Buying my first home in a crazy-hot market
I never bought a home before, or even followed any friend or relative who have purchased real estate. So I came into this blindly sometime in March 2021. And after a few days of house hunting, I started reading news articles and it dawned on me that I was in one of the craziest housing markets in the entire history of the United States. So, I’m writing this article because some folks asked me how I managed to pull off buying a home in Sacramento, California, which at the time was among the hottest, most competitive markets in the country.
Staying or leaving the Bay Area
In setting out on this journey, the first thing I had to ask myself was why I wanted to buy a home. I’m planning to get married to my fiancée. And I know at some point we wanted to live together. We both lived in San Jose prior to house hunting, and we looked at home prices and quickly determined that most homes were out of our affordability range.
- Rent in San Jose was, on average, about $2500/month.
- We might be able to find a home in the area for maybe $650,000 (and have to pay about $3000/month for mortgage, property taxes, and homeowner insurance).
- Or we can find a mobile home, for maybe $230,000, which comes out to be about $1000/month for mortgage, taxes, and insurance, but then you’d also have to include mobile park HOA fees of about $700–$1000/month. Also many banks do not offer mortgages on mobile homes, so we’d have to secure a private loan which could be a higher interest rate.
So those were our stay-in-San Jose options. But what about venturing out of San Jose? Maybe south of San Jose like Gilroy, or along the East Bay like Hayward? The prospects weren’t much better. And that’s when I had to consider possibly leaving not just San Jose, but the San Francisco Bay Area, for good.
As much as I was familiar with and liked the Bay Area, settling down and raising a family with my fiancée was important to me. I knew financially we had limited resources and could not afford to live in an expensive location. But another factor was that, in anticipation of having kids, space was a consideration. We had friends who raised their first child in San Jose, but lived in a 2-bedroom mobile home. It was pretty cramped. I could probably get by living that kind of lifestyle. But I wouldn’t be satisfied if I didn’t at least consider the possibility of living outside of the Bay Area. And since I am a software developer and can work remotely, I had the privilege of being able to keep my job no matter where I lived.
In my talks with my fiancée, if we were to live outside of the Bay Area, one of the factors that was important to her was the possibility that her mother would eventually move to live with or near us. And that was a very big consideration. You see, we’re both Vietnamese Americans. I am a second generation Vietnamese American, born and raised in San Jose. My fiancée arrived from Vietnam during her teenage years (she’s a 1.5-generation) along with her mother. And although my fiancée is now bilingual, my future-mother-in-law has very limited English proficiency. Thus for her to thrive, she needed to be near a sizable Vietnamese community. Especially a Catholic Vietnamese community, as we are all Catholics.
Another limiting factor is that I could not handle my seasonal affective disorder (the “winter blues”, a form of seasonal depression) in snowy seasons, so the Midwest and northeastern U.S. would be lower on my list of considerations.
I found a report on the top Vietnamese populations in metropolitan areas. But rather than being exhaustive in my search, I selected a few cities in order to do market research and test some assumptions:
- Sacramento, California, about a two-hour drive from San Jose
- Orange County of southern California, a seven-hour drive from San Jose
- Portland, Oregon
- Houston, Texas
- Tampa, Florida
What we were still trying to figure out was whether we wanted to stay in California, or move out of the state. If we were to stay in California, there was a limit to how much we can afford. If we moved out, we can find more affordable homes, but we’d have to contend with living further away from where we grew up, especially having to adjust to a new climate. Florida has their hurricanes. Texas has their hailstorms and tornadoes.
The first thing I checked for, in all areas, was average housing price and competitiveness using Redfin’s trends report.
