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Is ten percent down enough to be able to buy a home in Silicon Valley?

Right now our real estate market is having some hyper inflation, and that makes it hard to compete in the bidding wars, even with twenty percent down! Just the same, the market isn’t equally hot everywhere and in every segment. We have a conglomeration of markets, not really one unified market, so the answer is “it depends”.

  • in general, during the COVID induced white hot seller’s market, many or most houses have been selling with large down payments and no contingencies
  • the condo and townhouse market has been a little softer with more days on market and a lower sale price to list price ratio
  • if homes are on the market for several weeks, they are less likely to get multiple offers, and in those cases, a ten percent down offer would be welcome and more likely to be viable

In the article below we’ll provide some basic strategies and explain why it is usually an uphill battle for the low down payment home buyer.

Strategies for ten percent down home buyersStrategies for the 10% down home buyer

Here’s a quick list of strategies that can work if you are a low down payment home buyer.

  1. Only consider homes which have been on the market for 3 weeks or more, since they are far less likely to get multiple offers and squeeze you out. If you continuously bid on new listings (which right now means most likely in multiple offer situations),  you will burn yourself out and get very discouraged.
  2. Consider properties where you can add value later (we usually call it “sweat equity”), homes with problems that might make them unappealing to picky buyers now, but things which you can actually fix, such as a home that is dated, dark, or ugly. Avoid homes with problems that cannot be fixed, such as sitting next to a freeway or high voltage power lines.
  3. Avoid properties which are so far gone that your competition will be builders or flippers. They can fix up homes cheaper than you or I can, and they can outbid you.
  4. Be open to condos and townhomes if everything else is OK with those homes. Do carefully read the pre-sale inspections, the HOA docs, the reserve account (many HOAs are badly underfunded). The condo and townhouse market is not quite as overheated as the single family home market, so your odds may be better.
  5. Be open to the idea of a longer commute where the market is not so overheated (more on that below).
  6. Do be pre-approved, and if possible, pre-underwritten, and with a local lender so that sellers and their agents can feel confident in your ability to get the sale close despite having just ten percent down.


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.

Why do sellers care how much cash you put down? Sellers care because most of them are selling their homes with no contingencies of any kind , and that mans that home buyers need to be able to make up an appraisal shortfall if one happens. Having a loan is always a risk, but an all cash offer doesn’t have that risk. The more cash, the less risk, and the more likely the bank is to fund the loan (if there is one) at the end of the escrow. “Cash is king” is still true. With a small down payment, there’s no money left for an appraisal shortfall in most cases.

How much cash do you really need?

You’ll need some reserves beyond the ten percent down payment and the closing costs, whether it’s ten percent down or some other amount.

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,  roof electrical, plumbing, or other items – they can often be 1% of the purchase price or more) 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!

After the down payment you may need another 3% for closing costs, reserves, and repairs that need doing immediately.

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 single family home owners spend about 1% of the value of the property on repairs, upgrades, etc. each year. That’s probably a good working number. It would be less for a condo, of course. 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 twenty percent down payment), that would be great for most people.

In other words, you don’t want to just barely squeak into home ownership.

Saving for the down payment vs rapid home price appreciation

When the market is over-heated, like it is right now, you cannot save as fast as prices go up here. (And it’s almost impossible to buy with 10% down when prices skyrocket.) 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 not too bad, but as everyone knows, they are rising fairly quickly now.

Other tips for the ten percent down home buyer or home owner:

  1. Keep saving while house hunting, while in escrow, and after you close escrow.
  2. Once you do buy, plan to make improvements that will make your home worth more, and avoid spending money on things that won’t give you a good return on investment if you need to sell within a few years.

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. It’s still possible to buy condos in Los Gatos with ten percent down in some cases.

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.