Down Payments, Not Total Purchase Price Are Determining Winners in the San Carlos Market

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Multiple offer situations are back in San Carlos.  However, they are not back in the volume that they appeared a few years back, folks are not completely blowing away in the list price, and they are happening predominantly in the 700K-1M price zones. A few years back, the highest total purchase price was normally with winner in most multiple offer situations.  This is not necessarily the case anymore.  Sellers and their agents are most concerned with the certainty of close.  This concern is the result of the ever-volatile mortgage market and the myriad of hoops that buyers are now having to go through in order to obtain a mortgage.

While the mortgage banking industry is starting to get things straightened out with their guidelines, there is clearly a long way to go.  About a month ago, I had a 1.5M deal held up because there was a $35 difference in the purchase contract regarding a home warranty.  Here is another example:  One of the mortgage brokers that I use regularly had a client purchasing a $2M house.  His clients had a $1M down payment and had W-2s showing yearly income of over $1M and, the bank could not make the loan work simply because on that particular week they did not have a program which recognized $2M homes. Mortgage financing for well-qualified buyers that was once a given is now a fight to the finish. With constantly changing internal guidelines from banks, buyers are being put in very uncomfortable situations.

The biggest problem facing many San Carlos homes is the appraisal.  While they will never come out and say it, many appraisers are severely downgrading San Carlos properties for a variety of reasons….and here is how it affects San Carlos buyers:  Let’s suppose you have a buyer with a 20% down payment on a home that they have agreed to purchase for $1,000,000.  Banks will currently lend a maximum of 80% of the loan to value.  In this case, the buyers will be pre-qualified for an $800,000 mortgage.  The final piece to the lending puzzle will be the appraisal.  Let’s say the appraisal is downgraded and the value only comes in at $940,000.  The bank will now only lend up to 80% of the appraised value.  In this case, the mortgage amount went from the bank went from $800,000 to $752,000 (80% of 940,000).  The buyer now has $752,000 plus their $200,000 down payment for a total of $952,000.  They will need to find another $48,000, cash, in order to close the deal. In this instance many buyers end up backing out of the deal, or going back to the seller to renegotiate the price.  Neither of these two options is particularly attractive for the seller.  Therefore, offers which contain larger down payments, but slightly lower purchase prices may suddenly be more attractive, and that is exactly what we have seen happen in San Carlos over the past two months. For example, a buyer having a 30% down payment means that even if the appraisal was downgraded by 10%, the total mortgage amount would not exceed the 80% threshold and the transaction should close without issue.

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