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.