Lloyd Binen C.R.S., G.R.I.

Twenty-eight was the answer to my question about how many offers there were on a San Jose townhouse which my buyer-client just made an offer on. 28 offers and mine was one of 27 that did not get accepted. The listing agent, as is their wont, wouldn't give me much information about the accepted, or other, offers. He wants to move the germinal transaction along--it hasn't even been 24 hours since contract ratification. Sometimes, but not as frequently as 2-3 years ago, Buyer #1 has regrets and backs-out immediately. They were just kidding, I guess. I'm sure the accepted offer was All Cash and it wouldn't surprise me if there were several All Cash offers. That's what is happening here. The asking price for this townhouse was $169,000 which was close to 20% below today's current market value. That's how a seller gets 28 offers. The townhouse was put on the market last week.

The property is a 2 bedroom, 1.5 bathroom townhouse in Blossom Valley which is one of the lower-priced areas around Silicon Valley. Some would even argue it's not part of The Valley because it's too far south. The median sale price in that area, from peak-to-trough, declined 50%-60% percent. The same type of townhouse would have sold in the high $300,000s during the peak of the market! For the past year the vast majority of sales, including this townhouse, were lender-owned REO properties and some Short Sales.

For me and my buyer-client, we start over. This is the fourth unaccepted offer for my client, a single man in his mid-40s who works in retail sales earning a fairly low salary by local standards, plus commissions. He manages the money he does make well; his FICO score is above 800, an excellent credit score.

The number of properties coming onto the market For Sale is waning, especially low-end properties. Maybe it's the loan modifications efforts to prevent foreclosures, and maybe it's because non-distressed homeowners do want to compete in this market. Whatever the reason, the number of "low-end" residential properties that are put on the market For Sale is declining and demand is very strong.

A side note in this is that not only do I not meet the seller, I don't even meet the seller's agent. In fact, I don't meet anyone. I just "upload" a copy of the offer and supporting documents-23 pdf pages in all- to a website designated by the listing agent. I guess that's efficiency in the modern real estate world.

Questions: What is a "Short Sale?"

Answer: When the property owner's loan(s) is/are greater than the market value of the property, and the seller can't deposit cash into escrow but needs to or wants to sell their home, then the existing lender, or lenders, must reduce the amount owing on their loan/loans to close a sales transaction. That's a "Short Sale" - the seller's lender(s) accept(s) a "short" payoff; that is, a payoff for less than what is actually owed.

Question: What do you mean by ‘lender'?

Answer: The company that owns or services the loan like Bank of America, Wells Fargo, Chase etc.

Question: Must the lender accept a Short Sale?

Answer: No.

Question: Why would a lender accept a Short Sale?

Answer: Because the alternative--a foreclosure-costs the lender even more.

Question: But, how does the lender know that the property owner is not just trying to transfer their loss to the lender?

Answer: The lender investigates and qualifies the owner and the property. That's one reason Short Sales take so long to close.

Question: Are there other reasons Short Sales take so long.

Answer: Yes, there are at least two other reasons, maybe more. The flood of Short Sale requests happened quickly. The lenders have been, and are, under-staffed to handle these fairly complex situations individually. Also, the lender is usually just "servicing" the loan. ‘Investors' actually own the loan. Sometimes ‘investors' own just a small portion of a pool of loans so many parties must agree to accept the Short Sale.

Question: Is that what securitized mortgages are?

Answer: Yep. Just as you can purchase and own a bond (e.g., a U.S. Treasury bond or a Corporate bond), you can own mortgage debt. The lender must get investor's approval to accept less than full payoff of the loan.

Question: Should I buy a home that's a Short Sale

Answer: Yes, but beware: Short Sales transactions are almost always frustrating because the prospective purchaser must wait a long time for the lender's response. Sometimes after waiting 4-5 months, or more, the lender says ‘No'. They would rather foreclose then accept a Short Sale. Or, the lender may modify the seller's loan so the seller can afford the payments.

Question: May I make an offer on a different home while I'm waiting for a response?

Answer: Yes, as long as it's disclosed in writing in the offer and was accepted by the seller. You also need the right to unilaterally withdraw your offer anytime prior to the seller's lender approving the Short Sale.

Question: Should a homeowner do a Short Sale, or just allow the property to be foreclosed upon?

Answer: That's really a question for a knowledgeable attorney who can explain the legal and tax consequences.

