First Time Buyer in the San Francisco Bay Area

Photo by Phil Hearing on Unsplash

After house hunting for 9 weeks, it’s clear that the San Francisco Bay Area is a difficult market to buy a single family house for a first time homebuyer. House prices are driven upward due to scarcity of the supply and high demand for houses. House sales are completed in an astoundingly fast paced that is head spinning for a novice house buyer. The sheer competitiveness of the market forces the buyer to remove their safety nets in order to compete. Purchasing a house is pretty much a rat race skewed in favor of more wealthy individuals in the current housing market.

The Rat Race
an exhausting, usually competitive routine
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Here are things to know for any first time buyers in the SF Bay Area.

Market Conditions

Unfortunately, the bay area is a very competitive housing market where the seller has leverage because there are multiple offers to choose from. It’s commonly called a seller’s market. The listing price isn’t a great indicator of how much the house will sell for. In San Francisco, houses may be priced at 1 million but they will sell for 1.4 million. A whopping 40% over listing prices! Toward the East Bay, the competitive areas with good schools and neighborhoods may still go for 15% to 30% over listing price. In less desirable areas, offers may go 5% to 10% over listing prices. It’s rare for a “ready to move in” house to sell at or below listing price. There are too many buyers and too few sellers that a house can have 20+ competing offers that drive up the purchase price through a bidding war.

House listing can be underpriced to attract buyers to view the house and make offers. Sometimes a freshly renovation house pops up that looks amazing with a low listing price. A good way to tell if a listing is underpriced is checking online listing sites where there are estimates of how much the house will go for. A telltale sign is a house listed for 1.1 million but has an estimate of 1.3 million is a good indicator. The estimates are not 100% accurate but it’s within the ballpark.

Houses can go into sale pending around 7 days of being listed and popular houses are even shorter with around 3 days. The length leaves very little time to decide on a house because the offers may be due the very next day. Within roughly a week, a buyer would need to view the house, check the seller’s disclosures, decide what price to offer, and sign all of the purchase agreement paperwork. The first time is the most difficult as there are so many things to learn and paperwork to read. The process gets easier each time as its the same forms to sign and similar disclosures to look at.

There are three contingencies in California that helps the buyer get out of a purchase agreement without losing the initial deposit which are loan, appraisal, and inspection. A loan contingency helps when the bank doesn’t loan the money. An appraisal contingency helps when the bank appraises the property value to be lower than the offer price. Lastly, the inspection contingency helps when the property is in a worse condition than expected.

In a competitive market, buyers would waive all contingencies to make their offer more attractive without increasing the offer price. Unfortunately, it’s very common for offers in the Bay Area to have all contingencies waived. For a buyer to keep contingencies, they would have to offer more money to make their offer more attractive than offers with waived contingencies. Keeping buyer contingencies means more risk to the seller that the purchase can fall through so the seller balances risk versus money offered.

The condition of the house for around a million is unfortunately a fixer upper. Many houses in the bay area were built in the 1950s that are not up to date with today’s standards. Electrical may be 50 amp with a fuse box and the may still use two prong outlets that are unsafe by today’s standards. There may also be leaky pipes made from failing galvanized steel, termites, and fungus damaged wood. Buyers are accepting the problems as they purchase the house and expect to fix the problems after purchase. It is pretty much a “sold as is” purchase. All buyers can expect to have a budget to fix up problems and to renovation the house up to standards if they wish to.

Comparable analysis is comparing recent house sales in the neighborhood to find comparable houses to determine the price of the house. The logic is if a 3 bedroom and 2 bathroom in the neighborhood sold for 1.3 million, then a similar house inside the same neighborhood with similar house condition should also sell for 1.3 million. Buyers can expect they should offer at least 1.3 million for the same house, but the final price may be higher due to other buyers trying to beat each other’s offer price. The downside is if all the houses could have recently sold for 1.1 million but some person buys a house for 1.3 million, then all houses from that point be estimated higher be than 1.1 million. If multiple buyers offer 1.3 million to different houses in the same neighborhood, the house prices will be higher. Banks and popular online house listing uses a similar method to determine their appraisal/estimated price.

After an exhausting search to find a suitable house, there may still be a bidding process to get past before house ownership. Some sellers will accept the highest offer they received by the deadline but there are sellers who will ask the top offers to counter offer each other. Getting caught up with the competition without a plan will be stressful and scary. One thing to keep in mind is not going too far from the comparable analysis unless you have cash to cover the difference because the appraisal price the banks uses follow a similar method.

The best tip is to either:

  • Offer your “best offer” which is the highest price you’re willing to pay for the house and skip the counter offer process
  • Offer a competitive price and decide on what is your maximum you’re willing to pay if the seller is entertaining counter offers

The latter can save some money but is stressful when the agent says a higher offer was submitted and asks if you want to adjust the offer price.

Buying a house in a seller’s market is a rat race where everyone is trying to beat the other person in offering higher prices. Each time a bidding war happens, the house prices within the same neighborhood gets pushed higher. Welcome to the ever increasing house prices market. The middle class salaried person can’t really compete. Maybe things will be different in a few years if the house inventory improves.

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