Buying a home in San Diego County is not for the faint of heart.
The area’s median home price has increased 10.2 percent since the coronavirus pandemic began. That makes the process of purchasing a house stressful for even the most hard-core money savers. While interest rates are at historic lows — an average of 2.89 percent in September — it’s hard to find many scenarios in which it is cheaper to buy than it was a year ago.
A drop in available homes for sale, also cited as the biggest reason for increased prices, has meant bidding wars that drive up the price, pushing many homebuying candidates out of the market.
Local experts and Zillow weighed in on steps buyers can take to get an edge.
Get pre-approved for a mortgage
Having financing in order before the price war begins is key because it helps potential buyers act quickly on a house for which there are multiple offers.
Sellers often have a fear that a sale will fall through because of financing, so if a buyer has that ahead of time, it will make it a more attractive bid if there are multiple offers.
There is good reason to assume a sale will go quickly. The median number of days on the market in San Diego County was 14 in the week ending Oct. 25, according to the Redfin data center. That compares with 28 around the same time in 2019, 34.5 in 2018 and 24 in 2017.
Real estate agent Dan Beer of the Beer Home Team of eXp Realty of California said it helps to get approvals from multiple lenders to show how financially secure you are. Another method he recommends is contacting the listing agent to see what lender he or she likes working with and then getting approval from it.
“As a seller, you do not tie up your asset with anybody that hasn’t proven they have the means with which to perform,” Beer said.
Buyers can get pre-approved for a loan by finding a lender via their real estate agent or using online recommendations such as on a Zillow lender search tool or Bankrate.com. Some of the documents needed are pay stubs showing monthly earnings, previous address history, employment history, income tax returns, bank statements and investment or retirement accounts. Credit also will be checked.
Not all homes end up in a competitive bidding process. But it’s worth noting that fewer homes are for sale now than in past years. From Sept. 7 to Oct. 4, there were 5,191 homes listed for sale in San Diego County, according to the Redfin data center. That’s down from 7,949 around the same time in 2019 and 9,341 in 2018.
Parents helping? Have the talk ahead of time
About 40 percent of buyers with a mortgage, and 52 percent of first-time buyers, received loans or gifts from family or friends for the down payment, according to national data from Zillow. It suggested getting that money in an account ahead of time to factor it in the pre-approval amount.
While a scenario in which a child asks parents for an extra $5,000 as the deal gets closer is common, it might be better to have that sorted out ahead of time, said Zillow senior economist Jeff Tucker.
Tucker said having a frank conversation with parents or a friend ahead of time about how much they are willing to give will be helpful information for your lender. That will be factored into how much is pre-approved and assist the buyer in knowing a realistic price while shopping.
“It’s all a much more ideal situation than getting to closing and you need an extra several grand in your checking account,” Tucker said.
Get a head start on the competition
A lot of listings nowadays have virtual and 3D tours that can help potential buyers learn about a place before they can see it in person.
Under California coronavirus restrictions, real estate agents cannot hold open houses, and agents are limited to one showing at a time. Requirements include wearing masks and signing waivers. Buyers can get a head start by viewing 3D tours common on sites such as Zillow, Redfin, Realtor.com and Trulia.com. They aren’t that different from photos, but they do allow potential buyers to experience what it’s like to walk through the property.
Many agents use video services such as FaceTime, WhatsApp and Zoom to walk clients through properties. It was happening before the pandemic, but the practice accelerated after coronavirus restrictions began in March.
It is still rare for buyers to get a home without seeing it. Zillow said just 12 percent of national buyers do that, but it might be a bigger factor if competition gets more fierce.
Beer said it is difficult for buyers when there are multiple bids on the same property. He said his firm gets a head start by reviewing homes that were taken off the market because they didn’t sell and contacting the owner before they list the home again. Beer also said he looks for properties that are rentals and contacts the owner before the lease is renewed to see if they would consider selling.
“Out there are countless sellers that are sitting at the kitchen table considering a sale,” he said. “Getting to them before they raise their hand publicly is the strongest thing you can do as a buyer.”
Another factor buyers might be competing with is a cash offer. Sellers typically go for a buyer with cash because the transaction closes more quickly and reduces risk. However, it isn’t as common in high-cost areas like San Diego County.
Shop for less than what you are willing to spend
The next advice is more on the mental end in that it is best to assume homes will go over the asking price.
Zillow said 34 percent of homes in San Diego County in August sold for more than the asking price. That compares with 15.6 percent at the same time last year and 15.3 percent in 2018.
So if you are searching for houses at $400,000, it might be a good idea to search around $390,000 because you might end up having to increase your offer to seal the deal.
Another thing to consider is that just because interest rates are down doesn’t necessarily mean your monthly cost — or the down payment — will be down, as prices rise quickly in San Diego County. A lot of real estate agents point to lower rates as a reason to buy now, but it might be helpful to break out a calculator.
The San Diego County median home price in September was $650,000, up from $570,000 at the same time last year. In September, the interest rate for a 30-year fixed-rate mortgage was 2.89 percent, according to Freddie Mac, down from 3.61 percent the year before.
That means the monthly cost of a median-priced home now would be about $2,445, assuming 20 percent down on a 30-year fixed-rate loan and including property taxes and home insurance. That is up only slightly from roughly $2,360 a month for a median-priced home at last year’s prices and interest rates.
Still, to make that work would require a roughly $130,000 down payment, compared with $114,000 a year earlier.
“The rise in prices has not at all been offset by the drop in interest rates,” Tucker said.
There are always extra costs besides the down payment — taxes, appraisal fees and homeowners insurance — but San Diego homes might have hidden costs for people trying to buy at the low end.
Anyone shopping for a single-family home in San Diego County for less than $500,000 is familiar with “permits unknown” written into listings and photos that show homes that appear about to fall over. That means new buyers who bought older properties might have to shell out a lot of money to fix a leaky roof or get a toilet working.
Zillow senior economist Cheryl Young urges buyers to consider how much home improvement projects might cost — and how urgent those renovations are — and factor those into your budget, according to a new Zillow guide for buyers. “While new kitchen countertops can most likely wait, fixing a leaky roof cannot,” it states.
The average age of a San Diego County home listed for sale in August was about 34 years.
A word of caution
It’s common in highly competitive environments for buyers to waive contingencies on properties to make their offer more attractive. But it isn’t always recommended.
Contingencies are in place to allow buyers to back out of a deal if they aren’t satisfied with the condition of a home, the property doesn’t appraise at a certain value or the buyer’s loan doesn’t work out.
Jan Ryan, a RE/MAX agent, said she gets nervous when people want to waive contingencies.
Ryan said it’s important for buyers to be cautious and, even though interest rates are very low, that doesn’t mean it’s the right time to purchase. She said she has seen homes bid up $40,000 to $100,000 over asking price in recent months.
“When I have buyers, I tell them, ‘Unless you find the house you are going to live in for a long time — the house of your dreams — I would wait,’” Ryan said. “I probably shouldn’t say that.”