Buying my first property without contingencies in Milpitas

17 Replies

My wife and I just moved to San Jose and we are trying to buy our first primary residence in Milpitas, to start a family. We earn a bit more than $225K combined and we only have about $120K in cash. Therefore, we are only able to put down 10%. We qualify for a loan of about $820K. We are finding it extremely difficult to buy anything, not even a townhouse. 

The market here is insanely hot and our agent is telling us that we pretty much have to put in an offer without any contingencies at all AND offer free rent back to the seller. The costs just pile up and up. 

I am most concerned about the appraisal contingency. Our agent is saying that there is pretty much no data to estimate what the appraisal will come in at, so it is completely gambling without this contingency in. I always analyze our finances in detail to value the property and calculate what we can afford to offer. Without the appraisal contingency, my affordability analysis is pretty much useless.

Is it advisable to remove the appraisal contingency? I am concerned that if I don't, I'll never be able to purchase a home, but I really can't get past the risk of opening ourselves up to a cash shortfall. I feel like I am already strapped for cash as it is. 

thank you for any advice!

@Kenley Law All I can say is when I am spending a Million dollars I want some sort of security blanket. Home inspection and at least a mortgage contingency. Maybe this is a sign to wait for the market to crash because you cant sustain this for ever. be smart and buy when the market is down and sell when its up. The real trick is know when. I dont have that answer. If I did I wouldnt be on a forum I would be on my own private island somewhere LOL. Also look at properties that need work and are ugly and nobody else wants. There may be some real value there if you look hard enough. Its going to be more work and a learning curve but nothing is easy if there are rewards for you at the end of the day. Sounds like a tough market and good luck to you.

@Kenley Law Agree with @Alex Deacon . I know market here in Bay Area is pretty hot and will get crazy this summer. Prices should stabilize this year though because of the new tax laws.
I will say find ugly property and rehab. Also, try to look into areas like Fremont, Pleasanton, San Ramon etc where your money can go little farther.

@Kenley Law   Get a new agent.  Now.  I don't care if they are your friend, aunt, cousin, relative, etc.  They are not fulfilling their fiduciary responsibility towards you.  I live in San Ramon and grew up in Santa Clara.  I know this market better than the back of my hand.  

Yes, people are doing very risky things in making offers today.  They are desperate to get into a house.  They will write offers with no contingencies, 3 day closes, free rent to sellers, all while maxing out their spending to get into a home.  Does that mean you need to do the same?  

Ask yourself this - if your offer of no contingencies gets accepted and you are unable to close, can you afford the hit? I assume you are putting in 3% EMD, which on that home is roughly $24k. Are you willing to risk 20% of your savings on this offer?  If you lose it, how much home will you qualify for if you now have a $96k down payment?  And how much harder will it be for you to compete?

If you need to buy a home today, you can do it by writing offers that retain your contingencies.  It is just harder and takes a bit longer.  But based on what you have written, your downside risk on this is high, so it had better be one you are willing to absorb if you are going to pursue it.

My advice: Get an agent that fulfills their duties to you as a client.  Write offers that you are comfortable with.  Getting an offer accepted looks like the finish line to you now - it is the starting line.  Structure your approach so that you get to the finish line intact - and happy.

@Kenley Law yes the California marketplace is challenging and the numbers are vastly different from what you see throughout the majority of the country and it can be exceptionally intimidating and frustrating because of it. 

If I'm working with a seller and I have multiple offers to look at, looking at offers with 90% financing can be unsettling especially if you don't have the extra cash to bridge the gap between the purchase price and appraisal. The likelihood that the seller would need to cancel escrow if the appraisal doesn't come in and you don't have the extra cash, is very high. It makes your offer significantly weaker than someone else whois coming in all cash or someone with a lower LTV ratio or has the extra cash in the bank.

I don't see any problems with you removing the appraisal contingency because there's a strong likelihood that escrow would fall apart if you need to bridge the gap anyways. The alternative is that you could always cancel due to some concerns with the inspection. I'd also be hard pressed to say that your entry level price point is pretty close to what you're looking to spend (California is a whole other animal). The reason I mention that is to provide some security on your value and quality of product in contrast to an appraisal. Sometimes it can be difficult for appraisers to keep up with a "hot" market and they are more likely to be conservative especially post recession. Hope this helps and that your hunting goes well!!!

