Are you thinking of buying your first home now? If so, you're wise. It's as if there were a "20% Off Sale" in some areas of San Jose. As long as you are planning to stay in your home awhile (3 or 5 years or more), yes, you should buy!
I'm showing a lot of houses in Silicon Valley that are listed close to $500,000. These same homes sold a year or two ago for perhaps $625,000 to $650,000 or more. Some of them have been nicely improved with granite kitchens, a new roof, dual paned windows, and so on.
Some sellers just have to unload their homes due to divorce, job loss, illness, or other problems. A very common issue is simply the readjusting of the loan to a now un-affordable rate. Payments become difficult or impossible to make. Foreclosure looms. If payments are missed, and the owner doesn't contact the lender to get a loan modification (the lender would really rather change your loan, or put current payments at the end of your loan - called a forbearance - than foreclose), then a short sale may be attempted.
A short sale occurs when a lending institution agrees to take less than what is owed on the property to enable the owner to sell the home before going through foreclosure. Foreclosure is costly to the bank, often much worse than a short sale. (And while a short sale is bad for the borrowers credit, it's only half as bad as a foreclosure in that regard.)
So with a lot of folks in financial distress, there are a lot of homes for sale as short sales here in Santa Clara County. This is primarily true in the lower priced areas of the valley.
One San Jose house sold in 2005 for $655,000. When it didn't garner a buyer recently at the offering price of $595,000, the agent and homeowner lowered the price. Often we "reposition" the home by "adjusting" the price downward by 3-5% in a normal market. But this home was reduced to $429,000 yesterday. That is a drop of 25%!
Even in this market, that's not typical. But we are seeing bigger price changes than ever before as inventory stays on the market longer in east San Jose, Blossom Valley, Santa Teresa, South San Jose, and other areas.
So the numbers should get your attention.
But what's it like to buy a short sale?
Truthfully, it's no bed of roses. Most short sales do not sell and close escrow, but instead go through the full foreclosure process. Recently I heard a talk on these in which an expert asserted that about 7-8% of all short sales will actually sell to a buyer before the home goes through foreclosure, and that even if the lending institution accepts the offer presented by the buyer (and accepts the short payoff), only 40% close escrow.
What's the matter?
It's a deluge of applications for short sales. The lenders can't cope, files are ignored or dropped. They are overworked and understaffed. Additionally, there are different departments involved, and they may or may not be communicating with each other: the loan modification department, the short sale department, and the department persuing the foreclosure may all not know what each other is doing.
Recently an agent friend of mine told me that she had a property in San Jose listed at about $550,000 and she got a great offer that was very close to list price. The sellers signed it and the agent forwarded it to the bank for short sale approval. The bank sat on the file for three long months. In that time, prices in the neighborhood dropped about ten percent. The buyers got an acceptance after three months and were not prepared to overpay, so wrote a new contract with a far lower price. The bank is thinking about it. That home is now listed at under $500,000. The bank lost $55,000 + by screwing around.
Banks can't afford these kinds of losses.
So - you are wondering a few things. First, can I buy a short sale or foreclosure in San Jose for a good price? How far down can I negotiate on a short sale?
The answer is as murky as the process: it depends.
When sellers drop their prices below market value, they get multiple offers. When multiple offers occur, prices are pushed up - most of the time. Recently I was involved in one of these situations off of Monterey Highway in the Santa Teresa district. The house was in good shape, generally, with nice remodeling (if messy presentation). The agents received six offers in that case. It's been 2.5 weeks and we still don't know if the bank will counter any or all of the offers. Often agents negotiate just the one best offer between buyer and seller and send it on to the lender. But some institutions ask the seller to sign ALL offers and send them to the bank (which I think is insane since clearly they don't have more than one house to sell). In those cases, the lender is acting as if it were the seller or the one on title - which it isn't. The homeowner is at the mercy of the process. And so are the buyers.
So first, you may or may not be able to get the home for less than list price. Often you can, but no one is giving the house away. Banks expect at least 80% of market value, but usually more than that. I've heard a range of 85-95% of market value. So if you come in with an offer 20% or more off list price, don't expect anyone to be happy to see your contract. Just like regular sellers get offended, banks do too. If yours is the only offer in a long while, that's one thing. It's another is the owner just dropped the price 10 or 20% and now has three or four offers.
Second, there are no guarantees you can close escrow on a short sale. You can make an offer. The seller might accept. The seller's lender might accept your offer (with a lot of legalese). And, just before closing, it might still happen that a better offer will show up and boot you out of contract.
With short sales, you almost don't know until closing - which is often a very, very long time from when you put pen to paper and signed the purchase agreement - if you will really get the house.
It often comes down to "time vs. money". If you are patient, you may get a great Silicon Valley property for far less than it sold for a year or two ago. Want real estate at a good price? This is your opportunity. Just realize that it's going to be a lot of work, there will be frustration at the lack of control, and there may be surprises, from the time you go looking at these homes to the time you take possession.
May all your surprises be pleasant ones.
First time home buyers in Silicon Valley will find the new "Valley Of Hearts Delight: Real Estate in Silicon Valley" blog to be full of useful information and insights on San Jose area homes. While not aimed particularly at first-time home buyers, many of the posts will be highly relavent to them, with topics including:
