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The San Francisco Bay Area has many advantages for potential homeowners — including beautiful scenery, a vibrant arts scene and proximity to some of the country’s best-paying jobs — but our housing prices aren’t among them.
A recent Business Insider survey found that 12 of the 25 most expensive housing markets in the United States are in the Bay Area, including seven of the top 10. San Francisco is the major city with the most expensive housing market; a four-bedroom, two-bathroom home costs an average of $1.67 million.
Perhaps surprisingly, I think it’s possible to find a home in the Bay Area, even if you’re not a new tech millionaire with stock options. In my experience advising Bay Area clients, I’ve witnessed some basic tactics that can help you buy a starter home. Here are six to keep in mind.
1. Understand the concept of a ‘starter home’
A starter home is an affordable property that meets your basic needs and lets you dip your toe in the real estate pool. It can also help you build equity. You won’t spend the rest of your life in your starter home — rather, it’s a steppingstone. The equity you build while living in it will help you afford something bigger and better down the road.
2. Define your minimum requirements
Because you’ll be in this home for a while — about five to seven years — while you build equity, it’s crucial that it be livable. Make a list of your absolute “musts,” including number of bedrooms, proximity to work, public transportation access, schools, the quality of the home itself, etc. These should be minimum qualifications your home could have and still allow you to feel comfortable and happy.
3. Be realistic with your expectations and budget
Perhaps you’d love to own a condo in SOMA near the ballpark, but unless you can make an all-cash offer and go up 10% to 20% in price, that’s probably not a realistic goal. Be honest with yourself about how much you’ll be able to save for a down payment and what you can afford to pay per month for a mortgage, property tax, insurance and homeowners association fees, if applicable. Let your budget and minimum requirements guide your expectations. Your home-related costs shouldn’t exceed 28% of your gross income, and when you add in any other debts, such as that pesky student loan, your debt-to-income ratio shouldn’t exceed 38% of your gross income.
4. Be flexible on location
According to Paragon Realty’s interactive map of median home sale prices in the Bay Area, the median home in San Francisco costs $1.3 million. This means half of the homes sold in the city in 2016 cost more and half cost less, but there’s more to the story than that. Your money has varying levels of buying power in different neighborhoods within the city and its suburbs. For example, the median sale price in Vallejo was $335,000 last year, and median prices in Fairfield and Vacaville were $412,000 and $400,000, respectively, according to Paragon.
5. Search online, but shop with a real estate professional
Research shows the majority of home buyers begin their home search with online tools. These can give you an idea of available homes, but I think working with a real estate professional is the best way to gain insight into an area’s real estate market, help you pick the home most appropriate for you and help you make the right offer. Your online search might turn up what looks to be the home of your dreams in a great neighborhood for just $600,000. But in San Francisco, sellers often set a low initial asking price, knowing that a bidding war will drive up the sale price. A good real estate agent can help you navigate this often painful process.
6. Develop criteria about when to make offers
Work with your real estate agent to develop a plan about when you’ll make an offer on a property. The property should meet all of your minimum requirements. You might also want to find out how many disclosures were requested. If 20 disclosures have been requested, then there may be seven to 10 offers, assuming no major issues crop up.
Decide if you’ll consider a tenancy in common, a type of ownership structure prevalent in the Bay Area in which multiple parties share a transferable ownership interest and that has specific legal considerations to consider. And so on. Choosing your criteria with your real estate agent before you begin to make offers can take some of the anxiety out of the question.
Keep these tips in mind as you start the home search process. Above all, view your starter home within the context of your longer-term plan of getting to your dream house.
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Steve Branton, CFP, ADPA, is a senior financial planner with Mosaic Financial Partners.