This week I was emailed about a home mentioned on Trulia which seemed “too good to be true”.  It was a distressed property and the reader thought it was for sale for about $650,000 but it is in an extremely upscale suburb on the Peninsula and she could not find the home for sale on our MLS.  She didn’t want to pay to find out if this was a hoax or what, so she asked me to please have a look.

I clicked on her link and saw that it was a feed into Trulia from one of the companies which provides foreclosure information to consumers by paid subscription.  No where did it say the home was for sale, but instead it indicated that $650,000 was the home owner’s loan amount – and that the property had a Notice of Default filed against it.  The house wasn’t worth anywhere near $650,000, of course – instead it’s valued at more than $2,000,000.  (So this would NOT be a short sale – there’s tons of equity in this property.)

Some consumers think that if a home has a NOD, it is for sale.  That is simply not true.  Many homeowners (including some of my clients) have at times missed a payment and then found themselves scrambling a little to get caught up.  It’s not easy but it can and does happen sometimes.

Now imagine yourself as that homeowner with a Silicon Valley house you love but that you’ve had some trouble with late, partial or missed mortgage payments.  You are trying to keep your house but someone comes to your front door and thinks your home can be bought for the amount of the loan or the delinquencies or both.  I’ve seen million dollar homes in Los Gatos with a very small second loan, such as $20,000, that went into default. You’d be seriously misguided to think that homeowner will part with a $1 million home for the $20,000 that is owed.  Just because the seller is behind doesn’t make the seller stupid!

Some of these sites which sell foreclosure info to consumers do both them and the home owner a great disservice by implying that condos, townhouses and houses which are in pre-foreclosure are available for purchase.  If the owner wants to sell, the property will be listed for sale with a real estate agent or broker, or at the very least there will be a for sale by owner ad found on Craigslist or a sign on the front yard.  Show up on that struggling owner’s front porch and ask to buy the house at a crazy low price and you’re just throwing salt on the wound. Don’t do it.

For further reading on distressed sales, pre-foreclosures and short sales:

Q & A on short sales (popehandy.com website)

What’s the difference between short sales and foreclosures? What is an auction?

Short Sales Sell But Often Don’t Close: Why?

Right now there are about 4664 active residential real estate listings (homes listed for sale on our local MLS) which are houses, duet homes, townhouses or condominiums in Santa Clara County.  Of those, there are 1255 short sales (27% of the inventory) and 463 bank owned properties, or REOs (9%),  on the market.  So the “distressed properties” segment equals 37% of the Silicon Valley real estate market (or Santa Clara County real estate market).

Some areas are flooded with short sales & bank owned homes. Others are going through this meltdown nearly unscathed. Below please find a sampling of areas in and around San Jose with the percentage of distressed homes for sale (including both short sales and REOs or bank owned properties).  In most areas, there are usually about 3 times as many short sales as bank owned homes, but sometimes it’s a lower percentage, closer to 2.5%.   I pulled the numbers from our MLS tonight – info is deemed correct but of course not guaranteed. 

If you’re interested in buying a distressed property, or would like to discuss selling one, please contact me today! I have a team of experts with whom I work to assist home buyers & sellers throughout the county and with all types of home sale or home buying challenges.

There are a number of things which are related to the purchase and sale of real estate which require the professional guidance of those other than your Realtor, namely a legal or tax professional.  This sometimes surprises consumers.  Once I was discussing one of these areas with a prospective client and she felt quite frustrated and exclaimed, “you know the answer, you just won’t tell me!”  That was many years ago, but I’ve never forgotten it.  Many Silicon Valley home buyers and home sellers assume that they’ll never need to talk to a tax or legal professional, and if advised to do so, may balk.

So let’s talk about it.

In other states, such as New York, attorneys are very involved in real estate transactions. Here in California, though, that’s not the case most of the time.  We call on CPAs and lawyers when there’s a problem or a question which is beyond the real estate licensee’s scope.  I’ll provide a few examples.

Holding Title: Probably the most frequent question I get that I’m not allowed (or qualified) to answer is about how people should hold title when buying a home.  The purchase agreements we use (both CAR and PRDS) lay it out best and puts it in bold so that consumers don’t miss it:

“THE MANNER OF TAKING TITLE MAY HAVE SIGNIFICANT LEGAL AND TAX CONSEQUENCES. CONSULT AN APPROPRIATE PROFESSIONAL.” (newest revision of the CAR contract, April 2010)

Most title companies have a nifty little chart that summarizes the pros and cons of the various ways in which people can hold title.  But neither the escrow officer nor the real estate agent can tell you what’s best for you.  We know what’s most common, but that doesn’t mean it is best for you and your particular set of circumstances.  So talk to a CPA or talk to a lawyer (or both) if you do your research and are at all unsure of what to choose! (Old Republic Title has a summary of the most common ways to hold title in a downloadable pdf file, which you can access via this link.)

Arbitration: Realtors or other real estate sales people should not tell you whether or not to initial for arbitration.  We can explain it, but on that point we cannot advise.  (I will share that in my experience, virtually everyone does initial for it, so as a practical matter I explain that it will likely be a counter offer issue in a purchase agreement. Again, though, the ramifications of agreeing to arbitration, or not agreeing to it, are a discussion for a legal professional.)

