Is A Silicon Valley Short Sale For You?

Yesterday I met with some seller prospects – actually, I consider them clients since I’ve been assisting them, updating them, and giving them staging advice for about six months now. Their Blossom Valley home has been sliding in value and I have been concerned about the situation and trying to get them on the market sooner rather than later since they do want to sell.  A couple of months ago, I told one of them that they’d now have to bring money to closing; I asked if they knew this and if they planned to do it. “I think we’ll be OK” I was told.

But now it’s the middle of March and prices have slid about 10% over the six months we have been chatting about their home sale. They’d told me that they were ready to list so I had spent hours getting comps and stats and trends pulled together as well as the listing paperwork. But I knew the issue of “bringing cash to closing” was the major hurdle.

So that’s where we started. One of them was clear that this was an issue, but one appeared surprised. Before I said the amount, I heard “well we might be a short sale”.

“A short sale?” I was just surprised to hear that idea even floated.

Both of them are very gainfully employed. They want to move, but I don’t see a “have to move” situation. It was clear to me that the short sale concept was not well understood, nor the punishment it brings appreciated.

I guess it sounded like an easy answer. After all, wasn’t everyone else doing it?

Certainly, in this particular area of San Jose, and in this particular price point, a good 80% to 90% of the homes appear to be short sales – and they are dragging values down for everyone else.

Let me briefly explain what a short sale is and isn’t:

(1) What is a short sale?

  • it is usually a pre-foreclosure situation
  • the buyer cannot continue to make the payments and will go into foreclosure if the short sale doesn’t happen (or this will happen in the near future)
  • there is a significant “hardship” (job loss, sickness, death, divorce) causing financial problems
  • the owner wants to sell the home but cannot pay off the lender in full because the home has declined in value – there’s not enough equity
  • it is going to hurt one’s credit badly, but only half as badly as a foreclosure
  • short sales often do not go through – most of the time, they end up becoming full blown foreclosures

(2) What a short sale isn’t:

  • it isn’t a help to people who simply want to upgrade and don’t want to pay off the bank
  • it is seldom an option if you have other assets (like other properties or money in the bank) – the bank will want your money!
  • it isn’t a “get out of jail free” card – there are built in punishments for those who must resort to doing a short sale (trashed credit AND paying taxes on any amount “forgiven”)
  • a short sale is never a happy thing – it is always the lesser of two evils (vs foreclosure)

I explained to these nice folks that it didn’t appear that they would qualify for a short sale (no hardship, no inability to pay the loan etc.).

What options exist for Silicon Valley folks who want to move but have no equity?

Here are a few thoughts:

  • A promise was made to repay the loan, so the obvious first answer is to wait out the market or come up with the cash to buy out of the situation.
  • Walking away:  In some parts of the country, we are again hearing about “jingle mail“, in which owners simply turn in their keys to the bank and walk away. I remember decades ago that happened in Alaska when the market there tanked. Now it’s happening here too.In Sacramento, where some owners bought a home at 50% more than the identical house is selling for now, some folks are first purchasing the new home (same floorplan as current one) at the cheaper rate, then walking away from their old home. In effect, they get a home with half as much mortgage.   No, it’s not very nice. It’s defaulting (a strategic default) on their promise to repay a loan. The lenders could potentially persue them for losses. Will they? I don’t know – this is a crisis of epic proportions!
  • Renting it out: another possibility is to simply rent out the house (rents are rising due to increasing demand) and to move to the next house.

I don’t think anyone now doubts that we are in a recession which is fueled by the housing crisis. For every person who just “walks away” from a house, that’s the recession deepening for everyone. I’m not going to encourage it – it worsens the economy and trashes the borrower’s credit.

Rents are increasing with this crisis. So my suggestion: rent out your house and move on if you can.  Talk to the nonprofit credit counseling agencies. Give it a few years, Then call me when you’re ahead of the market and we’ll sell it for you. Or keep it until you have kids going to college and you can then use it to pay tuition.

