2018: SFV BUYER'S GUIDE
So, you’re ready to buy a house in the San Fernando Valley. Perhaps you live in metropolitan L.A. and want something more affordable. Or, you might live in the Antelope Valley and want to move closer to the city. And hopefully, you’re ready to stop paying rent and to build equity for yourself and your kids.
Regardless of where you’re coming from, buying a home in the Valley in 2018 isn’t easy. If you have ideas of finding a foreclosure at a great deal, or “offering low” on a listing to get the conversation started, you’re in for a long ride. For every good listing, there’s 10 other buyers who are heavily considering it.
Inventory in the Valley continuously stays at record lows. Buyers are funneling in quicker than homes are being built. People who already own homes aren’t moving because they’re intimidated by the high prices. If you’re in escrow before placing 4 offers, consider yourself lucky.
Our suggestion? If you like a home, offer on it as soon as possible. For more in-depth information on how to get offers accepted, please reference our Advanced Buyer’s Guide.
In this article, we’ll bring you up to speed on the buyer’s situation and what to expect from offering, to escrow, to close. This article isn’t meant to frighten or discourage. You will find your dream house. It just takes a nuanced combination of patience and aggression. By using this website (and its Realtors®), you will be several steps ahead of your competition. This means precious thousands of dollars - and time - saved.
Here's how to buy a house in the San Fernando Valley.
TABLE OF CONTENTS
No, the Market isn't Going to Crash Anytime Soon
How are Home Prices Today?
Prioritize Your Urgency
Get Preapproved for a Mortgage Loan as Early as Possible
Costs of Buying a House
Your Mortgage (And Our Mortgage Calculator)
Find a Realtor®
How to Detect a Listing that Would Take a Lower Offer
Otherwise, You're in a Bidding Situation. Here's What to Expect
Components of a Competitive Offer
How Escrow Works
1. No, the Market isn’t Going to Crash Anytime Soon
Experts agree that prices will continue to rise, though not as quickly as in 2017. Rapid changes in the market as well as interest rates have made buyers feel uneasy.
Your mortgage payment for the same home in January 2018 compared to January 2017 is around $300 more per month. That’s right, with a general price increase of around 6-7% and interest rates going up around a half-point in that period, the house you put off buying for a whole year will now cost you around $300 more a month - for the next 30 years of your loan.
That’s a car payment, groceries, savings, or if you were renting - even more fuel on the fire for lost money. This is not to say to rush to buy the first thing you can get your hands on. This is mental preparation for the arduous process ahead.
Generally speaking, there isn’t a major crash in the near future. There is a possibility for a market correction, but nothing significant enough to outweigh how fast prices are increasing. Economic growth differs from the years leading up to the previous recession because buyers are more protected from shady lending practices. And although prices are increasing, they are doing so healthily.
2. How Are Home Prices Today?
If you haven't checked in a while, the median home price in the Valley at the time of this writing is $650,000. With 20% down, your monthly payment is around $3,200. Or, if you put the least amount down as a first time home buyer (3.5%), your payment is around $4,200.
The bank will only lend at most 50% of your net income to be your monthly mortgage. In other words, if you make $10,000 a month after subtracting monthly bills (but before taxes), you can get a mortgage loan up to $5,000 a month. Keep this in mind when looking at home prices.
If you know all this and you’re still going to buy... then buy! Like, right now. Prices and interest rates are only going up. The next section covers with what urgency to approach the homebuying process.
3. Prioritize your Urgency
There are many time-sensitive issues that you must consider, especially in a competitive seller’s market. Some HAVE to move by a certain date. This is most common with families trying to get their kids into a school district.
Some might have a new job. Others want to close escrow on a house before the end of the year to use closing costs as tax deductions.
Don’t forget that buying home in the summer is more competitive than during the winter. This is for a variety of reasons, mainly being that children are off school during the summer. Furthermore, many buyers wait to file their tax returns in order to qualify for a home.
It should be assumed that you will be making multiple offers and may experience disappointment along the way. 2017 had abnormally high amounts of houses going for above asking price, or even being taken off to be re-listed for more money. This is when the disappointment comes.
