Buying a House in San Francisco

May 10, 2005

For almost two years Jennifer and I have been trying to buy a house in San Francisco. Two weeks ago we finally submitted a successful bid and the house should be ours by the end of the month. Here are some hints and tips we learned along the way.

Housing bubble

Many people will tell you that housing prices in San Francisco will continue to go up, and even more will tell you that they’re about to go down. Some people will even tell you it’s about to crash. In ten years living in the San Francisco Bay Area, I’ve found two things to be true: (a) every year people predict that the housing bubble is about to burst; and (b) every year those people are wrong. However, they’re going to be right sooner or later, so buy a house you can afford and that you like. Buy a house you wouldn’t mind living in for many years. Don’t buy a house because you’ll think it’ll go up in value.

Besides, let’s say that it did go up in value, like $350k in three years. (That’s what happened to the previous owners of our house.) Unless you want to leave the Bay Area or rent, you’re just going to put that money into your next house, which is also going to have appreciated that much (on average). Your mortgage will be the same in a different house, so you’re no further ahead. You only win if you cash out and move to Nebraska.

Get a good real estate agent

For most of those two years we had a real estate agent who didn’t do much for us. We found all the listings ourselves, went to all the open houses ourselves, and she helped us write two bids. We finally switched agents, two days later he chose four houses for us to look at, and less than a week later we put a bid on one and it was accepted. Maybe a coincidence, but for us this new agent just clicked better. Don’t be afraid of changing agents if you don’t feel like you’re getting much out of yours.

You’ll feel obligated to stay with them because they’ve already done some work for you, but really you have no legal obligation to them. We asked ours to switch and she recommended a co-worker, from whom she got a referral fee. If you go to a completely new agent you could ask them to pay your old agent a referral fee too, but of course they could refuse. In any case, it’s not a good enough reason to stay with an agent you feel isn’t getting you closer to buying a home.

If you don’t have an agent, think twice about hiring an agent you meet at an open house. That agent is selling the house, so they may be more of a seller’s agent than a buyer’s agent. They’ll take you on, but they may not actively help much. It’s better to get an agent who specializes in buyers. Get recommendations from friends. We definitely recommend ours (Jed Lane).

Use the MLS yourself

Every Friday, Jennifer looked through the MLS (Multiple Listing Service) listings for promising houses. She liked the Domicile Properties website; look for the “Search All Listings” link. I think they only have San Francisco listings. The pages will say to contact Patty Rogers—don’t be confused by this, she’s not necessarily the listing agent. If you see something you like, either go see it at an open house (usually Sundays 2 pm to 4 pm) or ask your agent if they saw it at the Tuesday tours.

(Silicon Valley and the rest of the Bay Area are served by MLSlistings, though we’ve never tried it.)

You can use my San Francisco crime map to help you gauge an area. Despite what I said on that page about Bayview and Hunter’s Point not being so bad, stay away from them. I get a daily report of police activity in the Bayview district and that area is frightening.

Hire the seller’s agent

We didn’t end up doing this, but you could consider it. See my page on conflict of interest. After going into contract (when our bid was accepted), I was pretty glad that we had our own real estate agent. I really felt like he was on our side. Just keep in mind that before the bid is accepted, his interests really line up better with the seller’s.

Bidding tips

There are a few things you can do to help the chances of your bid being accepted.

With your bid you will include a check (actually a copy of a check) for the deposit. Usually people write a check for 3% of the bid price, but actually it can be as large as you want. The contract will probably say that the seller can only keep up to 3% of the deposit, and even doing that is hard, so it really doesn’t hurt to write a check for more. The seller might be impressed by the big check, although it’s really pretty hollow because of the 3% limit.

Write a nice letter. Describe your family, your long history in the city, and what you plan to do in the house. Our sellers said they loved our letter. No idea how much it helped in practice, but it could break a tie.

The loan terms on your bid don’t have to match the loan terms you end up getting. Sellers like buyers who pay a large down payment because the loan is more likely to come through. So in your bid, if you can, put a large down payment, such as 20% or more. Get pre-approved for both 20% and 10% down, put the 20% one on the bid, knowing that you’ll choose the 10% one if you’re accepted.