Question: A Realtor wants to list my house For Sale. S/he tells me s/he's a Short Sale specialist?

Answer: All of the sudden there are lots of Short Sale classes and Short Sale specialists. Short Sales have been virually non-existant since the early 1990s. I recommend getting legal and/or tax advice before listing with a Realtor. Yes, I know that's expensive. But remember, even if you receive no money from the sale there may be tax ramifications. And perhaps there is a better alternative.

As the sun heated up the damp soil after the recent heavy rains in Santa Clara County, swarming termites were flying all over. It always happens when the weather conditions are just right. But this year I saw more "swarmers", as the termite guys call them, than I've ever seen in Saratoga (self-dubbed "Tree City"), where I live. The termites love Tree City because of all the free food. Every street with a home on the broker caravan had some swarmers. Their flying style is distintive--they are weak flyers and they sort of flutter, almost like a slow, very small, moth. They're easy to snatch right from mid-air and they look like big ants with thin, see-through, wings. They attract predators like dragon flys that eat them if flight. Very cool. The termites ae just trying to find some comfortable home--in your home--were they can eat some wood (yum, yum) and raise a little colony. Ah...Mother Nature. I'm not a termite guy, but one defense is to make sure there are no areas for access into the framing of the house. Every little crack and crevice in the exterior of your home should be caulked. The cleanest, best-maintained, house I've ever sold in 34 years belonged to a guy who alway carried around a loaded caulking gun ready to seal any little opening in the exterior of his home. He focused on eves, rafter tails, soffits and cracks around window and doors.

There are chemical barriors of course, but the traditional ones don't kill the termites, they just prevent them from coming up through the treated soil. They go to the neighbors house, instead, I guess. Newer and better products are on the market that advertise eradication of subterranean termites colonies. Luckily, I have a few lizards in my yard and they love to eat the termites as they emerge from the ground and before they fly off. It's like 'shooting fish in a barrel'. The lizards work great, but I still think I need to do some caulking and maybe some chemical eradication.

SHADOW INVENTORY

We're seeing reports that Banks are holding back foreclosures in order to stabilize real estate prices. It's argued that lenders, by not foreclosing, are creating a "shadow inventory" of homes which will eventually be put on the market For Sale, possibly depressing home values. Home lenders may be foreclosing more slowly, but they not trying to control or manipulate the market; they're trying to comply with Governmental pressure to modify loans in order to avoid foreclosures. And that process takes lots of time. The chart below shows the number of Default Notices (Step #1 in the foreclosure process); and the percentage of residential listings (including Condos, townhouses and Single Family residences) that are Lender-owned in Santa Clara County.

The convergence of several things have formed a ‘perfect storm' which has caused the Santa Clara County real estate market to hit bottom and bounce upward. First, mortgage interest rates are hovering around 5% which is extraordinarily low. Next, home prices are low compared to recent history, and in some parts of the county have declined 50-60% from peak-to-trough. Also, first-time home buyers receive a federal income tax credit up to $8,000, if they purchase a home by 12/01/09. This tax credit is a tax-payer funded gift of home equity to first-time home purchasers. Additionally, reports in the media that the worst of the recession is over have given prospective purchasers confidence that the economy has started to rebound, albeit slowly. Finally, in Santa Clara County, there are fewer homes available For Sale so the supply of homes is constrained (see the "Months of Inventory" graph on the reverse side). Consequently, the Number of Sales is about average for this time of year, and is more than twice the number that sold in September ‘07. The Median Sale Price for Santa Clara County Single Family Residences, although 5% below September '08, has trended steadily upward since February ‘09. The Foreclosure/REO market is hot with the Average Sales Price bid-up 5% over the Average Asking Price. (Foreclosure/REO are homes that are owned by the lender who acquired ownership through foreclosure, and they're sold on the Multiple Listing Service.) Upward pressure at the bottom of the market tends to stabilize home values throughout the spectrum of price-ranges.

The question looming remains: What happens when the Federal Reserve stops buying mortgage-backed securities? Presently, 85-90% of residential mortgages under $729,750 (the ‘conforming' loan limit) are purchased by the Federal Government through the Federal Reserve in order to keep interest rates low. Will non-U.S. government investors have enough confidence is the U.S. housing market to purchase mortgage-backed securities at current interest rates? Got an opinion? E-mail it to me and if I get more than 20 e-mail responses I'll tabulate and categorize the opinions in the next newsletter.