Almost everyone underestimates how time-consuming buying a home is. The more it heats up, the more akin to a part-time job it is. You also have to consider your schedule to go see homes. Sometimes, you can’t afford to wait until the weekend for a popular listing. On weekdays, going when you get off work at 5:30 might also not sit well with sellers. And if your Realtor® isn’t around to show you homes when you want to, you should consider finding a more flexible one. Being the first offer is oftentimes the difference between winning and losing tiebreakers.
4. Get Pre-Approved for a Mortgage Loan as Early as Possible
But before you even start looking at homes, get your preapproval. No matter how many times we say, it's not enough. You can’t do anything without a preapproval from a bank. Your offer won’t be considered unless there’s an official letter saying that the bank is willing to give you money.
The preapproval process can take an indefinite amount of time - or as little as 24 hours. They run your credit, look at how much money you have in the bank, and verify your tax returns. There are an infinite number of issues that prevent you from getting a loan, including identity theft, having too much debt, or simply not being able to show where your down payment is coming from. Because of this, listing agents know that getting a preapproval can be difficult. Therefore, they absolutely demand that you have one. Put yourself in the seller’s shoes. Would you accept an offer that doesn’t have a mortgage loan ready to go?
As a rule of thumb, $100,000 of income with around 20% down and no debt can get you a mortgage of up to $650,000, which is just about the sweet spot for homes in the Valley. Keep this in mind when filing for tax returns, thinking about your down payment, and negotiating for a raise. Most importantly, remember that any debt you take on directly affects your purchasing power. This includes car payments, credit card debt, student loans, and other payments.
5. Costs of Buying a House
While many think the down payment is the only cost, there are several more fees.
Your earnest money deposit will usually be 2-3% when buying a house. This is the deposit that you put into escrow to show the seller you’re serious. It goes toward the down payment when you close escrow. In other words, if your earnest money deposit is 3% and your total down payment is 20%, you only wire in another 17% once you close escrow. You get your deposit back if you cancel escrow, as long as you haven’t removed certain contingencies.
You pay for your physical inspection as well. This runs around $300. You pick your inspector, though your agent can probably recommend some for you. Ask us for our recommendations.
Your appraisal will also cost from $300-$500. This is your responsibility, but the lender will order this.
Finally, you have the rest of the closing costs. This is generally 2% of the cost of the house. This includes property taxes, escrow fees, and fees associated with the loan. None of this goes toward the down payment, unlike the earnest money deposit. Remember you’ll need another $10,000 to $15,000 for the process of buying a house. These are due upon the close of escrow.
Don't forget the costs associated with living in a house:
Utilities, which range from $200-$500 a month
Cable, Internet, which definitely vary.
6. Your Mortgage (And Our Mortgage Calculator)
Remember that if you put less than 20% down, you pay Private Mortgage Insurance (PMI). It might not make sense, but if you own less than 20% of your house, there is an insurance that lenders require. This cost ranges between $200-$400 a month. This is a substantial amount of money, especially if you aren’t expecting it.
Interest rates are in the mid 4%’s. They are going up, although they are still historically low. If you’re thinking of buying, it’s still a great time.
7. Find a Realtor®
The writer of this guide is a Realtor®. It's hard to provide criteria without basically explaining oneself, but here are some guidelines anyway:
Sends you homes ASAP - This is important because homes are sold before you blink. You have to be on it and offer before everyone else.
Takes you to see homes - If you're just finding the homes on your own, then you're doing all the work. You might as well just call said writer.
Doesn't push you - Some agents want a commission check now. That doesn't align with the fact that you're buying the largest investment of your life.
Is a local - The Valley changes dramatically within a 5-minute drive. You need someone who understands that change. Born-and-raised in the Valley is preferable.
Tech-Savvy - You can buy a house almost completely through email in 2018. Make sure your knows this too.
Exercises Fiduciary Duty - This is the real estate agent's blanket term for "has your back to the very end." In essence, your agent must exercise caution, care, and loyalty at every stage of the real estate transaction.
And if all else fails, it doesn't hurt to tell a few agents, "whoever brings me the house gets the job." This will really ignite their motivation.
8. How to Detect a Listing that Would Take a Low Offer
On the rare occasion that a property is on the market for more than 30 days, the price is negotiable. That’s the general industry standard. Anything less than 2 weeks, and don’t consider offering lower.
Houses with shabby pictures can also be great deals. On the off-chance that they’re actually amazing houses, you can consider your competition to be much more limited.
Houses on main streets are often fantastic for their price. They tend to be around $30,000 less than houses away from main streets.
