Homeowners who are in financial trouble with their property sometimes wait too long to seek help, and then cannot mitigate the situation with a loan modification, a short sale or a deed in leiu of foreclosure. They wait so long and miss so many payments that significant harm is done.  The embarrassment, the sense of failure, the significant feelings of loss can keep home owners from reaching out for advice and guidance. This is happening on a big scale and is happening within my own close circle of loved ones too.

Recently a friend of mine, with whom I’ve done several transactions, informed me that she’d done a short sale with her home through a local attorney and hadn’t wanted to bother me with it, though she knew I’d have been willing to help.  (She was right: I would have.)

I was stunned on several counts, most of all that we hadn’t talked before she did it; I truly think it matters tremendously to do a good amount of information-gathering, and talking with trusted sources, before pulling the trigger on something big like this.  But very often, people become more private when under financial pressure. (Others are virtually in denial.)  This really just makes things worse since they may make huge decisions with insufficient information.

After a moment or two, I also realized I’d never seen her San Jose condo on the MLS and asked her how it could have sold without my noticing it.  She told me that a lawyer had helped her to effect the transaction, but he’s not a Realtor and it was never put on the multiple listing or marketed like a regular home for sale (aiming to get the highest price via the most qualified traffic).   He brought in only a few people and one of them bought it.  “I asked him how much he charged and he told me that the bank would pay the fee”, she offered.  She didn’t seem to know how much he’d been paid.  The sale was done, though, and she was relieved.  I was glad that she felt relieved but not convinced that her financial danger was over.

Feeling protective and worried about her being chased down later for the forgiven debt, I asked her if there would be any deficiency judgment. She didn’t know what I was talking about.  I tried to clarify by adding “are they going to send you a 1099?” (reflecting the “phantom income” or forgiven debt) – again, no idea what I was talking about.  There were other things, too, which pointed to the fact that although she’d gone through a short sale, and the sale was closed, there were an awful lot of things which she simply didn’t understand.  I’m not convinced that she comprehended the risks of what was involved even after the close of escrow. I am hoping that her lawyer didn’t have her sign off without a promise from the lender that there would be no deficiency judgment – but since she didn’t know about it, I’m not so sure that happened.

A rush to action could have been prevented with a little research and some conversations with more than just one professional.  When I speak to a home owner who’s considering a short sale (or deed in leiu or just walking away), I always suggest that he or she consult with an attorney and also a tax professional; these professionals can speak to issues that are not my area of expertise. A big plus, usually, is that there is no “vested interest” on the part of the lawyer or tax professional in advising one way or the other. He or she gets paid for advice and does not gain from there being a short sale (or lose for lack of it).  That neutral, unbiased advice is crucially important.  As a Realtor, I should not advise anyone to do or not do a short sale.  One big reason is simply that I stand to get paid with a short sale, but not if other avenues are taken.  In the case of my friend, the person advising her to do the short sale did profit from her following that advice.  I am concerned about that.  But it’s too late – so nothing I can do to help and I certainly don’t want her to feel bad about it so of course just let it lie.  I am hoping she will be ok.  I’d feel more certain of it if she understood better what she had done.

For my readers, though, I want to encourage you, if you’re in trouble, to not just do something impulsively and without consideration, but instead, please do some research and reflection.

Of course, I have seen the other extreme too, where instead of spontaneously jumping into it, Silicon Valley home owners carefully decide to do a short sale but then are so emotionally upset that it’s nearly impossible to move ahead.  They stall or find reasons to not either get ready to sell or to make the home ready and presentable.  Foreclosure inches closer and closer and the risks, and the stress, go up.  That’s not good either.

One bit of good news now, though, for people considering a short sale is in a recently passed California Senate Bill.  For people with just one loan, there are benefits to waiting until January to close escrow on a short sale, due to a new law in California, SB 931. After January 1st, home owners with just one loan who complete a short sale will not have to worry about a deficiency judgment.  Now that’s a relief!

Are you in trouble with your San Jose, Los Gatos, Saratoga or Campbell area home? I offer a no-cost, no-pressure initial consultation.  I won’t push you to list or sell your home with me or to do it at all.  I may be able to suggest alternatives that haven’t occurred to you, perhaps some that can help you to keep and stay in your home.  I will actively encourage you to do your research and get qualified advice. It’s important to neither drag your heels nor to rush impulsively into a short sale. Gather information, do your research, then chose and act!

Related articles on Silicon Valley short sales:

Silicon Valley Short Sale Listings (on my Live in Los Gatos blog)

Silicon Valley Short Sale Listings: Tracking the Numbers in Los Gatos, Monte Sereno, Saratoga and the Cambrian Park Area of San Jose (also on my Live in Los Gatos blog)

What’s the Ratio of Distressed Sales – Short Sales or Foreclosures – to “Regular Sales” in Santa Clara County?

Underwater & Considering a Short Sale or Loan Modification?

Short Sales Sell But Often Don’t Close: Why?

