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House Key:  Can you buy a home with just ten percent down?Silicon Valley Realtors have been seeing a “shifting market” for about a year now, at least in many segments of the real estate market. What does that mean for home buyers and home sellers? One major difference is the amount of cash, or the percentage of cash down, needed to compete in the bidding wars of recent years. Ten percent down purchase offers may become viable again.

Quick reviewL the years of bidding wars – high amounts of cash down, few or no contingencies

Since 2012, we have seen an incredible run up in Silicon Valley home prices, particularly in the hotbed areas of Palo Alto, Mountain View, Cupertino, Sunnyvale, and nearby areas. For each property that went for sale, there were multiple offers – at least most of the time! With some of the extreme cases, homes were selling with more than a dozen offers, sometimes more than two dozen, and selling “all cash, no loans” and also with no contingencies. Sometimes, buyers were lucky and there were no cash offers to compete with. In those cases, the strongest offers (large down payment and few or no contingencies) would simply go to a buyer with the largest down payment and the smallest number of contingencies for things like loan, appraisal and inspection. Much of the time, it would be 30% or more down and no contingencies. (You can check the market stats going back to 2002 at my Silicon Valley Real Estate Report.)

Silicon Valley real estate history repeating itself

For those new to the area, this isn’t the only time when we’ve had a crazy red hot market. We saw this just before the great recession, we saw it in 2000, and we saw it in the mid to late 1980s, and before, too. In fact, it seems to happen about every 10 years. It’s a pattern: economy good, inventory low, qualified buyers fighting to buy a limited supply of Silicon Valley real estate, prices escalate, clauses get increasingly insane (no contingencies, huge down or all cash).

Hard as it can be to imagine, that became the norm. Especially for the nicest homes in the premium areas with shorter commutes and great schools. If anyone asked “Can you buy a Silicon Valley home with ten percent down?”, the answer was a resounding “no” – very very unlikely.

For that reason, in recent years, it has been challenging for home buyers to purchase with less than about 25% down (because with multiple offers, even the gold standard 20% wasn’t enough). The market has been softening a bit, though. Most homes are still selling fast by national standards, but the days on market have been increasing and the sale price to list price has been decreasing. Some homes don’t sell until they’ve had a price reduction. And then they sell with just one offer. We are seeing the return of contingencies.

Smaller down payments will come with a slower, quieter market that is more balanced. A 20% down offer will no longer be viewed badly at all.

Risks with smaller down payment, ten percent down offers

The premise is still true that for home sales, the smaller the down payment, the larger the risk that the sale or escrow will fall apart due to financing or appraisal problems. And the smaller the down payment, the more risky the bank will view you – and charge you accordingly. (It’s also relevant to the risk of your offer being accepted or rejected.) If you can swing 20%, it will cost you less to borrow the money needed to secure the home and you will have fewer headaches in obtaining the financing.

How much cash do you need?

You’ll need some reserves beyond the down payment and the closing costs. Closing costs often run about 1% of the home price (appraisal, loan application and various loan fees, inspections you may need to do, recording fees, lenders policy of title insurance). Additionally, the lender will want to know that you aren’t cutting it too close, so may ask to see a few months’ worth of your monthly payments stashed in savings as part of a “reserve account”. Additionally, you will no doubt need things when you move into your new home, whether it’s repairs that the seller didn’t make (such as fumigation) or furniture that you need for the rooms you didn’t have before. Many people buy a house after never needing a lawn mower, rakes, or other garden tools – and they can really add up! It’s also wise to have a fund for unexpected emergencies or repairs (think refrigerator going out, fence coming down in a storm). Most houses will need ongoing improvements and repairs, and you don’t want to be caught short. Recently I read an article that suggested that home owners spend about 1% of the value of the property on repairs, upgrades, etc. each year. That’s probably a good working number. Some years you may need to do almost nothing, but others you may want to re-roof or remodel part of the home – and will go way beyond that 1% in that year. If you can have another 2-3 percent set aside (beyond your ten percent down or tweny percent down payment), that would be great for most people.

Saving for the down payment vs rapid home price appreciation

When the market is over-heated, you cannot save as fast as prices go up here. (And it’s almost impossible to buy with 10% down). When the market cools, and prices flatten, though, you have a chance to save. The other thing to factor in, however, is interest rates. Right now interest rates are incredible – almost at historic lows. The odds are good that it won’t say like this for another 5 or 10 years (and could change within a year for all we know).

Drive a little, save a lot

Many smart consumers decide that they don’t have to buy or rent in the city where they work – they’d rather drive a little and enjoy more house or townhouse for their money. In some cases, you can get from work to home without getting on any of the dreaded freeways. Los Gatos real estate is a bargain compared to Los Altos, Palo Alto or even Saratoga. For people working in Cupertino, this should be a very viable option, as Los Gatos has great schools, a vibrant downtown, loads of both natural and architectural beauty, and is the gateway to the coast and beach.

Don’t go it alone – connect with a good real estate professional early on

Talk with a trusted Realtor to help sort out the gauntlet of choices, and to set a plan of action so that you can buy a home – even if you are buying with ten percent down – or less.