Here’s what we determined:
- Sacramento, California: Super-competitive, but close to the Bay Area and decently affordable
- Orange County of southern California: Expensive, average competitiveness, in the heart of the Vietnamese community, but far from the Bay Area
- Portland, Oregon: Wide range of home prices, not very competitive, but far from the Bay Area (but at least I have relatives up there)
- Houston, Texas: Good-bye California, in the heart of the Vietnamese community, very affordable, and not very competitive
- Tampa, Florida: California will be like a distant memory, very affordable, average competitiveness
We decided to try our luck with Sacramento first, as it was close by, and we needed to try for a few weeks to see how competitive it was before we would try outside of California. I did ask my friend in Texas for a real estate agent referral, and was prepared to hunt in Houston if searches in Sacramento became unfruitful.
Playing the Sacramento bidding game
Right at the start, before I toured my first home, I applied for pre-qualification on a mortgage through my local credit union. This helped me get a sense of how big of a mortgage I can obtain to help finance the purchase of a house.
I remember one of the first homes we toured with our real estate agent, she asked us if we wanted to put in an offer. Since we didn’t know how competitive the market was at the time, we naively put in an offer at the asking price. A week later, we lost the bid…among 30 other offers. That’s when I started doing more reading and researching to figure out what it would take to win a bid in Sacramento.
There are a few key things I had to consider:
- What is the home price range I should be looking for? How much should I offer?
- How much of a fixer-upper am I willing to tolerate? If the home needs a lot of repairs, am I willing to put in the time to repair/remodel it?
- Where in Sacramento County should I focus on? Near downtown? On the outskirts? On the south side near Elk Grove (or even in Elk Grove)? Or on the north side towards Roseville?
Calculating my war chest and the bid
The first thing I had to figure out was how much cash I was willing to part with. I had to see how much cash I had in my checking account, emergency funds I tucked away in CDs, personal loans I had outstanding among friends, as well as personal loans I can take out among friends and family. This became my budget ceiling.
It’s worth noting that I’m 39 years old and have been living with my mother for 36 years of my life. So I’ve been saving up quite a bit of money, which is why I have a pretty decent stash of cash to compete against other buyers. If I didn’t have enough cash, then I’m simply unfit to compete in Sacramento; I’d just have to look somewhere else, like Florida.
I knew that we had to take out a mortgage. But then there’s the question of how big of a down payment to consider. Although I wanted a lower down payment in order to have more cash liquidity, lower down payments were probably less attractive as a bid. And according to Redfin, down payments were supposedly at an average of 30.8%. I don’t know if this is true, but I decided to try 20% for the time being and readjust later if necessary. This also had the additional benefit of avoiding private mortgage insurance (PMI), which is often required by the lender on conventional mortgages if your down payment is less than 20%. You should also reserve about 1.5% of the mortgage size for closing costs (so about $6000 on a $350,000 mortgage). I keep this number separate from my budget ceiling just to keep calculations simple.
Another thing I did was analyze homes sold in the last month and looked at their initial listing price versus their final sale price. You can find this information on Zillow.
What I found was that most homes fell between 5% to 12% over initial listing price. That was the unfortunate state of the market. Most of my friends who gave me advice about buying homes based their advice on their experiences from years ago when the market was cooler. The idea of bidding under the initial listing price was not applicable to today’s market conditions.
So I had to be prepared to bid over asking price. But there was a gotcha that my real estate agent warned us about: when you apply for a mortgage, they base the loan amount on the appraised value of the home, not the final sale price. The appraised value of a home is where an appraiser walks through your home and takes note of the conditions of the house and determines what they think the home is worth. It is independent of what you are willing to pay for the home. And here’s the kicker: if the final sale price is more than the appraised value, you have to cover the gap between the appraised value and the final sale of the home out of your own pocket. For example, if you bid $400,000 on a home, and the appraised value comes back $380,000, you are responsible for covering the $20,000 difference out of your pocket. In normal market conditions, many articles that you find on the internet would advise you to go back to the seller and negotiate for a lower price. But, uh, I don’t think that will work in current market conditions for 2021.
