There is a lot of confusion over short sales.  They are a bit of a mystery to the general public and many agents struggle with them as well.  Before we go into the wonderful world of short sales, I believe that I should explain why I believe San Carlos may start to see more and more of them on the horizon.

Why will Short Sales become more common in San Carlos?

Anyone currently looking for a home in San Carlos will tell you just how awful the inventory situation has become.  Here we are in March and we only have 30 homes on the market.  Not much to choose from and those homes that are attractive to buyers are receiving multiple bids.  Why is inventory so low?  Quite frankly, sellers are not selling unless (1) they absolutely have to; (2) there is a job transfer (3) they are secure enough with their job and finances that they can take advantage of the move-up market; and finally (4) the home is the product of a probate or trust sale.  The result….very little inventory, as these are not groups that typically produce decent levels of inventory in a down economy.  So what would lead to a sudden change in short sale activity?  The answer lies with (1) above….people not selling unless they absolutely have to.  Based on my recent experience of meeting with sellers in San Carlos over the last six months, I think it is safe to say that we have a number of families just barely hanging on.

Many of these families who bought in the last two years with a lower than 20% down payment may not be able to sell their home and get out of the transaction without having to come to the table with a check to cover the deficiency.    Once all other options are exhausted, the families will have two choices (1) Foreclosure; and (2) a Short Sale.

Why Short Sales are more attractive for sellers

The thought of having to leave a home for financial reasons is perhaps one of the most difficult decisions a family can make.  Most families in this situation are aware of letting the home go to foreclosure as a possible option.  The problem with this route is that a foreclosure will typically remain on the seller’s credit report for 7-10 years and greatly reduce their credit score. Additionally, if any of the loans on the property are non-purchase money loans, the lender can foreclose and possibly institute a legal action to recover the deficiency.

If a short sale is completed, and completed correctly, all of the loan balances will be satisfied.  Whether they are a purchase money loan or a non-purchase money loan is irrelevant.  A short sale will lower your credit score as well, but it is not nearly as devastating as a foreclosure would be.  Most short sales show up on a credit report as something similar to “debtor and creditor reached an agreement to settle for less than the amount owed”.

How exactly does a Short Sale work?

The mechanics of a short sale are as follows:  The seller puts the home on the market, as they would do if they were attempting a regular sale.  The fact that it is a short sale must be declared on the MLS and to prospective buyers.  Once the sellers find an offer they would like to accept, they can do so.  However, the seller’s agent will have the buyers and sellers sign a Short Sale Addendum, which essentially states that the seller will only be obligated to sell the house to the buyer when and if all current lien holders reduce their balances owed in a manner that would allow the prospective purchase price to satisfy all outstanding balances.  Next, the bank or banks, depending on the number of loans on the property, are informed that the seller is in financial trouble and attempting a short sale.

The next step is tricky, and it is where most short sales fall apart. The bank will then ask for a Short Sale Package to be sent in to their loss mitigation department.  The Short Sale Package differs slightly from bank to bank, but basically consists of the following:  A hardship letter from the sellers, a completed financial package from the sellers, bank statements from the sellers and a copy of the proposed purchase agreement.  The goal of the seller’s agent is to get the Short Sale Package in front of a negotiator at the bank who will make two determinations: (1) whether the hardship actually exists; and (2) try to determine if the price offered by the buyer is the fair market value of the home.  If the answer to both of these questions is answered in the affirmative, the short sale moves forward to be negotiated by all parties.  Most short sales tend to fall apart at this juncture because they never get in front of the negotiator, or at least in front of a negotiator that does not re-assign the file.

Why do the majority of Short Sales fail?

Most agents have not completed short sales.  They are a relatively new phenomenon to the peninsula.  Consequently, many buyers and sellers do not have their expectations set correctly and end up getting frustrated and abandon the process. Here are two more reasons why short sales generally fail:

(1) Just getting the short sale package to the bank is difficult.  As mentioned in a previous short sale post, we once spent 40+ days trying to fax in the Short Sale Package.  Quite simply, the loss mitigation departments in the big banks are completely overwhelmed and understaffed.