Distressed sales: In addition to these two areas, right now we are seeing many short sale and bank owned (REO) transactions.  The paperwork involved in them is significantly different than in a regular transaction.  Often the bank involved has addenda which nullify many of the “buyer protection” clauses in the purchase agreement, for instance, more so with REO sales than short sales, but significant in both cases.

And that’s only the tip of the iceburg.  It’s not unheard of that with a bank owned sale, the bank will not provide to the buyer signatures and initials on the contract which make it binding – but they want the buyer to go ahead, put the good faith deposit in escrow, proceed with inspections while the purchase agreement may still be voidable! (In other words, the bank may kick the buyer out of contract.)  Because there’s so much increased risk to buyers in purchasing homes in which the bank is the seller (or in some cases needs to approve a short sale), I advise my clients to consult with a good attorney to make sure that they understand what they’re agreeing to and what the actual risk is.

For home owners doing a short sale transaction, even the bank approval letter may be something to run past your attorney as the language used may indicate whether or not you will be open to trouble from the bank later. In my experience, short sale sellers are the most likely to need but not be willing to pursue professional tax & legal advice. Not so long ago I had a client who wouldn’t even make use of low cost or free legal services, insisting instead that he could find everything he needed on the internet.  That is really a mistake!

Transactional Nightmares: Finally, if a transaction is hitting a bad, bumpy stretch in which the other party appears to be in default (not performing), your Realtor may suggest that you consult with a real estate attorney if other avenues don’t get the desired results in a timely manner.  Every once in awhile, there will be a weird and unforeseeable turn that may put the sale on shaky ground.  It may even be that  who must (or can) do what may be unclear.  Realtors don’t often suggest that home buyers & home sellers call an attorney for a consultation, but if they do, take their suggestion seriously.   A good lawyer (or tax professional) can often get you an answer quickly and soon put your mind at ease and help you to establish a game plan, if that’s what’s needed.

In conclusion, if your trusted real estate agent suggests that you seek tax or legal advice from a qualified professional (or any other professional), it’s probably in your best interest to do so.  Your Realtor will not get any kickback or payment for the referral – it is made only for your own best interest.  While there’s a lot of good information to be found online and in blogs, none of it will be tailored to your precise set of circumstances, so it cannot substitute for a confidential conference with a lawyer or CPA.

The Santa Teresa area of San Jose is enjoying a hopping real estate market with the number of pending sales suddenly going through the roof! (Stat below care of Altos Research, to which I have a subscription. List prices are used.)

Homes in this part of south San Jose are often selling over list price as inventory drops. The days on market appears slow, but a lot of homes that have been “just sitting” on the market are now selling.

The great rush in Santa Teresa is, of course, in response to the list prices, which have been falling steadily in most areas – and making for incredible bargains.

Here are the August sales stats for our MLS “area 2″, Santa Teresa (per the REReport, also a subscription, which uses closed sales):

With more pending sales than active ones, you can see that most houses are now selling and the pace is quickening.  A major player in the market conditions of this part of San Jose is the situation with distressed properties: foreclosures, short sales or homes sold under pressure as they’ve got a notice of default on the property.

How big an impact does the REO or short sale label have on a home’s eventual sales price? How much more or less will a home sell for based on the situation as a “regular sale” or “bank owned” or “short sale”?

Buyers are voting with their wallets. Uncertainty causes buyers to be unwilling to pay top dollar. In some cases, the bottom of the heap is short sales – because the condition is less known (there are no pre-sale inspections) and even more, because the time in which the bank eventually responds, if ever, is likewise unknown. In other cases, REOs sell for the lowest amount because the condition of the home may be especially poor. Some REOs are “stripped”, with whole kitchens missing, trim missing etc. I recently visited a Willow Glen REO that even had a missing shower head in addition to the water heater, kitchen appliances, and windowsill.

Regular sales DO sell for more. How much more? Here are the numbers, which may surprise you. I looked at both 95119 (which is most of “Santa Teresa”) but also our MLS “area 2″, looked at pendings (which reflect list prices), solds in the last month and solds in the last 3 months.

Most regular sales are not only unpressured, but there are pre-sale inspections and often work done to put the home into good shape for the sale. So buyers know that they are getting a solid house with a regular sale.  They know that they will get disclosures completed by the sellers.

The numbers above display a wide range of prices per square foot, but in all cases, the distressed properties are selling for less than regular homes.  In some cases the difference in the average price per SF of the solds is double digits.  Among the pending sales, the list price is 10 – 18% less than amoung short sales or bank owned homes.

The widest gap for the average sales price is about 20%, but if we looked at individual sales we’d find some lower and some higher than that. The worst ones will be abused houses, and the best ones will appear almost like a normal sale, but perhaps a bit dirty.  One of the problems with the “auto comp” sites is that they don’t factor in these conditions, which have such a giant impact on a property’s value.

What is a home really worth? Usually it’s what an informed buyer will pay for it.  In Santa Teresa, as in other parts of San Jose, informed buyers are scooping up bank owned homes and short sales, but only if they’re getting a sizeable discount.  Aggressively priced, well staged and marketing “regular sales” are getting top dollar here and throughout Silicon Valley.