As I mentioned in my last post, I showed a lot of bank-owned residences in Los Banos on Friday.  One thing that struck me was that for the most part (with a few exceptions), the properties were in good condition.  Out of the ten that we saw, at least half of them had been freshly painted and new carpet was installed.

This goes against what most people think of when they consider the condition of REOs and short sales.  But the condition of these homes is sometimes ”turn-key”, meaning that you could move into the home and not have to do anything.

In the south Santa Clara County cities of Morgan Hill, San Martin and Gilroy, there are currently 346 distressed residential properties that are either REOs (bank-owned) or short sales.  See my previous post that defines the meaning of these types of sales.  These homes range in price from $1,999,999 for a short sale at 12895 Ales Place in San Martin,

to $104,900 for a bank-owned townhouse at 7759 Murray Avenue in Gilroy:

Both of these properties appear ready to move into.

If you like the prices of the distressed properties that are on the market now but are reluctant to even look at them because you are concerned that all distressed properties are going to be terribly damaged, please reconsider.  As your agent, I can weed out the properties that are in poor condition and only show you the properties that require very little work to make them habitable.

   I’ve had several clients and friends recently ask me just what, exactly, have home prices been doing in south Santa Clara County since they peaked.  And, by the way, just when did they peak?  To answer that question, I turned to MLSListings Pro where Realtors go to look at the Multiple Listing Service.

Here’s what I found for Morgan Hill:  Morgan Hill’s average home sale price peaked in September, 2006 at $1,091,144.  The average sale price for the year of 2006 was $945,240.  The average sold home price in 2007 didn’t dip too drastically, but did fall 5% to $901,582.  Our most recent data for 2008 through the third quarter shows an average sale price of $767,900.

For Morgan Hill, that is a total drop in average home sale prices from the year of 2006 to the end of the third quarter in 2008 of 19%.

And for Gilroy, the statistics look a little gloomier:  Gilroy’s average home sale price peaked in the year 2006 with an overall average sale price for single family homes of $800,620 for that year.  The average sale price for a Gilroy home in 2007 barely moved from the previous year and was $796,676.  But through the third quarter of this year, the average sale price for 2008 is $565,278.

For Gilroy, that is a total drop in average home sale prices from the year of 2006 to the end of the third quarter in 2008 of 30%.

Gilroy has been particularly hard hit with foreclosures and short sales and those “distressed” listings seem to be what is selling there, so of course, that will drag down the average sale price for the city.  If you live in Gilroy and you want to know how much your home may be worth now, don’t just automatically take 30% off what you think your house was worth in 2006.  Each house is still valued individually and there are many factors that make up its worth.  Call me for a thorough, in-depth market analysis if you are considering selling your home.

RealtyTrac, an online foreclosure marketplace, contains nationwide foreclosure information and is a good source for finding out what is happening with distressed properties locally.  RealtyTrac shows that Gilroy currently has 446 bank-owned properties and 295 pre-foreclosure properties (one where the owner has received a Notice of Default.)  As a comparison, Morgan Hill has 154 properties that are bank-owned and 163 pre-foreclosure properties.  So, all-in-all, Gilroy has 424 more properties that are in some stage of foreclosure than does Morgan Hill.  These include commercial properties, but the vast majority are residential.  Even San Martin has their fair share of bank-owned homes.  According to RealtyTrac, there are 154 bank-owned properties in that small community.

                                                  

However, both Gilroy and Morgan Hill are seeing a majority of the sales that are occurring are “financially distressed” sales, meaning either bank-owned or short sales.  See my blog post from September 8th for the description of short sales and bank-owned properties:  http://southcountyrealestatetoday.com/2008/09/08/a-brief-primer-on-distressed-properties/

The Multiple Listing Service shows that in the past month, there were 77 residential listings in Gilroy that went under contract.  Of those that did, 58 were either bank-owned or short sales.  In other words, just over 75% of the recently sold homes in Gilroy were financially distressed.

And in Morgan Hill, there were 40 residential listings that went into contract in the past month.  Of those, 27 were either bank-owned or short sales.  That would be just over 67% of the recently sold homes in Morgan Hill that were financially distressed.  Still a very high number.

And, finally, San Martin has had two sales in the past month - both were short sales.

Even with all of the buzz in the media regarding short sales and foreclosures, I still have people asking me basic questions regarding the difference between a short sale, pre-foreclosure, foreclosure and REO.  So if you are completely educated on this topic, you might want to go onto my next post because this post will be just going over the basics on these topics.