How much to bid?

You can get a report of the prices of comparable houses in the area. (It’s called pulling comps.) It’ll tell you the price they asked for, what they got, and what that is in percentage over. Ignore percentage over, it’s not meaningful because it takes into account the original asking price for the house, which itself isn’t meaningful. Look at the average selling price. That’s how much similar houses go for in that area.

To guess on a price, think of the first number that jumps into your head. That’s probably the number that will jump into other bidders’ heads, so you want to go a little above that (maybe $10k above). If you think many other people will bid on the house (over 10 people) then several of them will do the same and you’ll have to go $20k or $30k higher to out-smart those people too.

There’s a philosophy that says that you don’t want to bid a “round number”. By “round number” they probably mean a multiple of 10, like $750k. The idea is that other people will also bid a round number, and you’ll have a tie, so you may as well bid $751k to break the tie and win. Of course since everyone knows that, everyone else will also bid $751k, so you should bid $752k, and drive yourself crazy by continuing this forever. So don’t worry about it and bid a round number if you want. If you’re that close, maybe the sellers will ask for a counter offer.

(Incidentally, I was never able to determine whether asking for a counter offer is legal in San Francisco.)

You should determine the highest price you can afford. Your lender can help you with this, and you should independently confirm it using the mortgage calculator at the bottom of this page. Do not give this number to your agent. If your agent knows your maximum, you will find that he (coincidentally) suggests this amount when bidding. His goal is for you to win the bid, not for you to pay a reasonable amount. Let him come up with a bid amount based on comparable houses. If that’s higher than your maximum, then skip this house.

When you get outbid and you didn’t bid your maximum amount, you’ll kick yourself for not having bid more. That’s unnecessary. A solid bid should be based on comparable houses, and if someone else paid more than you did then they may have well overpaid the house. Don’t believe the lender’s (or the agent’s) cliché that it’s only “pennies per day” to bid $10k more. If you assume that the resell price won’t be affected, then that’s $10k out of your pocket. $10k is a nice bathroom remodel.

One possible approach is to find houses where your bid price is likely to be right at your maximum. Then you can’t kick yourself for not bidding more when you’re rejected. Be careful, though: paying your maximum for a house will leave you with no money at all, so the house had better be in perfect condition and you had better be confident in your sources of income.

Unwanted houses

If there’s been a death in the house, particularly a violent death, then many people will refuse to buy it. If it doesn’t bother you, then you can benefit from that. See if you can track down houses where this has happened. Maybe look at crime reports. The day that we looked at our new house, we also looked at a house in Sunset Heights where last summer the husband had shot and killed another man and then killed himself. Everyone we spoke to said they would never bid on such a house. If you’re okay with it, you’re at an advantage. You have to disclose the death for three years after the event, so if you keep the house longer than that, it won’t hurt you on resale. (I think that after three years you still have to disclose it if someone asks, but you don’t have to volunteer it.)

The loan

We got our loan through a broker, Robin Powell, who at the time worked for Triton Funding. She found a good rate and was helpful. Once you decide to bid there will be no time to waste. We decided on Sunday night and had a bid in by noon the next day. Robin was very quick to write us a letter for the bid amount. Make sure whoever you get pre-approved with is able to react that quickly.

Many people are getting either interest-only loans or 5/1 ARMs these days. I would encourage you to get a 30-year fixed. You may think that you only want to stay in the house five years, so a 5/1 ARM works well, but in five years if the interest rates are high enough, no one will want to buy your house and your mortgage may be unaffordable. Buy a house you love, get a 30-year fixed loan, and stay as long as you want to or have to. You don’t want to be pressured to sell and take a loss.

Financial calculations

I made very heavy use of a spreadsheet originally put together by my friend Drew Olbrich. It takes into account almost everything financial, and compares buying with renting.

He has since turned it into a webpage: Mortgage Calculator.

Finally . . .

Everyone told us that when we would walk into our destined home, we’d know it. Well we didn’t. In fact when we saw it we almost walked out because we thought it was hopeless. Just the previous week we had decided to stop looking altogether and make do with our small loft. So don’t listen too much to what other people say and don’t give up.

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