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 it is:

• it is a pre-foreclosure situation
• the buyer cannot continue to make the payments and will go into foreclosure if the short sale doesn't happen
• there is a "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 it isn't:

• it isn't a help to people who simply want to upgrade and don't want to pay off the bank
• it isn't an option if you have other assets (like other properties or money in the bank)
• 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 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. 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.