Thank you everyone for the valuable advice!

@Yousif Abudra I don't think our agent is necessarily forgoing her fiduciary duty to us. I think she is just trying to align our expectations with reality because of what the seller’s specific demands are. That being said, you are absolutely right, that we have to do what we are comfortable with and getting an offer accepted is totally just the beginning. Our offer price has to make sense for market conditions now AND the future.

@Alex Deacon , @Alpesh Parmar  Our most recent offer was at 706k for a 3bed/1.5 bath townhouse that was listed at 628k. Same layout sold sept 2017 for 665K. The seller received 21 offers and of course, our’s did not win.  From an investment perspective, this area seems bad to us. There are fundamentals to evaluate, but they simply don’t matter to buyer’s because there is no supply. However, we still need a place to live and bad investment or not, with rising rent prices, we are just looking to the lesser of two evils – continue paying sky high rent or pay sky high prices for property. There is no right or wrong, but we’d rather pay into our own equity rather than our landlord’s. Perhaps we can start with buying small to live and investing elsewhere till the market here balances out.

We’ve looked at potential rehabs, but I don’t have the skills/experience at the moment to evaluate distressed property. That will take some time to develop. It also seem most properties that require a complete rehab seem to be bought by cash buyers.

@Kristina Heimstaedt If we rely on getting out of the deal on the inspection, that would mean that we are going to need to leave the physical condition contingency in, which would still weaken our offer, albeit would it weaken our offer to a lesser degree than the appraisal contingency?

Thanks for all your advice!

I thought our incomes were pretty decent, but I'm finding it no so much for the Bay Area.

Originally posted by @Yousif Abudra :

@Kenley Law "Reality" as defined by your agent's perception may be skewed. Be careful.

 I know what you mean. Based on what I've seen for myself though, I believe her perception is justified. People are paying 20 - 30% over comps from Q3/4 of 2017 with no contingencies.

It feels like a lot of buyers are digging themselves a grave. How can you compete with suicide bombers?

What about buying a small multi family like a triplex or quad? You’ll qualify for much more than $820K because the lender will count the rental income. I bet that your net monthly outflow will be much lower than a townhouse.

Furthermore, you can get an FHA loan and only put 3.5% down. Save the rest of your cash for improvements or reserves.

You’ll be making a sacrifice because you’ll be sharing walls and having to deal with tenants. But it will be a worthwhile sacrifice.

@Account Closed I don't mind sharing walls at all. My ultimate goal is to actually be a landlord. However, will they count the rental income right off the bat? With my previous rental property, the bank wouldn't count my rental income until I had at least 2 years of rental. (That was in Canada. I don't know all the rules here)

@Kenley Law Not sure of current lending guidelines, but I believe they do count it, even without experience. @Chris Mason can confirm. (Who is also a super star loan officer, get his contact info and add him to your team if you don’t already have a loan contact). 

Originally posted by @Kenley Law :

@Account Closed I don't mind sharing walls at all. My ultimate goal is to actually be a landlord. However, will they count the rental income right off the bat? With my previous rental property, the bank wouldn't count my rental income until I had at least 2 years of rental. (That was in Canada. I don't know all the rules here)

 Hi Kenley, 

Many 'jumbo' lenders will not count rental income without history of receipt and/or landlord experience. Some do, however. 

If it's an Agency (not jumbo, but Fannie/Freddie/FHA/etc) and you are being told rental income doesn't 'count,' that's an overlay

But, the good news is that the threshold where it becomes 'jumbo' goes up with unit count. In the Bay Area you're up at $1.3m for a fourplex, $1m for tri, and $870k for duplex, rental income 'counting' and not 'jumbo.'

With the good comes the bad, however: it'll likely take more than writing offers on MLS properties in Milpitas to get something accepted in the 2-4 unit space using one of the low down payment options. Driving for dollars, dialing for dollars, mailers, network, et cetera.