(2) If a seller is not organized or not thorough with record keeping and information gathering, the transaction will be over before it begins.  Banks have no patience to keep after the seller for incomplete items in the Short Sale Package.  If something is missing or out of place, it will be given back to the seller’s agent and the file will go right to the bottom of the file and the process will start over again.

(3) Often sellers wait until it is too late to start a proper short sale and the prospective short sale is pre-empted by foreclosure.

The benefits of Short Sales

The seller gets out from under the home and does so without a foreclosure on their record.  The benefit for the buyer is that they generally purchase a home for slightly under fair market value.  Homes that are short sales are generally priced a little under fair market value for two reasons: (1) the seller’s agent should understand that they are going to need to give some incentive for the buyer to stick with a process that could take six months and has no assurance of actually closing; and (2) the bank may come back and ask for more money from the seller when negotiating the short sale.

If you are considering a Short Sale, be aware of the following

These are complex transactions and should only be attempted after advice from an accountant (for any tax ramifications), a legal consultation and the input of an agent experienced in short sales.

You will need to exercise a good deal of patience and understand that the process is long and frustrating at times.

Summary

Short sales will be appearing more frequently in San Carlos in the months to come.  Buyers and sellers should educate themselves on the process so that they can make the right call when the time comes.  If executed correctly, a short sale can be a life-saver for a seller and a true bargain for a buyer.

The previous post from today regarding the police message has been deleted because of conflicting information.  I spoke with the San Carlos Police Department this afternoon and they do not have any record of the message regarding a carjacking in nearby towns under the scenario which was described.  Whether the message is a fraud or just someone (falsely claiming to be from the police department) floating incorrect information is unclear. We are continuing to ascertain the origin.

Thanks for your patience and I will update you as soon as we have more.

Bob Bredel

Everything from an intro to rock band, to medieval adventures, to gifted programs.  San Carlos has a lot to offer students of all ages for Summer of 2010. Please see below:

Move over Brad Lewis….you have company.  San Carlos native Kathryn Bigelow made history last night when she became the first female to win an Oscar in the category of “Best Director” for her film “The Hurt Locker.”  She now joins Dana Carvey & Barry Bonds as the most famous native San Carlans.

>>>To read the complete press release, click here.

A well organized and passionate group of San Carlos residents are doing everything possible to communicate their desire to keep our parks open.  Last month, the San Carlos Parks and Recreation Department announced that they would be recommending the closure of Crestview Park, Arguello Park, Laureola Park and the Youth Center, as part of their mandatory budget cutbacks.  Their recommendations are scheduled to be discussed by the San Carlos City Council.

A group going by the name “Keep San Carlos Parks Open” has their own blog dedicated to the effort to save our parks from closure.  A link to that site can be found by clicking here. Additionally, you can join their Facebook group by clicking here. As of the Friday morning, the group has already assembled 723 members. Finally, the group has a specific “call to action” that can be found in the PDF below as well as on their blog and Facebook group page.  Please consider joining this worthwhile cause.

Remember why you moved here.

With all that is going on in our town recently it is easy to get caught up in an avalanche of negativity.  Lost somewhere between budget deficits, school boundaries, synthetic fields and tax increases, are the reasons many of us moved here in the first place.

Over the past three years I have occasionally posted articles that asked San Carlans what they liked best about San Carlos.  The following is a compilation of what your neighbors had to say when asked:

Words you think of to describe San Carlos:

Progressive

Community oriented

Volunteerism

Generous

Educated

Proud

Active

Family-friendly

Tolerant

The best parts about San Carlos:

San Carlos Schools

Laurel Street

Hometown Days

Art and Wine Festival

Music in the Park

San Carlos Educational Foundation

Chicken’s Ball

Burton Park

Week of the Family

Eucalyptus during Christmas

Hiller Aviation Museum

I have a lot of confidence in San Carlos. Times are tough and it is easy to dwell on all that is currently wrong with San Carlos.  However, my personal belief is that everything which makes San Carlos unique is still here and will continue to make San Carlos a special place to live.  I want say thank you to San Carlos Blog reader, Dave M., for his contributions to this post.