Eventually, the market will improve. You don’t have to sell when it’s at a low point.

Thanks for reading this article – I hope you find this Silicon Valley real estate blog to be of help to you!

Please see also these related posts:
Underwater & Considering a Short Sale or Loan Modification?
What is a “Kick Out” Clause?
How Long Does it Take to Buy a Silicon Valley Home?
Short Sales in the West Valley Areas of Almaden, Los Gatos, Saratoga, Campbell, and Nearby
Real Estate Inventory & Sales in Silicon Valley’s “West Valley” Areas of Los Gatos, Saratoga, Campbell and Cambrian Park
Interested in Buying a Los Gatos Short Sale?
All posts relating to “short sales” on this blog for real estate in Silicon Valley

 

 

 

Silicon Valley’s Real Estate Scene: Short Sales, Foreclosures, and REO Properties For Sale

Which part of the Santa Clara Valley
is seeing all of this foreclosure and pre-foreclosure activity?

Short sales pre foreclosuresDepending on where you live in Santa Clara County, you may be seeing a whole lot of distressed properties on the market – or you may be seeing none at all. This is part of our current “bifurcated market” situation.

Generally, the more expensive areas of Silicon Valley (Palo Alto, Cupertino, Saratoga, Monte Sereno, Los Gatos, Almaden Valley and Silver Creek) are not suffering from a huge number of listings in which the sellers are in financial straits.  There are some, though.

It is the less wealthy areas in San Jose (including parts of downtown, the east side, south San Jose, Santa Teresa, Blossom Valley) and the south county cities of Morgan Hill and Gilroy) where there is an inundation with short sales – in the lower price ranges especially.

Generally speaking, most short sales, preforeclosures and bank owned homes are priced below $600,000.

How can you tell if a home is in pre-foreclosure?

Homes listed for sale in your neighborhood of San Jose, Saratoga or Los Gatos that are in pre-foreclosure may look like any others available. They may have granite in the kitchen, beautiful baseboard and crown molding, new dual pane windows, and on and on. The sellers may have borrowed and borrowed to improve the property, be unable to make the payments due to job loss, divorce, or other problems, and now be in default on a loan, heading toward foreclosure.

This status usually doesn’t “show” unless you have access to the county records or have a subscription to a service that lets you know the status (and those services are no where near 100% reliable, by the way). Your real estate agent, who should have a subscription to the MLS with full information, can see a report at no cost that shows the foreclosure history.  (Not all pre-foreclosures are short sales.)

What’s a short sale? Being in “pre-foreclosure” means that the seller has missed payments on a loan in which the real estate owned is used as collateral, or security. Let’s say a home is worth $1 million, but the amount in default is a small loan, perhaps of $25,000. If the home is sold, it can pay off the debt in full.

Sometimes, though, a distressed seller bought higher than the home is now worth. When prices fall (and if the owner bought the home with a low down payment especially), selling the home will not be enough to pay off the loan. So again let’s imagine that a house is worth $1 million, but the owners owe $1.1 million on it (and to sell they have to worry about closing costs to boot). By selling the home, foreclosure can be averted – but to do so, the bank will have to agree to not being repaid 100%. This is a “short sale”. (Not all short sales are in preforeclosure, though, as not all home owners of these properties have missed payments on their mortgage.)

We’re seeing a lot of short sales in the entry level markets. In these cases, current owners bought their properties a year or two ago – for 10% or 20% more than those houses are now worth.

In the higher-priced regions of Silicon Valley, it’s less common to see a short sale than it is a straight pre-foreclosure because someone just can’t make the loan payment (due to some new problem like divorce or job loss, or because the adjustable loan went up and the payments are now untenable).

See also:
So you think you want to buy a Silicon Valley short sale?

Short sales sell but often don’t close: why?

Browse Short Sale Listings & Bank Owned Properties for Sale in Los Gatos