If you live in Berkeley and didn’t think you live on a million dollar block, think again. Last month, a 3-bedroom, 2-bath house directly across the street from mine in the modest flats of Berkeley listed at $769,000, sold for 32% over asking to the highest bidder at a cool $1.014 million in cash. (In 1997, that same house, minus some improvements, sold for $225,000.)
No, I’m not talking about a house in the Indian Rock, Berkeley Hills, or Claremont neighborhoods. I’m talking about a house (albeit a lovely house, but with no dishwasher) a stone’s throw away from the Dollar Tree on San Pablo Avenue and not far from what was once disregarded as the industrial wasteland of Berkeley, now coined Westbrae.
Some residents and real estate agents still attempt to lump this area with the more desirable North Berkeley, but make no mistake, this is not the Gourmet Ghetto of Alice Waters fame. Nonetheless, that house across the street, with its neatly laid shingles and yellow daisy flowers, was my favorite house on the block.
Like many thirtysomethings during the years immediately following the millennial tech boom, my husband and I moved to Berkeley from San Francisco after quickly realizing that we could not afford to buy there. At that time, we were barely out of graduate school, making payments on our student loans, and working entry-level jobs in our profession.
Fast forward ten years, two kids, several pets, and many jobs later, we had clearly outgrown our 952 square foot “bungalow” and craved more space, but had come to love and appreciate our down-to-earth neighborhood (and incidentally, so has Whole Foods, set to open on Gilman Avenue by the end of this year).
When that house – my favorite – came on the market earlier this month, listed in a price range that we could afford, assuming we both continued to work, we decided to make a genuine attempt at buying it. At the time, it seemed like a perfectly reasonable thing to do; we weren’t even trying to move “up.”
Well, the joke was on us. Since we regularly follow the real-estate market, we were aware that the Bay Area, particularly Alameda County, had been experiencing an unprecedented surge in demand, met with very little inventory. Multiple offers were the name of the game, with many buyers bidding well over asking and listing no contingencies.
For days, we agonized and debated over what we should bid – we were no strangers to competitive bidding having purchased our current house during the previous bubble – and finally decided to go nearly 15% over asking, with a no-inspection contingency (we spent $300 on a pre-offer inspection that did not raise any major red flags), and a tight loan contingency period. We knew there would likely be some offers more attractive than ours, but hoped to get ourselves to a counter-offer situation. Less than 12 hours after we submitted our bid, it was over. Another offer accepted; no counter necessary.
Later, we discovered the staggering facts: of 20 offers, several were in the high $990,000-plus range, three were all cash offers, and the final two offers were both over $1 million dollars. Who were these people? I didn’t know whether to laugh or cry. The disappointment I felt was not the type in which my desired thing came close but slipped through my grasp. Rather, it was a sickening realization that in this market, for a house on my very own block, trying our best meant not even coming close.
If you consider yourself middle class, as defined by the Bay Area, and are looking to buy, here are some hard truths you should know before diving in:
“Worth” is a misnomer
Because you probably work hard for your money and think about how you spend, you are likely accustomed to thinking in terms of “worth.” However, in the current market, it is fruitless to gauge a house according to its worth. Traditionally, a property’s worth is determined by objective factors such as its characteristics and location. But when supply is greatly outpaced by demand, and demand is comprised of people with a lot, and I mean a lot, of money to spend, a property’s worth is simply what people are willing to pay for at a particular moment in time.
Thus, comparative prices (“comps” as they’re known in the business) produce widely varying results with no helpful patterns to glean; if looking at them makes you feel like you’re doing your homework, do it, but it won’t do much beyond that. The one caveat, as pointed out by a friend who recently purchased a home in San Francisco, after being defeated five times prior, is that comps can help you determine how high you have to go to beat out the all cash offers – more on this point below. However, a word of caution: if the bank does not appraise your property as high as your offer price, the seller may demand that you make up the difference between the appraised price and your offer price by putting down an even larger down payment.
Cash, not persistence, prevails
It is unlikely you have boatloads of cash sitting around in an investment account, but maybe your parents, relatives, in-laws, or family friends do? If so, have no shame — borrow from them.
Sellers love all-cash offers for their speedy closes because they don’t have to go through any lending or appraisal processes, thus greatly reducing the chance of a deal falling through. In 2013 in Alameda County alone, approximately 25-30% of home sales went to all-cash offers, far above the historical average of 13% across the Bay Area.
Don’t (just) blame high tech or foreign investors. Agents are also seeing cash offers from older buyers who made money off of a previous sale and regular people scraping cash together from a hodge-podge of sources, including mommy and daddy, borrowing against their retirement accounts, and obtaining a line of credit or a bridge loan on their current home. Bottom line: the cash people are here to stay and a smart buyer will have to figure out a way to compete with them.
There’s no pop in this bubble
Maybe I’m a glass half empty kind of person, but calling this market another bubble is nothing but hopeful thinking. Sure, the frenzy might cool off a bit eventually, as interest rates rise and more people who had no intentions of selling decide they too want to make a million bucks. But all you have to do is grab a salad during peak lunch hour in downtown San Francisco and you too will quickly realize that the hordes of start-up trendsters standing in line aren’t going anywhere anytime soon.
If you don’t believe me, think of all the internet services you use (Google, Twitter, Pinterest, Uber, Lyft, LinkedIn, Munchery, Stitch Fix, to name a few). Those companies all have offices in San Francisco that weren’t there during the previous bubble, with employees hungry to buy or upgrade. Of course, they will first try to buy in the city. But when that doesn’t pan out – and Rockridge can absorb only so many of them – take a wild guess where they will be headed? I’m sorry to say, but this time, unlike 2005, their qualifications are good and the money is real.
Don’t get attached
Buying a house is an inherently personal endeavor. Our home is our kingdom; it’s the place we raise our kids, grow old, and create lifelong memories. I couldn’t help myself from going there, i.e. visualizing my kids running up and down the hallways of my favorite house, my artful black and white travel photos hanging on the freshly painted walls. Save yourself the heartache. There’s no such thing as fate in real estate. A house is a house and you can live in any number of them. Focus on writing the best offer possible, not birthday parties in the fictional backyard.
For now, our family has no real choice except to stay put and wait for the market to level off. But perhaps this recent attempt at home buying was not a complete waste of time. Our little piece of property, or rather, real estate heaven, is really not that bad after all, and we are grateful for all that we have, even if it means being cozy all of the time.
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