How many of the Silicon Valley homes for sale are listed as short sales? How many are bank owned properties? This morning I did some time pulling the numbers out for my readers so that you can see the actual real estate figures.

What’s being counted below are homes for sale, including houses, duet homes, condominiums and townhouses (or townhomes) in the various areas of Santa Clara County listed below.

As was the case a year or two ago, most of the short sale activity is taking place in the most affordable price ranges. The higher priced areas are not immune, though – but because there are fewer distressed properties to choose from, they get purchased rather quickly, so we’d see a higher percentage of them among the pending sales rather than the available listings.

Today I did a post on this subject focusing specifically on the Los Gatos real estate market in terms of short sales today vs the last couple of years (and the question of whether or not the trend is to rising numbers of short sales available). To learn more, visit the article on my Live in Los Gatos blog.

For bargain hunting buyers of high end properties, then, it’s slim pickings!  In the entry level areas, there’s much more selection but also lots of competition.  Last week I was involved with some buyers in a bidding frenzy in a terribly underpriced Cambrian short sale: it got 43 offers!  (So please remember that the list price may be completely unrelated to the sales price.)

If you’re looking to buy or sell a home in Silicon Valley, it helps to have the assistance of a Realtor with a pulse on the market.  Please contact me for a confidential & no-obligation meeting today!

Although interest rates are nudging upwards, there was some really positive news that you should know about this week.

For distressed home sellers in California, one of the problems with short sales and some foreclosures was the liability for California State Income Taxes on any “forgiven debt”. It looks like that may be disappearing – not a moment too soon for people already suffering economic hardships in the recession.

The Los Angeles Times reports that

“Thousands of Californians whose homes were foreclosed on or sold at a loss would get tax relief under a measure approved Thursday by the state Legislature.

“The bill would waive state taxes on mortgage debt that has been forgiven in a foreclosure or short sale. It is expected to affect about 34,000 taxpayers.”

The governor is expected to sign this bill.

In some parts of Santa Clara County, a very significant percentage of homes for sale and homes under contract (pending sale) are “short sale” listings.  This is particularly true in entry level areas like San Jose’s Alum Rock area, the Blossom Valley district, the Santa Teresa area, etc.  These homes can be hard to sell and even harder to close – but why? They are usually well priced so should just fly off the market, but often that isn’t the case.

The trouble with short sales is that there are a lot of people involved, so there are a lot more places for things to go wrong. Unfortunately, they often do go wrong. I believe the national average is that about 20% of short sales that sell (go pending) actually close.   Think of it like hurdles:

• The first hurdle is getting a buyer to write an offer (despite the significant risk that the sale will never close)
• The second hurdle is getting the seller to accept the offer (and the seller’s agent to agree that it is viable)
• The third hurdle is in having the lender or lenders approve the purchase agreement – it is MUCH easier if there’s only one lender, very difficult if there are two lenders and extraordinarily hard if there are three lenders. Sometimes lenders would rather foreclose than work with a short sale, especially if there’s more than one loan.
• The fourth hurdle is the seller approving the lender’s terms, which may or may not be easy to swallow (some lenders require that a seller promise to pay back some of the money over time or upfront).  Sellers reserve the right to refuse the terms.
• The fifth hurdle is the agents (and possibly buyers) approving any concessions the bank requests. Sometimes the bank will require a commission cut. Agents may or may not be willing to accept what the bank requests. (Imagine having your income suddently cut by 1/3 or 1/2. You might say no too.) Buyers may be informed that the bank requires them to pay more costs too.
• The last hurdle is keeping the buyers in escrow during the prolonged period between when the seller accepts the offer and when the seller accepts the bank’s terms.  Sometimes unscrupulous buyers will write offers on several short sales and then wait to see which one is accepted first – and bail on the others. This causes a great deal of harm to the seller, who may have been nudged closer to foreclosure.  On the other hand, though, with only a 20% chance of success, buyers wonder why they shouldn’t take this approach just to hedge their bets.

I’ve seen all of the above happen in my Silicon Valley real estate practice: buyers writing offers on multiple homes, sellers refusing bank approvals, lenders foreclosing when a great offer was on the table, agents refusing commission cuts. 

In many parts of the San Jose area, short sales sell for about 20% less than the same type of home that’s a regular sale (not distressed, not bank owned). The reason they sell for so much less is primarily risk, but sometimes also condition.  Very often, sellers in short sale situations aren’t highly motivated. Emotionally, they may have already said goodbye to the home and often the property is not being well tended.  In many cases, too, these homes were bought a few years ago “As Is” but no repairs have been done – so buyers are facing a lot of catch up work with deferred maintenance.

Each short sale situation is unique. For all the bad news out there about lenders, sometimes you’ll be fortunate enough to run into a great servicing company or bank.  So don’t assume that the bank is going to be impossible to work with – it may or may not be.

