Buying a home in San Diego is not for the faint of heart.
County home prices have increased 10.2 percent since the pandemic began. That makes the process of purchasing a house stressful for even the most hardcore money savers. While interest rates are at historic lows — an average 2.89 percent in September — it is hard to find many scenarios where 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 home buying candidates out of the market.
The San Diego Union-Tribune spoke with local experts and Zillow about 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 where there are multiple offers.
The basic reason is 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 market in San Diego County was 14 days in the week ending Oct. 25, said the Redfin data center. That compares to 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 they like working with and trust, and then getting approval from them.
“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.
He said competing with other buyers on price is part of the puzzle, but proving who is the most prepared and financially secure is sometimes more important to a seller.
A buyer can get pre-approved for a loan by finding a lender via their real estate agent or using online recommendations, such as a Zillow lender search tool or Bankrate.com. Some of the documents you will need: pay stubs showing monthly earnings, previous address history, employment history, income tax returns, gift letter (if using), bank statements, investment or retirement accounts. Your credit also will be checked.
Not all homes end up in a competitive bidding process. But, it is worth noting that there are fewer homes for sale now than there were in past years. From Sept. 7 to Oct. 4 there were 5,191 homes listed for sale in San Diego County, said 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, national data from Zillow shows. It suggested getting that money in an account ahead of time to factor it in the pre-approval amount.
While a scenario where a child asks parents for an extra $5,000 as the deal gets closer is common, it might be better to have that sorted 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 also be helpful information for your lender. That will be factored into how much is pre-approved and assist 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 competition
A lot of listings nowadays have virtual and 3D tours that can help potential buyers learn about a place before they can actually see it.
Under California COVID-19 restrictions, real estate agents cannot hold open houses, and agents are limited to one showing at a time. Requirements include wearing masks and signed waivers. Buyers can get a head start by viewing 3D tours common on sites like Zillow, Redfin, Realtor.com and Trulia. It isn’t that different from photos — but it does allow for potential buyers to experience what it is like to walk throughout the property.
Many agents use video services — like FaceTime, WhatsApp and Zoom — to walk clients through properties. It was happening before the pandemic, but the practice accelerated after COVID-19 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 this, 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.
Samantha O’Brien, a real estate agent with PorchLight in University Heights, said she closed 40 transactions this year — 37 buyers and three sellers — and just one sale was all cash. She typically sells homes in the $500,000 to $600,000 range.
“It’s very rare where someone is buying with all cash,” she said.
The National Association of Realtors said cash sales made up 18 percent of nationwide purchases in September, up from 17 percent at the same time last year.
Shop for under 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 asking price.
It doesn’t always happen, but it occurs often enough — especially in super tight markets like San Diego — that it might be a good idea to prepare for it. Zillow said 34 percent of homes in San Diego County in August sold for over asking price. That compares to 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 somewhere around $390,000 because you might end up having to increase that price to seal the deal.
This might not be a lesson a majority of people need. Raylene Brundage, an agent who sells in several North County communities, said her experience shows buyers tend to shop under the purchase price they qualified for — especially millennial buyers.
“What I found in the last three to five years, they are naturally doing that. I have not had a buyer who went to the limit,” she said. “Because of what happened with the crash, and even with younger buyers, they are looking for under what buyers say they are qualified for.”
Brundage said many buyers are already factoring in money needed to improve a home and are cautious in general.
Another thing to consider is just because interest rates are down, it doesn’t necessarily mean your monthly cost will be down — or the down payment — 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 also 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, said Freddie Mac, down from 3.61 percent the year before.
That means the monthly cost of a median-priced home now would be around $2,445 a month, assuming 20 percent down on a 30-year, fixed-rate loan and including property taxes and home insurance. That is only up slightly from roughly $2,360 a month for a median home at last year’s prices and interest rates.
Still, to make that work would require a roughly $130,000 down payment, compared to $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 under $500,000 is familiar with “permits unknown!” written into listings and photos that show homes that appear about to fall over. This means new buyers that bought older properties might have to shell out a lot of money just 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, as well” stated a new Zillow guide for buyers. “While new kitchen countertops can most likely wait, fixing a leaky roof cannot.”
The average age of a San Diego County home listed for sale in August was about 34 years old.
Brundage, the agent in North County, said buyers are increasingly ready to make improvements to older properties if the home is the best spot for them.
“Location has become so important. It’s not just buying a house,” she said. “People are more selective about where they are living, and figure they will fix (the house) up or whatever they have to do to be in the neighborhood they want to be.”
A word of caution
It is 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 a buyer to back out of a property if they are not satisfied with the condition of a home. It also allows a buyer to leave the deal if the inspection does not appraise at a certain value, or a buyer’s loan does not work out.
A buyer will likely find themselves signing something as a sale nears completion from the California Association of Realtors called a “Market Conditions Advisory.” It warns that giving up contingencies could mean if a loan falls through it could make you legally in default and required to pay damages or even forfeit deposits to the seller. It also warns that if a lender’s appraiser does not think a property is worth what you have agreed to pay for it, the lender may not loan the full amount and it could also result in default.
The inspection contingencies are probably the most discussed and something the association also warns of waiving. If the buyer waives this right, it might mean they are on the hook for damage to the property that was not made clear during a home tour or by the seller. It doesn’t always mean a seller is hiding something. It could also be a problem they were not aware of.
Jan Ryan, a RE/MAX agent based in Ramona, said she gets nervous when sellers want to waive contingencies and it isn’t always a favorite move by real estate agents — despite more and more talk about it in the competitive environment.
Ryan said it is important for buyers to be cautious and, even though interest rates are very low, that doesn’t mean it is the right time to purchase. She said she has seen homes bid up $40,000 to $100,000 over asking price in recent months, even if properties are priced at the already high market value.
“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.”