How common are “all cash” transactions for Silicon Valley real estate right now?  Throughout Santa Clara County, they were 20% of all sales among houses, duet homes, condominiums and townhouses (class 1 and class 2, does not include mobile homes, 2-4plex or apartment buildings or raw land).

Some areas and some types of sales are more frequently all cash than others.  Here are a few quick stats for the last month (last 30 days from today – numbers from MLSListings, crunched by me – disclaimer on good intentions but no guarantee):

• Santa Clara County: 20% all cash
• San Jose (entire city): 24% all cash
• San Jose short sales: 33% all cash
• San Jose bank owned or REO sales: 37% all cash
• Short sales & REOs were 48% of all sales in San Jose in the last month
• Of SJ homes listed at $300,000 or less: 48% all cash
• Los Gatos & Monte Sereno: zero sales all cash
• Saratoga: 29% all cash
• Almaden Valley area of San Jose: 14% all cash

Some of these sales will have no financing and the new owners will occupy the home.  Particularly in lower priced homes, though, these are investor buyers who will be renting out the property.  This is often the case with the lower price distressed properties in particular.  In higher priced homes, some new owners will put financing on the property after close of escrow.

With the crazy new demands that keep coming at us from banks and new requirements being imposed on appraisers, now more than ever, cash is king.  That doesn’t mean that the cash buyer will get a deep discount, but there will be a slight one in most cases and certainly preferential treatment that will create a great advantage in multiple offer situations.

Learn more about buying and selling Silicon Valley real estate with cash offers:

Cash offers: what do you need to know if buying “all cash”?

Q & A: Making an Offer

What’s My Silicon Valley Home Worth? Estimating the Probable Buyer’s Value  (financing impacts market value)

How many home buyers and sellers understand what a default is?  Consumers often confuse the term default with cancelling the sale at any time – even backing out of a contract during the contingency period for a legitimate reason.  Cancellation does not always mean default, though – there are some  fair ways and times to get out of contract without it being a default. 

Default is a strong word which refers to a failure to do something promised in contract or not doing it on time; we sometimes call it “non-performance”.  In the purchase agreement, buyers and sellers both make promises to do certain things within a certain timeframe, so either one could potentially default.  For instance, the following items are areas where a buyer could default:

• not putting the initial deposit (good faith deposit) into escrow on time
• cancelling the sale after removing all contingencies or without cause allowed by the contract
• not removing contingencies on time (or possibly ignoring other deadlines)
• not completing loan papers on time

Missing contingency removal deadlines may be a default.  For instance, the PRDS contract states on page 1 of that agreement:

BUYER’S  FUNDS:  Buyer  represents  that  all  funds,  including  deposits,  cash  balance,  and closing costs, will be readily available as “good funds” (as determined by Escrow Holder) at  the  time  of  payment.  Obtaining  these  funds  is not a contingency of this Contract.

The loan approval, though, may be indirectly tied to whether or not the buyer liquidates stocks or other accounts to provide the downpayment.  What happens if the loan is fully approved except for the verification of this downpayment?  The buyer’s job is to have the funds available so that obtaining them later does not cause a delay.  If a delay is caused because the buyer didn’t get the funds ready on time, that is a buyer default.

Not every default is an equally grave problem, of course.  In the case above, the buyer can go ahead and remove the loan contingency and continue to liquidate the downpayment assets (which should have been done much earlier in the escrow).  BUT, if the buyer does not complete the sale due to a problem with getting those funds, his or her good faith deposit will be at risk via the liquidated damages clause because getting those funds is not a contingency.

Sellers, too, can be guilty of defaulting on contractual promises. Here are some areas in which a seller could default:

• not moving out on time
• not providing completed disclosures or reports on time
• not having work done which was contractually required (such as pest work or repairs)
• not keeping the power & water on for inspections and final walk through
• causing a delay in closing due to not signing off on time

In Silicon Valley, there are two purchase agreement forms in use: the California Association of Realtors (CAR) contract and the Peninsula Regional Data Service (PRDS) contract.  Generally speaking, the PRDS & CAR contracts are similar on many points.  They are not so similar in the treatment of defaults, though.

Oddly, the CAR contract only mentions the word default twice, and in both cases the topic is a buyer’s default, first in the liquidated damages paragraph (25) and next in the other terms & conditions paragraph (27).
(more…)