Thinking of selling a short sale?  Understand that if you do, the bank won’t let you close the escrow with a dime (figuratively). If you have assets, most likely the bank will want them.  Own another home? The bank may expect you to pull equity out of it to support the one you need to short sell. Have money in savings? The bank may ask for it.  If the bank doesn’t insist on a cash payment upfront, you may be required to sign a promissory note and repay the debt over time.

Right now there are protections for you on Federal Tax in some cases, but that is not true in all cases and it’s not true for California state taxes.

Don’t forget the risk of deficiency too. In some cases, even if you go through foreclosure or short sale, banks may later come after you for the money lost.

It is imperative for you to make an informed decision about what’s in your best interest.  Your tax and other consequences will vary depending on whether the loan you have is a purchase money loan or a refinance, and if a refi, what you used that money for.  In some cases, a foreclosure may be your best option.  Please speak with a tax professional and a real estate attorney about your options and your liability with a short sale vs a foreclosure.  We Realtors can assist you if you want to do a short sale but we cannot advise you to do one or not to do one – you need your tax and legal professionals for that.

Thinking of buying a short sale?  Ask a lot of questions upfront! Questions include:

• How many loans are there?  If two (or more) are they at the same institution?
• Has a Notice of Default been filed? If so, when?
• Is there a Notice of Trustees Sale filed? Again, if so, when?  (Many lenders will not even look at an offer if it’s in the last 2-7 days before the auction.)
• Does the listing agent have experience with short sales?
• Does the seller own other property? Is the seller prepared to sign a promissory note, if needed?
• How long has the current owner owned this property? Are there old inspection reports available? If work was called out on the reports, was any of it done?

These are just a few things to consider.  If you want to buy a short sale home, it will take time and patience. Make sure you understand the situation clearly before committing to the short sale.  Do use the California Association of Realtors Short Sale Addendum – it is excellent. Make sure it is completed (no blanks, appropriate boxes checked). It is a great protection when used correctly.

It is a strong seller’s market in the Alum Rock area of San Jose right now: inventory is shrinking and prices are rising after hitting bottom a few months ago. Prices are still way off year over year, but for the last 4 months or so, prices have been rising in this part of Silicon Valley, and it’s quite dramatic.

As of a few days ago in this area of San Jose, there were 203 single family homes for sale and there were 114 that sold/closed in the last month. To get the “months of inventory” or absorption rate we just divide the 203 by the 114 and we get about 1.8 months of inventory, which makes it a very strong sellers market. 

(Because it’s so affordable, first time homebuyers are flocking to Alum Rock in droves. Unfortunately, they are sometimes outbid by all-cash investors and left frustrated as homes get multiple offers and prices skyrocket out of reach.)

The absorption rate can be measured in days, weeks, months (or years) of inventory.  Below is a chart reflecting the days of inventory relative to the last 18 months or so.  As you can see, the absorption rate has been shrinking very, very dramatically (as prices have fallen through the floor).

The market is a sellers market because homes are selling fast (fast, not at a great price for the sellers). They are selling fast because of one main reason: prices are slashed to “bargain basement” prices, and this has happened because the vast majority of sales are foreclosure related: they are short sales and bank owned property sales

A subset of that market are the few “normal sales”. When I take them apart, there are 66 for sale and 18 that have closed in the last 30 days, which is a 3.6 month supply of inventory - still a seller’s market, but not as strong. (Under 6 months is a sellers market, over 6 months is a buyers market.)

What about pricing?

How much more will a home that’s a “normal sale” sell for as opposed to a foreclosed home (REO) or a short sale?

Let’s take the example of a home that’s about 2000 SF and see how it plays out.

Regular sales $319 per SF

Of the homes “for sale” in Alum Rock, of homes about 2000 SF there are:

27 in all
7 bank owned
13 short sales
7 normal sales

Of the homes “under contract” in Alum Rock, of similarly sized homes there were:

66 for sale
15 are bank owned
44 are short sales
7 are normal sales

66 sold in all
53 were bank owned
10 were short sales   (note that a high percentage of short sales SELL but do not CLOSE)
3 were normal sales

Buyers: if you buy a short sale or an REO, there will be “issues” but there will be discounts.  Sellers: if you want to sell a home in Alum Rock, you must be very competitive, whether your home is a normal sale (about 5-10% of the inventory only) or a short sale.  If your home is not a distressed sale, you can sell for more – but not oodles more – than the rock bottom pricing that the bank owned or short sale homes will fetch.

Additionally, there’s a difference from one price point to the next. Below, please see the list price by quartile for the most recent week in the 95127 zip code of San Jose. NB how much better the market is performing here in the high end price range. The higher the price, the more the upswing.  Why? Fewer defaults!

If you want to buy or sell a home in the Alum Rock District of San Jose or anywhere in Silicon Valley, please know that to get the right price, it’s imperative to dig down to the local level and specific home type and not rely on general stats. There is wide variation from one subdivision to the next, let along areas with views, no views, small homes, big homes, etc.

Please contact me for assistance in analysing your market and how to make the most of it. And please visit my Alum Rock statistics and trends section of my RE Report.