Thus the formula for the final sale price is
maxbidPrice = mortgage + budgetCeiling
Assuming down payment is 20%, the mortgage is 80% of the appraisal value
mortgage = 0.8(appraisalValue)
My budget ceiling, which is how much I am responsible for out of pocket, is my down payment (20% of appraisal value), plus the gap between the final bid price and the appraisal value.
budgetCeiling = 0.2(appraisalValue) + bidPrice − appraisalValue
Rearranging the terms
maxBidPrice = budgetCeiling + 0.8(appraisalValue)
There is a problem, which is how do you know how much a home will appraise for. Unfortunately you cannot determine this without actually conducting an appraisal. There are some generic estimators that Zillow and Redfin provides. Zillow provides a Zestimate, and Redfin has a Redfin Home Value Estimate. I don’t know their secret sauce, but I believe they base their estimates on filed home sales recorded with the county of similar homes in the area. They might have access to appraisal reports, especially Zillow since Zillow also offers a home selling service as well. So let’s say you find a house for $390,000, and Zillow’s Zestimate is $405,000, and Redfin’s Home Value Estimate is $391,000. Let’s say you use Zillow’s Zestimate, and your budgetCeiling is $100,000. Your maxBidPrice would be $424,000. If you take Redfin’s estimate, then the maxBidPrice is $412,800.
I also define a minimal bid price, which is based on collecting data on recently sold homes. Remember I said that most of the homes that were recently sold seemed to be around 5% to 12% over initial listing price. So if a home lists for $390,000, then the minimum bid would range between $409,500 to $436,800. Alternatively, if you want to, you can also look at Zillow’s information; they also include an estimated sales range (for my example home, Zillow showed a range of $385,000–$433,000).
So on that $390,000 home, I should expect to bid at least $410,000, and my $100,000 budget allows me to bid at most $412,800–$424,000. You also have to lower that number if you think the home is a fixer-upper, i.e. there will be a lot of necessary repairs. This you will have gauge based on what you see during the tour, or when you go into negotiations and start doing home inspections. Sometimes it’s a hazard requirement like wood rot on the roof or foundation. Other times it’s cosmetic like cracks in the cement or tile floor.
And that’s all you can do. You let your agent know that’s what you’ll offer. If you get it, great! If not, well, just move on. It’s a competitive landscape, so you have to just go through many homes and get lucky. For me, I put in as many offers as I can, knowing that if things didn’t work out, I was prepared to look at Houston. We went up to Sacramento just about every weekend to tour homes, queuing up about 8 homes to visit that day. Half of the homes we toured would have pending offers pretty much that day or the day after. After all, the average time it takes for a home to go to pending offer is about 7 days in Sacramento.
I also signed up for a HelloSign subscription because to put in an offer on a home, you actually have to sign and submit a document. Doing it on 8 homes per week is a lot of paper! I don’t want to print, sign, then scan it back into the computer. Plus, I have digital copies that I can access (or share access to anyone else) at any time, even if I lose my paper copies.
Being the big fish in a small pond
So one of the things I started noticing as we were making offers is that the really nice homes seemed to get a lot of offers. When we put in our offer, I felt like a small fish in a big pond. And then there were fixer-upper or average-looking homes which seemed to get fewer offers. So I wondered, is there an easy way to gauge how popular a home is? I mean, aesthetics is one thing; a home that is well-staged and had been remodeled quite well will probably get a lot of offers. But it’s hard to quantify. And then I noticed this piece of data on Zillow: the time it has been on the market, the number of views, and the number of saves (or bookmarks).
I noticed homes that were popular had a lot of views and saves, especially within 2 to 3 days. I sorted the homes into several buckets:
- Newly listed homes which had been on the market for less than 2 days, I would come back later.
- Homes that are under a week, with less than 100 saves, I called these homes less desirable.
- Homes that are under a week, with more than 100 saves, I called these homes hot.
- Homes that have been on the market for more than a week, I would briefly look at them and wonder why it’s still on the market.