If you have other items that you would like to add to this list, please do so below.  If you have your own story of why you chose to live in San Carlos and would like to share it below, please feel free to do so….and remember why you moved here.

The recent loan modification programs for most big banks were set into motion as a part of the Obama Stimulus Plan.  75 Billion dollars was set aside to help homeowners who found themselves in over their head on their loan payments.  The reality of the situation is that less than 4% of those who apply for a loan modification are actually given a modification.  Furthermore, for those with a Bank of America mortgage, those odds are even worse with less than 1% actually receiving a modification.  Both of these statistics provided by cnnmoney.com.

In the previous three months I have met with five families in San Carlos who have applied for a mortgage modification.  All five have either been denied or wrapped up in so much red tape that they have simply given up hope after many months of jumping through hoops.  A few of these families encouraged me to write a blog article on the matter to let other San Carlos homeowners know more about the realities of the world of loan modifications.

Why the world of loan modifications is so frustrating

The first obstacle to dodge when seeking a loan modification is the hundreds, if not thousands, of scams.  Unfortunately, there are many looking to capitalize on the fear and misfortune of others. Be aware of any loan modification firm asking for a substantial amount of money up front.  Reputable loan modification firms will be paid after the modification takes place.  Next, many of the bigger banks will blame the consumer for the lack of organization when submitting their paperwork, and thus the reason for the low conversion rates on loan modifications.  While I am sure that there are a high number of individuals who have applied for a loan modification and not been organized, I can tell you that there is an equally high number of folks who are very organized and done everything asked of them without so much as a return phone call from the bank.

Here’s an example:  I recently had a client trying to procure a short sale with Bank of America.  The documents to be submitted for a short sale are very similar to that of a loan modification and the process is very similar as well.  We had all documents perfectly organized and were told to fax them to a particular Bank of America number, which we did…..about 187 times without success.  For one and a half months we tried to fax the documents hourly, every day, at all times of day, only to receive a busy signal.  The bank would not give us another number to fax to and we had to continue to fax to that particular number.  We tried all hours of the day, even a 2:00 am and 5:00 faxing, which still received busy signals.  Finally, on about the 45th day, it went through.  We called three days later to confirm receipt and they claimed we did not fax all of the documents necessary (even though we had) and that we needed to resubmit the entire fax again, as one.  We were successful the following week, only to be told three weeks later that Bank of America was switching the doc gathering process to a new online system which would require us to forget everything we had done the previous three months and start the process all over again on their new system.  You can see where the frustration begins to overtake the situation and borrowers simply throw their hands up.

The process is set up to fail, both on the loan modification side and usually on the short sale side as well.  Regardless of what they may say publicly, I find it impossible to believe that banks are  making the best and most efficient use of the stimulus money intended to help buyers in a loan modification situation.

The Incentive

The process is set up to fail.  I have nothing to base this on other than common sense, but at a certain point you have to wonder why the process is so badly flawed.  Is there an incentive for these banks to foreclose on the property rather than work with the borrower on either modifying the loan or allowing a short sale?  That depends on who you believe.  This much is true, if a bank cuts the value of a property either through a loan modification or short sale, the bank needs to record the new, lower value on their balance sheet.  However, the longer they stall the loan modification or short sale, the longer they get to keep the higher home value on their books.  Complicating matters is the fact that most mortgages are securitized and then sliced and diced among many different investors, many of whom are from far away places such as China and Europe.  All of these investors will want some say in the matter as well, which further complicates the process.

When to pull the plug

If you are organized and have done everything possible to obtain a loan modification and not had success, be prepared to move on.  Too many times homeowners wait until the home modification process has taken them into the start of the foreclosure process. If the home modification option does not pan out, homeowners should at least explore the option of a short sale.  However, you need to make sure that you have enough time to make a proper run at a short sale, which takes time. Homeowners need to do everything possible to avoid foreclosure.