The first step that a financially distressed homeowner should take is to call their bank and ask to speak to the loss mitigation department.  They should ask for someone who can help them with a forbearance agreement or a loan modification agreement.  Remember, the lender doesn’t want to foreclose but would prefer to work on options that would allow the homeowner to stay in their home.

Should these agreements not be obtainable, the homeowner should explore selling their home as a short sale.  A short sale happens when the unfortunate situation arrises where the owner must sell but their mortgage amount is greater than the amount that they can net on the sale of their home in the current market.

Why do banks accept short sales?  Simplistically, they do because the mortgage is in arrears, the property may be in poor condition, the homeowner has suffered a hardship (must be proved), the area or neighborhood has depreciated, or the bank simply has too many REOs (bank-owned) properties on their books.

Why do short sales get such a bad rap in the real estate market?  Because of the time that it takes for the seller’s bank to agree to the contract price.  This can take 30 to 90 days (I’ve seen longer.)  Most buyers lose patience and look for another home to purchase.

What do banks require from the short seller?  The package must contain, in addition to several other items, the most recent mortgage statement, hardship letter (for job loss - pink slip, for divorce - divorce filing, for excessive debt - consumer credit counseling, for illness - a letter from their doctor, for death - a copy of the death certificate, for a job transfer - the relocation order), completed financial statement, three months bank statement, three months pay stubs or P&L statements, two years past tax returns and current asset statements.  If this is incomplete, the process will be delayed that much further.

If the short sale is unsuccessful, foreclosure is the next step.  A foreclosure is the legal process of selling property to satisfy a defaulting borrower’s debt.  The preforeclosure process has several steps:  Notice of Default given to homeowner, Notice of Trustee Sale setting the auction date, the Trustee Sale auction, and the Trustee’s Deed which transfer the property title to the highest bidder or to the beneficiary (the bank).

The timeline for a foreclosure begins with the Notice of Default (NOD) recorded.  On Day 14, the NOD is mailed to the borrower (homeowner).  At this point in the preforeclosure timeline, some buyers may offer to buy the mortgage from the owner.  Some owners are not accomodating and may not allow any inspections of the home.  Also the burden is on the buyer to check whether any liens are on the property.  On Day 91 the Notice of Trustee’s Sale is recorded and mailed.  Day 115 is the deadline to cure default and Day 122 is the Trustee’s Sale.

There is no right to withdraw an offer made at the Trustee’s Sale.  The buyer is responsible for any liens on the property.  The minimum bid at the Trustee’s Sale covers the loan balance, accrued interest and the fees and costs associated with the foreclosure.  These days, most often there are no bids on many of the properties due to the high minimum bids. At that point the bank becomes the owner and the house becomes a Real-Estate Owned property.

Short sales and foreclosures effect a distressed homeowner’s credit rating differently.  Although there are not definite amounts that the scores will be lowered and these numbers may be optomistic, a general rule of thumb is that short sales will lead to a loss of 80 to 100 FICO points and that it will take approximately 18 months for the short seller to be able to buy real estate again at a decent interest rate.  A foreclosure will lower the credit rating by about 250 to 280 points and it will take approximately 36 months after going through foreclosure to be able to purchase a home with a mortgage that has a reasonable interest rate. 

(Title quote from Charlotte Perkins Gilman) 

I currently have three offers out on short sale properties.  Banks are taking forever to respond to these offers.  One offer was submitted on March 1, 2008, one on March 30, 2008, and one was just submitted on May 5, 2008.  I don’t have a response on any of them.  Thank goodness my clients are aware that they will have to be extremely patient while waiting for a response from the seller’s bank (or banks if there is more than one loan on the property.)  But, in the meantime, new properties are coming on the market, and the sellers and the banks may lose what offers they currently have on the table as buyers are always looking….

Anecdotally, the banks don’t seem to realize the value of the Realtors who list the short sales or those who represent buyers who make offers on the short sales.  Banks want to severely cut our commissions.  From what I understand regarding short sales versus foreclosures/REOs, banks would be much better off financially if they would work with the Realtors in a timely manner, pay our full commissions and get these short sales closed.  The banks’ losses will be much greater if these short sales work through the foreclosure process and end up as REOs.  And with the way the system is working currently, it is very probable that the majority of short sales will become REOs.  Ironically, once the REOs are listed on the MLS, the seller, i.e. the bank, usually offers 3% commission to the buyer’s agent.

Gretchen Merrick Phone:408-892-9015 gmerrick@interorealestate.com Featured Listings 16830 Edwin Jones Court Morgan Hill, CA 4 BR | 3 BA $749,000 More Details 16868 De Witt Ave Morgan Hill, CA 6 BR | 4.50 BA $849,999 More Details

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