Homes that were hot, I probably could not get them unless I put in 10% or more over asking price. But there were homes that received less attention. Some were clearly fixer-uppers, which I avoided because I didn’t think I could afford the money nor time to have to hire contractors to do major repairs or remodeling. Some had no pictures online; you had to see the pictures through the MLS report that your real estate agent might have access to, or just tour the home in-person. These could be hidden gems because no one is able to evaluate it without pictures!
But there was a handful that looked decent, despite having photos online. And I really wondered why no one was looking at them. Was there a lot of crime in the neighborhood? (You can look up crime map data on Trulia.) Didn’t seem like the case. So I told my real estate agent to put an offer on this particular home which had only 40 bookmarks in 5 days. And the very next day, the seller contacted us. We later found out that our offer was the better of two offers on the home. We were the big fish in a small pond!
Getting the home
We entered in negotiations with the seller. Since this was a seller’s market (where sellers have the advantage), I had to accept a waiver of appraisal contingency, which meant that if the appraisal came back too low, I could not back out, and would have to eat the cost out of my pocket. I was a bit nervous of this possibility, but I double-checked and made sure I had enough cash on-hand if the appraisal came back too low. You don’t want to be caught with insufficient funds and then lose your deposit for failing to fulfill your financial obligations.
Also, most of the homes we bid on were sold as-is. Sellers mostly would not be doing any repairs. We were able to negotiate credit for repairs on hazardous repair requirements, such as a lack of a sediment trap to trap particles from the gas line leading to the water heater.
I think one thing I was lucky to have was an awesome credit union servicing my mortgage, KeyPoint Credit Union. It wasn’t the cheapest rate. Some people tell me they were able to secure a mortgage or refinance for less than 3%; my rate was ultimately 3.25% on a 30-year fixed. But still, it was very cheap if you compare to the last 30 years, and I think my credit union made up for it by just having great servicing. My real estate agent told me that with some of the more mainstream banks, it was not surprising if they were behind schedule with processing your loan. So I didn’t have to deal with that pain; we were able to secure the mortgage and close in 30 days (from the day the bid was put out to closing date). And of course when getting a mortgage, the underwriters required a lot of documentation regarding employment, income, tax returns, proof of assets via bank statements, etc. So make sure when you do your pre-qualification, ask your lender for a list of documents you will need to collect, and prepare to scan everything and send it their way. You do not want your mortgage to be delayed during your housing negotiations because of a missing document!
The home I got required some minor repairs, but overall was pretty much ready to move in. And it was three miles within everything I needed: Costco, Walmart, Home Depot, and even a Vietnamese Catholic church!
Final thoughts
If you’re in the process of looking to buy a home, I can’t say you’ll be lucky as I was. But at least with what I shared here, you’ll know what you’re capable of. From there it’s a numbers game whether you get a response from the seller. If you’re picky, you will have a tough time getting an accepted offer. Don’t be too stingy with your offer thinking of trying to save money; if you’re serious about buying the home, put in an offer as much as you can afford and are willing to part money with. This is not the right market conditions to try to find a deal.
And, well, sometimes it’s also about really thinking about what’s important to you. If anything, the COVID-19 lockdown, and perhaps all the years prior, inform us how much time we really allocate to things. If you’re reluctant to move because you’re into haute cuisine and want to live near excellent restaurants, then I ask: How often do you really go out and eat, and can’t you simply make such outings a mini-vacation trip if you lived just a bit further away?
There might be things I miss about San Jose. But I know that most of the time living in San Jose, I was either working, or at home doing my own hobbies of playing games, doing art, or going out with my then-girlfriend-now-fiancée. And I know that I can still do the same while in Sacramento, or even in another state like Texas or Florida.
So good hunting! But know that if you’re struggling to get accepted offers, then you either have the choice of waiting, keeping at it, or just take a leap of faith and imagine yourself what it would look like if you were to live in another city or state altogether, especially if you have the capability to work remotely. Life is an adventure! Give yourself a reason to write a new, exciting chapter in your book of life!