The truth about foreclosure

The truth is that foreclosure will devastate your credit for the next 7 to 10 years.  Additionally, many do not understand the rules in California regarding a deficiency judgment.  Thankfully, California has what are called “anti-deficiency judgment statutes,” which protect home borrowers from the bank claiming a deficiency judgment against them if the proceeds from the foreclosure are not adequate to cover the balance due. In other words, if a homeowner owes $800,000 on their mortgage and the house goes into foreclosure and only nets $700,000 on the sale, the bank is prohibited from chasing down the owner for the remaining $100,000.  However, there are exceptions to the anti-deficiency judgment statutes.  The statutes only apply to what are called, “purchase money loans.”  In other words, it only applies to loans on the property that were used to purchase the home.  If a homeowner purchases a home and takes cash out through a refinance or adds a credit line against the property, those amounts are most likely not subject to the protection of the anti-deficiency judgment statutes.  Theoretically, a homeowner with a non-purchase money loan on the property could be foreclosed upon and end up owing the balance due on the loan, plus fees, on the uncovered balance of the loan(s).  This fact should add more fuel to the fire for homeowners to examine a short sale after attempting a loan modification.

The current financial crisis is just not limited to City Hall.  The San Carlos School District is facing its own financial crisis.  In a memo released from Superintendent Craig Baker, the SCSD and the SCTA (San Carlos Teacher’s Association) had been meeting over the last few months to try and reach an agreement over current labor contracts with an emphasis on the 2010-2011 school year.  Unfortunately, those meetings were not encouraging and the SCSD filed paperwork with the State of California indicating that the two parties were at an impasse.

The SCSD has been pounded by relentless, mandatory cuts by the State of California.  In June of 2009, the SCSD had expected a $700,000 budget shortfall for the 2010-2011 school year, however, due to the latest budget proposal by the governor the budget for the 2010-2011 school year will actually need to be trimmed by $2,800,000.  The SCSD has already eliminated five administrative positions.  Other budget cutting possibilities are reducing elementary music classes, library support, reducing the hours of some vice-principals and many others. Even after the reduction in staff and reducing or eliminating certain programs, the budget will still be $1,200,000 short of being balanced.  To make up this difference, the SCSD is focusing on reducing compensation in a variety of ways.  Just some of these reductions to be examined by the SCSD center around salary, furloughs, and the elimination or reductions of certain positions.  With this in mind, it’s not hard to see why the SCSD and SCTA are at an impasse.

The SCSD offered a 7% reduction in total costs/compensation across the board to the SCTA.  This reduction was possible in a number ways including a reduction in salaries, furloughs, freeze on step raises and elimination of certain positions.  The SCTA rejected this proposal and did not want want to take on any reduction whatsoever.  Given the two positions, the SCSD filed the paperwork with the State which is required when the two sides have reached an impasse.

The filing is a requirement for the State to take the next legal step of providing a mediator who will try and bring the two sides to a mutually agreeable contract. If the mediator is unable to bring the two parties to an agreement, the State will provide a Fact Finder.  The Fact Finder seems to provide a service similar to non-binding arbitration.  The Fact Finder will hear from both sides and gather the applicable information and give his or her findings to the San Carlos School Board.  That recommendation is not binding. The SCSD will need to file a budget by June 30, 2010, so the process should heat up over the next few months.

I realize that for many it is difficult to believe San Carlos schools are in such financial turmoil given the value of our properties, parcel taxes and the herculean efforts of the San Carlos Educational Foundation.  Unfortunately, the budget disaster is more of a reflection of the failings of the State of California.  Clearly, you have two respected groups doing the best they can under an impossible set of circumstances.  The San Carlos Blog will continue to keep you up to date on this issue.