Fixer-uppers also bring potential too. While you can change your house over time, you can’t change your location. A beat-up house in a great area is a wise investment if you’re familiar with how to navigate the situation.
Websites like Zillow and Redfin even display how many "views" and "saves" that a listing has from its users. This helps you further gauge how competitive a listing may be.
And of course, get your Realtor® to check out how many offers a listing has. While listing agents don’t like to disclose exactly how high offers have gone, you can get your agent to bug them.
9. Otherwise, You’re in a Bidding Situation. Here’s What to Expect
There are two rounds of offers. The first time, you just offer whatever you feel makes you look good. In a multiple-offer situation, you’re going to the second round everytime - unless your first offer is just that ridiculously sweet. If not, it’s important to view your first offer not as your best one, but as an introduction to who you are.
By that, we mean to not offer low just to see if someone will take it - unless it’s been on the market for 30 days. A low-ball offer presents you in a negative light and doesn’t show confidence. Sellers are looking for the offer that’s most motivated to close the escrow. A low bid is a show of weakness.
Bid higher than asking price. If you do, you should be able to make it to the second round. This will be called a “multiple-counter offer” situation. As the name suggests, there’s multiple offers fighting in competition. And furthermore, all of you will receive the same response, which is asking for your final price to be “best and highest”.
“Best and highest” is a confusing and ambiguous situation to be in. You can offer as high as you want, and could potentially end up offering $20,000 more than the next best one. One’s first reaction might be to ask how high the other offers have gone. Most listing agents don’t like to answer that question, but they are obligated to answer unless their seller asks them not to.
Ask yourself, how high are you willing to go? There’s a premium to be paid for having what you want when you want it. It’s a benchmark of capitalism, and when demand exceeds supply, we are confronted with difficult scenarios.
Many new buyers are distrustful when their agent pressures them to offer higher. But after losing out on 3 dream homes, buyers start to get the point - there’s likely someone out there who wants the house more than you do.
Here's how to get a better chance to win the bidding war:
The escalation clause.
It plays out like:
"Offer to be $1,000 over next highest offer, up to maximum of $700,000, contingent on satisfactory visual evidence of said offer."
In this situation, you don't have to overbid up to a ridiculous amount, when there is a possibility the second-highest offer is already $20,000 lower than yours. Genius, right? It helps avoid a senseless bidding war.
10. Components of a Competitive Offer
Sellers are generally looking for the items listed below. For work-arounds, please refer to our Advanced Buyer’s Guide.
An introduction letter about your family, with a picture. Most sellers don't want to give up their home to investors. Sellers know they have a gift, and want to feel good giving it to the family that can use it best. If there are specific house features that fit with your family's lifestyle, mention them.
20% down payment or more. The idea is that if a buyer has more cash sitting around, they’re more capable of buying a home. Also, if the appraisal comes in low, a buyer with cash will be able to pay out of pocket for the difference.
Short escrow period - 30 days or less. Unless…
Seller will need a longer escrow period. So you can offer longer (anything more than 60 days is unreasonable) or rent-back, which is when the seller rents it from you after the close of escrow.
Shortened contingency periods. There are three main contingencies, which are the physical inspection, appraisal and loan. We recommend at the longest 10 days for inspection, 14 for appraisal, and 17 for the loan.
As many items waived as possible, including the above-mentioned contingencies and termite clearance.
Most buyer’s agents will recommend these factors automatically, but do double-check to make sure that your offer looks like this.
11. How Escrow Works
Congratulations, you got your offer accepted! You’re close, but there’s still work to be done. Around one-fourth of escrows cancel. Especially in a tough situation like yours, there are backup offers and a seller that feels entitled to keep negotiating for anything they want.
Your Attitude in Escrow
You can now negotiate more once you’re in escrow. Chances are you’re in escrow for more money than you wanted to pay. Now is the time to get as much back as possible.
Be as aggressive as you want without destroying the escrow. By that, we mainly mean the physical inspection, which leads to the next part.
The Three Main Contingencies
But first, what are contingencies? In short, contingencies are a fancy term for milestones throughout escrow. If you have 10 days for the physical inspection contingency, then the seller gives you 10 days to perform all inspections and come to a satisfactory conclusion for all parties. After 10 days, the seller has a right to cancel the escrow.
