One of the hottest discussions in our local Santa Clarita real estate market, isn’t decreasing home values, and it isn’t the amount of bank owned homes, rather it’s the ever increasing number of Short Sales.
Incase you aren’t aware, a short sale, simply put, is when an owner is facing the prospects of foreclosure, and elects to sell his or her home for less money than what they owe to their lender(s). The short sale, must be fully approved by the lender, who will receive a net loss on what they are owed. That net loss, is frequently more attractive to take, than foreclosing on the home, and losing just as much money, if not more. The bank puts it all in a balance, and decides which of the options, is the lesser of two evils, short sale approval, or foreclose. It appears that short sales are slowly becoming the healthier option to these lenders, as the majority of the banks inventory of homes they own, has grown to quite uncomfortable levels. Afterall, they’re in the business of lending money, not managing and owning real estate.
Ever since the Spring of 2007, we’ve seen a rapid rise of homeowners in Santa Clarita who are trying to perform this type of sale. Why? Essentially, successfully completing a short sale, is a heck of a lot better than a foreclosure, or, at least that’s the common wisdom. A full foreclosure, where the bank actually takes back your home, may or may not be a better option for you – as twisted as that sounds. You’d have to consult with your own attorney, tax advisor, and professional Realtor to narrow down which route best fits your financial situation. With that said, it appears that a lot of Santa Clarita homeowners are trying to avoid foreclosure, by selling their home in a short sale, before time runs out.
Once a homeowner is in default on their mortgage, they have about 3 and a half months before the home is sold at a Trustee’s sale. When pursing the short sale, it’s common for the bank to extend that time frame, and grant time for a short sale to complete, but don’t bank on that! Each bank operates differently. It’s crucial to allow as much time as possible if you’re going to have a successful short sale. How much time is needed? It would be best to start the short sale process early, before you get a notice of default, which happens after 3 months of failing to make your mortgage payment. The fact of the matter is, that the majority of homeowners try to do what they can to get caught up in payments, but they frequently fail in that attempt. And so several months usually passes, at which point they realize that they either have to walk away from the home, or perform a short sale with what time is left before the bank forecloses on the home.
A lot of people don’t even know what a short sale is, therefore, they aren’t even aware that it’s an option. While it’s not known exactly how much better a short sale is for your “credit health,” it’s common knowledge that it is less detrimental to your credit than a finalized foreclosure. I understand that it often leaves a mark on your credit, reading, “Settled” or “Pre-Foreclosure Settled” or “Settled for less than amount owed.” Aside from a lighter drop in FICO score, “Settled” reads a whole lot better than “Foreclosure.” Hence the amazing increase in their popularity. Another contributing factor in their popularity has been the recent passage of the Mortgage Forgiveness Debt Relief Act of 2007. Now the amount of debt forgiven by the banks involved, isn’t required to be added to one’s income taxes as additional income. With some of the major debt forgiveness I’ve negotiated for my clients in 2007 and this year, that’s a relief! The median income in Santa Clarita is near the $100,000 marker. Can you imagine tacking on an additional $100,000 due to the amount of debt forgiven by your lender? Imagine the hassle of being uprooted from your home due to financial difficulty, then realizing you have a new best friend – the IRS.
Many in Santa Clarita are facing foreclosure. They are behind on their house payments, and aren’t in a pretty financial situation. They have either borrowed to much money from their home, or purchased in the last year or two, only to watch home values move down quite noticeably in a short amount of time, making it difficult to sell the home conventionally.
Currently, the Santa Clarita MLS system reports that there are a total of 475 short sales in our area. Of that amount, 46 of them are in escrow. Each month, the inventory of short sales has been increasing. I can tell you, that there are quite a bit more short sales than the MLS system reports. Many agents don’t properly denote that their listing is indeed a short sale, so there’s really no way to find the EXACT number of short sales in our area, unless you went through the entire MLS and reviewed each listing, one by one. No time now for that.
Unofficial Stat Of The Day: Today, there are 2,165 active listings in the Santa Clarita area. Break out the calculator, and you’ll see that if there’s a MINIMUM of 475 short sale listings, that means a MINIMUM of 20% of our Santa Clarita real estate inventory, are pre-foreclosure homes! A short sale, after all, is considered a pre-foreclosure – a home in the foreclosure process for non-payment, but not yet fully foreclosed on.
Until banks start being very proactive with short sales, and approving them with greater vigor, the majority of these short sale listings will end up being fully foreclosed on. It looks like only about 10% of the 475 Santa Clarita short sale inventory are in escrow and poised to sell. The rest are slowly watching the sand run it’s course in the hourglass. When the bank forecloses on the home, they attempt to sell it at the Trustee’s sale. And when it fails to sell at the Trustee’s sale, as is often the case, it ends up in the inventory of the bank’s homes for sale (REO’s). So, the short sale listing, and sign in the yard or window, will be taken down more often than not, and replaced with the signage of the bank’s agent, and it will be back on the market, for all prospective homebuyers to consider, again.
Another topic, for a different post, is how and why, short sales are priced the way they generally are: LOW!
Look for the inventory of Santa Clarita short sales to continue to rise. I’m pretty sure that the short sale inventory will likely double during 2008, despite very attractive interest rates that would leave you to wonder why these people don’t refinance into a cheaper house payment. Here’s Why: Home values have decreased to an amount below what many owe to their lender, so refinancing is no longer an option as no one will give them a new loan. Keeping the payment current is the only chip left on the table.
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