price for a single-familyy home went up 19.6%. Had they offered the maximum amount feasible for them toward the beginning of 2017, they would likely have had a bid accepted earlier on and acquired a home in the neighborhood they truly desired to live in.
In the case of Sophie and Brayden, they were determined to find a home in Crocker Highlands where they had friends who had purchased a home in 2015. They knew the prices were climbing and the competition was tough, so before even seriously looking at homes they decided to get their financials in order. In addition to having a pre-approval packet, they liquidated funds that enabled them to put a lot more cash down upfront, strengthening their offer. Not something everyone has access to, but an important factor when considering a competitive bid should you have options.
In addition to securing their position financially, Sophie and Brayden recognized the need to move quickly and aggressively if they found a home they loved. And that’s exactly what happened. After losing out on a home the week prior – by about $25,000 – they weren’t going to take the risk of losing another one they loved, even though the kitchen needed updating and the lot was not as flat as they would have preferred, they moved forward. Using the data to compare comps, pricing details and most importantly that particular neighborhood’s specific trends, they put their best foot forward and with the help of their agent wrote the strongest offer they possibly could. Fortunately for Sophie and Brayden, their strategy worked. It took courage, determination and overcoming the fear of paying too much, that prevailed in the end. The median price of homes in Crocker Highlands went up 18.3% in 2017, which equated to an estimated 18% savings for the couple had they not taken the same approach.
These stories surface over and over again in the current Bay Area real estate market. No one wants to purchase a home at the “top” of the market. But pricing in the Bay Area is unlike almost any other market nationwide. Serious buyers need to be incredibly informed about the home buying process and educate themselves with the data before they even start the process.
Home Truths is written and sponsored by Red Oak Realty, one of the largest independent real estate brokers in the East Bay, serving the community since 1976. Read more in this series. If you are interested in learning more about the local real estate market or are considering buying or selling a home, contact Red Oak at firstname.lastname@example.org, tel: 510-250 8780.