First Time Home Buyer - where do I start?

Holding Open Houses in San Francisco you meet a lot of first time home Buyers who are just starting to stick their tow in the water. Most have a few months of reading about how the sky is falling in real estate, so if they like the home I'm showing they usually get around to asking "would they accept $xxx,xxx?" Usually that number is 10% to 20% below what we're asking.

It's easy enough to peg a newbie, but this question removes any doubt that the person isn't educated on the local real estate market - that is the CITY of San Francisco - and in particular the neighborhoods I mainly work in. They think of themselves as experts because they read the WSJ and the Economist regularly, and they KNOW the sky is falling. But they've just started looking at properties in San Francisco, so in fact, visiting Open Houses is truly their first "real" education.

So "where do I start?" You start with self-education on the local San Francisco housing market. When reading about the U.S. real estate market, or even the Bay Area real estate market, and unfortunately all you've learned is what reporters, who spend half their time writing about hurricanes and local politics, thinks the pencil pushing economist, who hasn't bought a house in 20 years, said about the macro-economic issues that are impacting the overall real estate market. Sorry for the run on sentence.... but say that 10 times fast and then tell a friend who tells a friend, and eventually you get the kind of education that will help you ask the following question:

"I know your Seller is asking for $775,000, and I know you told me that just the other day she turned down an all-cash $725,000 offer that had a 10 day Close, but would she be willing to accept my $675,000 offer?"


While I condensed 2 days of in-person and email conversations together to write the above question, it is exactly what a "newbie" Buyer asked me this past weekend.

I dealt with the above question seriously, because like in anything else, there is no such thing as a dumb question - it is after all the best way to learn - stick your toe in and start asking questions. So I tried to explain that should the Seller accept her offer it would be as if she gave a complete stranger a $50,000 gift. I know some generous people, but not that generous.

Another explanation is that IF my Seller would consider an offer so much lower than what we were asking, I, as her Listing Agent, would first encourage her to lower her price... let's say to $699,000. Given the feedback on this particular home from "real" buyers, I'd have to guess that I'd have 3+ offers inside of a week between $700k and $735k.

But the best explanation is what the market is telling us the Condo is worth - backed up by local numbers - and I'm not even talking San Francisco the city info, which is far better than anything the WSJ has ever reported - I'm talking about all activity within a 5 block walk of this particular condo in the past 3 to 6 months.

If this "newbie" Buyer had that kind of information she'd have seen that the cheapest "comparable" that has sold recently went for $725,000. So our "all-cash" buyer was using some logic in his offer. My seller knew that "comparable" Condo did not have in-unit laundry, and was in an older building with deferred maintenance, and that the 3 next cheapest comparables all sold for $740,000 with the rest selling for $775,000 and above. That's why she turned down the offer $50k lower than her asking price... she felt that her Condo had to be worth at least $740,000 and if we wait long enough for the right buyer, $775,000.

But the moral of the story here is that to be a "real" buyer, you need to be educated on "your market". In this case, her market was all north end of town neighborhoods like North Beach, Russian Hill, Pacific Heights and others.... for Condos with at least 2 Bedrooms and 2 Bathrooms. She would also have seen how much things were selling "per Square Foot", how much everything was selling in comparison to the Listed price... which I believe was 1% under.... not 12%... and how long it was taking Condos to sell... so if it's an average of 45 days and we're at day 30 the Seller is hardly desparate.

So, to answer "where do I start?" First - even before you check out Open Houses, and before you even decide what "your market" is, you need to know what you can afford. For that I strongly recommend speaking to a Lender. You need a spreadsheet with ALL expenses you will face if you own a home... including HOA dues and property taxes. Then you know your upper price range. If it turns out it's $675,000, you should really only look at the $775,000 Condos after they've been on the market for 60+ days... or some time frame that is higher than what "your market report" tells you all of the others sold.

No need to write another Post for Step #2... as indicated above... with your purchase price maximum solidified... skip months of house hunting by asking your favorite Realtor for a report on "your market". That is all activity from what has Sold in the past 3 to 6 months, what is in contract now, and what is currently For Sale. Now you'll have a general idea of what your purchase money will get you.

You must then decide if you are willing to accept what the market will give you. If you insist on a 3 Bedroom condo, but the report shows you that in your price range the largest Condo sold in 6 months was a 1 Bedroom, you either have to accept the idea of a 1 bedroom, or you have to find more money, or you need to scout out other cheaper neighborhoods. You can't force a square peg into a round hole, or expect a Seller to hand you a $50,000 gift.

Step #1 - speak with a Lender
Step #2 - get a local market report on "your market"
Step #3 - be realistic, and focus on what you really can afford

Finally - Step #4 (with many more steps to go) - get out there and look at as many homes as possible. Armed with the information above, you'll begin to earn "feet on the street" type of knowledge that we Realtors have.

Happy House Hunting.

Novemeber 21st update - the condo in question sold for $725,000. I wrote this post on Sept 3rd, and then the market CRASHED. It crashed so much that we were only have to duplicate that first all-cash offer of $725,000. So... $675,000 was never a realistic number.... but I became wrong on my estimate of the condo's worth the day the word "bailout" became national news.

You may also be interested in reading:
The Next Hot Real Estate Market
District 7 Market Report
Mortgage update From a Lender I recommend
Secrets to Getting Low Offers Accepted

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