You want to buy a Silicon Valley short sale? Be careful what you wish for! There can be unpleasant and expensive surprises ahead. We’ll go over the risks.

The lure of a short sale

The news stories make it sound so attractive – get a home for 10% less than market value. That may happen. Sometimes.

The national average for short sales actually closing is extremely low, by some counts as low as 10 or 11 percent.

What about San Jose area short sales? Lets start with the lay of the land in Santa Clara County specifically (Silicon Valley includes Santa Clara County and a bit of Alameda, Santa Cruz, and San Mateo Counties). Some areas are loaded with short sale listings, others have few, if any.

You Want To Buy a Silicon Valley Short Sale – do you care where it is, or only that it’s cheap?

The best deals, in terms of low pricing, are going to be in areas with a lot of the short sales because they sell for less and pull property values down, making them more and more affordable. Those are the areas with lower priced homes, generally, the entry level areas where perhaps the buyers didn’t have great credit to start with.

In places like South San Jose, the south county areas, and Blossom Valley, for instance, most of the entry level homes are short sales. Values are plummeting there.

In places like Cupertino, Saratoga, and Los Gatos, there are hardly any short sales. Virtually none. And home values are rising.

Sometimes buying these distressed homes can pay off for some buyers.

If your goal is to purchase an investment property, this may be a good strategy for you. (We’ll go over the risks shortly.)

If you can afford one of the rare short sales in the higher-end neighborhoods, this can be a good opportunity for you. No guarantees, but if you can purchase in an area that’s appreciating, you may be able to get equity in your home without waiting years for the market to recover.

Risks in getting into escrow on a short sale

If you are looking to buy an entry level single family home for about $500,000, though, there are a lot of pitfalls that you need to be aware of. I’ll list a few here:

• Home values in most of these areas are falling quickly
• If you buy today, the home will likely be worth less tomorrow
• The seller may agree with you on a purchase price, but with a short sale, you will need the approval of at least one bank (or in some cases, the lender has a servicing company, which is another issue, and in other cases, there will be a first mortgage and a second mortgage, so there may be more than one bank involved)
• Lenders are overwhelmed with short sale requests and are taking a month or longer to respond to buyers and sellers who’ve agreed on the contract – some banks are taking 90 days, and some never respond at all. A few are saying that they will not process any short sales at all. Period.
• It is important to calculate out how fast the market is changing, because if you agree to an amount one day but the bank doesn’t say ˜yes for 30 or more days, it may no longer be a good price!
• There is a lot of ˜smoke and mirrors” going on with short sale listings, duplicity on all sides. Be aware that things may not be as they seem!
  • Many homes are listed as available but they already have a ratified contract between buyer and seller and it’s awaiting bank approval. (Agents are not supposed to do this. Technically it should be reported as a pending sale with a contingency. On the other hand, the home is sort of available because the bank has to approve the sale and reserves the right to take a better offer.)
  • Although a buyer and seller may have a ratified contract, the bank may continue to look at offers (perhaps until they approve an offer, perhaps later). So a buyer may be ˜bumped” at various points in the attempted transaction. In a normal sale, that really cannot happen unless the buyer badly missteps and is in default.
  • Also, some buyers are putting offers out on multiple homes, even though obviously they can purchase only one. The reason is that banks are responding so slowly, if at all, that buyers are thinking “I will go with the first one that responds”. So in some cases, listing agents have changed the status to sale pending, the seller is counting on that sale, but the buyer may not really try to complete the purchase at all.
  • You may be preapproved to buy and find out that your lender decides to change the loan conditions. Recently some of the larger lenders stopped being willing to loan to folks with 10% down and insisted that they now have 15% down. This is an unhappy surprise for buyers who are relying on their preapproval!

My advice: skip the short sales and wait for them to go through the process and become bank owned properties. Most of them will go through the process and will be less expensive and not involve the risk of having to evict someone when it’s all said and done. With the bank owned homes, there may also be issues (usually with property condition) but if you get into contract to purchase a home, the bank will do its best to see that you can close escrow on the deal.

Related post (on my Live in Los Gatos blog):
Can a Real Estate Agent Help You to Buy a Distressed Home or Pre-Foreclosure in Los Gatos?