San Carlos currently has 52 single family residences in some part of the foreclosure process.  It is interesting to note that this number is only higher by two, over the amount of foreclosed homes on the market last year at this time. First, it is important to note that there are different stages to the foreclosure process.  Second, most homes going into foreclosure will never hit the market as a foreclosed home.  Most homes are either sold or the owner finds a way to pay the amount in default and take the home out of foreclosure.

Generally, homes fall into the following 3 stages of foreclosure:

Stage 1:  Pre-foreclosure

When a homeowner fails to make their payment on time, the mortgage holder will generally file what is called a “Notice of Default,” or what is commonly called, an NOD.  The Notice of Default is a public document filed at the county recorder’s office.  It lets the homeowner know that the mortgage holder will be initiating a foreclosure action, if the home is not brought out of default, in order to protect their security interests in the property.  Generally, the Notice of Default period lasts about 120 days, at which time the home will be sold at a public auction if the loan is not brought current.

Stage 2:  Notice of Trustee’s Sale

Toward the end of the pre-foreclosure period (usually about 90 days), the bank will schedule the home for auction.  This is the first sign to the general public that the owner has been unsuccessful in any attempt to bring the home out of foreclosure and it would seem more likely that the home will actually make it to auction.

Stage 3:  Auction/Bank Owned

Depending on the amount owed on the property, a member of the general public or the bank will purchase the property at auction.  If the property is underwater in terms of what is owed versus market value, nobody will bid on the property and the title will revert back to the bank.  At this point the property becomes bank owned. This is the final stage to the foreclosure process.  The bank will then take the property as quickly as possible and put it on the market as a foreclosed home.  As mentioned above, in San Carlos, many homes in the process do not make it this far.  Another reason that foreclosed homes have not been labeled a tremendous bargain in San Carlos is because, the inventory in San Carlos is extremely low right now and we also have very  high demand.  The result is that any foreclosed home that debuts on the market at a lower than market price will be brought up to market value by virtue of multiple offers.

San Carlos Foreclosed Homes

The information below shows the amount of homes on track for foreclosure in each Area of San Carlos as well as the stage of the foreclosure.  Currently, there are 52 single family residences that fall somewhere along the foreclosure timeline.  For a detailed map of each of the six areas of San Carlos click here:

Area 350 Alder Manor

Pre-foreclosure:  3

Scheduled for Auction:  1

Bank Owned:  2

Total:  6

Area 351 Beverly Terrace

Pre-foreclosure:  9

Scheduled for Auction:  5

Bank Owned:  5

Total:  19

Area 352  El Sereno (White Oaks)

Pre-foreclosure:  5

Scheduled for Auction:  4

Bank Owned:  1

Total:  10

Area 353 Howard Park

Pre-foreclosure:  1

Scheduled for Auction:  1

Bank Owned: 0

Total:  2

Area 354 Clearfield Park

Pre-foreclosure:  4

Scheduled for Auction:  0

Bank Owned:  1

Total:  5

Area 355 Cordes

Pre-foreclosure:  5

Scheduled for Auction:  3

Bank Owned:  2

Total:  10

(1)  Overbids and multiple bids were the story of San Carlos real estate last week.  813 Tamarack, 142 Wildwood, 26 Beverly, 159 Ruby, 2230 Carmelita all fell under this category.

(2)  San Carlos has 32 Active properties and 28 Pending properties.

(3)  For those of you looking for an off-market listing, there is a 3/2, 1,500 square foot home on Prospect for sale, but not on the MLS. The home is nicely remodeled.  List price is $925K.  Contact me for pics and more information.

(4)  Two widely attended San Carlos events that are forthcoming: Chicken’s Ball-tickets available to public February 27th at Bianchini’s Market between 10-2. Please click here for more information on Chicken’s Ball. Please click here for more information on Spring Fling Also, the San Carlos Educational Foundation will host the single biggest fundraising event of the year, Spring Fling, on Saturday March 6th.  .

(5)  For those that can’t get enough of Town, I’ve gotten word that it will soon be open for brunch on Sundays.