I notice you're in Pleasanton, but house-hunting in Milpitas. You've commented on the near-insanity of the Milpitas market. As soon as you get to Union City and north, things get a lot calmer (still hot, but not insane). Milpitas is "too close" to Silicon Valley, if that makes sense. Pleasanton, where you presently live, is also still fully sane (still hot, but not insane).

Just so you don't feel bad: the overwhelming majority of your competition in Milpitas putting 25%+ down did not save it up the traditional way that you probably saved up your 10% down. Most of them, it's either a cash out refinance from some other property, gift from family (which could be that cash out refinance on Mom's San Jose home purchased 20 years ago at the 1998 price), lucky IPO (if you want $10m, it's actually really easy to do: build a time machine and go become one of the first 50 employees of Facebook), etc. Most of these folks flashing all this cash aren't advertising where it actually came from. 

Originally posted by @Kenley Law :

My wife and I just moved to San Jose and we are trying to buy our first primary residence in Milpitas, to start a family. We earn a bit more than $225K combined and we only have about $120K in cash. Therefore, we are only able to put down 10%. We qualify for a loan of about $820K. We are finding it extremely difficult to buy anything, not even a townhouse. 

The market here is insanely hot and our agent is telling us that we pretty much have to put in an offer without any contingencies at all AND offer free rent back to the seller. The costs just pile up and up. 

I am most concerned about the appraisal contingency. Our agent is saying that there is pretty much no data to estimate what the appraisal will come in at, so it is completely gambling without this contingency in. I always analyze our finances in detail to value the property and calculate what we can afford to offer. Without the appraisal contingency, my affordability analysis is pretty much useless.

Is it advisable to remove the appraisal contingency? I am concerned that if I don't, I'll never be able to purchase a home, but I really can't get past the risk of opening ourselves up to a cash shortfall. I feel like I am already strapped for cash as it is. 

thank you for any advice!

 Im not from CA, I know the market is different than OH - but like some others have pointed out, I am spending a million I want to be able to have a basic inspection contingency - I understand a market can be hot! but reasonable contingency should be of no concern to a credible seller / credible property

@Kenley Law like Chris had mentioned, you can shop around at other areas where it may be less crazy. or rent. save your downpay, built it up, learn about landlording, analyze some rental deals, run the numbers and when your ready, buy an investment property like an apartment somewhere else where the cash flow works or even a 4 unit house hack if you find a good deal. if you put all your saving in buying a house, and your future goal is to be a landlord, how long will it take to replenish that savings to acquire a rental property? cardone always says "rent where you live, own what you rent." some people may disagree but everyone has their REI strategy.

@Chris Mason thank you for the info. I did live in Pleasanton and love it, but my wife works in Santa Clara. The commute absolutely doesn't work for her. I'm guessing the prices for a fourplex would be more than 1.3 million? Given that a SFH goes for that price?
You are right, being new to this area, I saved a lot of my money conventionally, which might not be the smartest way, but I worked hard at it. I'm guessing a lot of people from the Bay area are also flush with cash from cashing in their stock options.

@Paul Choi I am leaning more and more towards that thought. I'm now thinking buy small (just a modest place to live in), like a 1 or 2 bedroom condo and invest in other rental properties outside of CA. I do not want to rent because rent prices are so high and keep increasing. My original plan was to buy a house and build an add on suite to rent out, but that seems to be a huge challenge now. 

@Kenley Law , your C.A.R. standard real estate purchase agreement includes six contingencies for the purchase of a regular residential property: loan, appraisal, physical condition, disclosures, title, and HOA. Within those, there is a lot of room for discretionary disapproval of certain facts discovered during the escrow. Every escrow and property is different, but as long as the contingency is exercised in good faith, it is up to the buyer's discretion and approval for the most part. So, is your agent suggesting that you need to remove all contingencies or just your appraisal contingency? If just the appraisal contingency, you would still have other contingencies that would potentially allow you to cancel the transaction and recover your initial deposit.

@Bryan Zuetel all contingencies. The more I get into the market, the more I'm seeing that this is the basic requirement. Sellers are demanding for non-contingent offers and buyers are giving into those demands. 

Such is the story in the Bay Area.