Furthermore, if you remove your inspection contingency, and then cancel because of inspections later, then you risk not getting your deposit back. This is important to note, as canceling escrows after removing contingencies is the main form of not recovering your deposit.
When you shorten contingencies, you’re pledging to the seller that you will move quickly through the escrow, thus sweetening your offer. Although this seems unfair to the buyer, there are still many, many escrows where buyers drag their feet. Contingencies are really the only protections sellers have from their time being wasted.
With that being said, let’s discuss the three main contingencies.
The Physical Inspection Contingency
The physical inspection is where many escrows fall out, because the buyer and seller can’t agree on a cost for repairs. No matter what, unless you’re buying a new house, there will be issues. Do not freak out when you get your inspection report. But do look over what’s reasonable to ask money back for.
The rule of thumb is to request repairs for anything that wasn’t disclosed, wasn’t immediately visible, and affects the functionality of the house. For example, if the inspection reveals that the sewer line is clogged, you should have a right to ask for a repair or money back. It likely wasn’t disclosed, wasn’t immediately visible, and certainly affects the functionality of the house.
We recommend just asking for closing costs in return, instead of asking for the seller to repair. This could take longer and potentially include shoddy work. At any rate, you can probably safely ask for $5,000 back as long as you emotionally and effectively present your case. Your agent will use a Request for Repairs form, which doesn’t allow for effective persuasion.
Make sure they gather all pictures and write flowery descriptions about each one. Keep in mind that the seller is in a position of power. They can just as easily refuse your requests. Your main bargaining power is that the seller doesn’t want to open up escrow again.
The Appraisal Contingency
The appraisal contingency is your right to cancel escrow if the appraisal comes in low. You must remove your contingency between 14-17 days into escrow. It could be less if your lender orders the appraisal immediately upon entering escrow. If you can tighten up this part of your offer, do so. Having a 13-day appraisal contingency removal looks better than a 14-day removal.
The main purpose of this is to protect buyers if the appraisal comes in lower than the offer price. For example, if you offer $650,000 on a house and the appraisal comes in at $630,000, then someone is $20,000 off. The seller thought they would receive $20,000 more, but your loan will only go up to $630,000.
Your appraisal contingency is your right to cancel or negotiate the outcome with the seller. Generally speaking, there is a resolution to this, and it ends up favorable for the buyer.
More importantly, most appraisals today come at the purchase price. This is because we are going through a period of strong growth. It’s not hard for appraisers to justify the prices of houses now.
Naturally, appraisals come up short most often in lower-priced homes. It’s harder for appraisers to stretch the value of a condominium, as opposed to a single-family residence (SFR).
For SFR’s, it’s become normal to outright waive your appraisal contingency to get offers accepted. This is for three reasons.
First, it gets offers accepted. Sellers don’t want to deal with the probability of an appraisal coming in low. Unfortunately, the risk is that buyers must come up with the difference in cash. Thankfully, that usually doesn’t happen.
Second, appraisals almost always come in at value price. This is especially true if your lender has a good relationship with the appraiser. Make sure you verify with your lender that they can get this done with your appraiser.
Finally, a low appraisal can destroy your loan. Technically speaking, your loan is invalidated with a low appraisal. As long as you still have your loan contingency, you can get out of the escrow. This is what one would call a technicality. The loan is dependent on the appraisal. If the appraisal is deficient, then the loan is too.
In sum, waiving the appraisal contingency isn’t a huge problem.
The Loan Contingency
The loan contingency is usually the final barrier before a buyer is all-in on a deal. Once you remove this loan contingency, typically 17-21 days into escrow, you’re headed for the finish line.
Waiving the loan contingency is riskier, but it is becoming more status quo. Refer to the Advanced Buyer’s Guide for more information.
Maybe: Sale of Property Contingency
If you own a house that needs to sell, this is actually the last contingency you remove.
You need to sell your current residence in order to fund the purchase of your next one. You remove this contingency mere days before the purchase of your next house. This is because as soon as your house sells, the money goes straight into the next one.
At times, this can be a disastrous contingency, especially because it's right before the end. Perhaps the buyer for your house cancels, which completely undoes the purchase of your next one. Or, the sellers of the house you're interested in cancel - leading to a domino effect of cancellations.
For more information about the list-to-buy process, check out Edgar’s video (He's a pro at these tricky situations!).