Lately, in my practice as a Silicon Valley Realtor, I've been showing a lot of short sale houses and a few bank owned properties (known as REOs or "real estate owned" by the lender). They have been in entry level, single family homes close to $500,000 in Blossom Valley, Santa Teresa and south San Jose. In fact, the majority of homes that I've been showing there consists of distressed sales. Since that is the case, it is pulling prices down in those areas very dramatically. Homes bought two years ago for about $640,000 are now selling for about 80% of that recent sales price.

That's not happening in Los Gatos.

Yes, our prices are soft and inching down a bit, but not by 20%. If you own a home in any part of town, that should make you happy. If you are trying to buy a home in Los Gatos, that may not seem like good news at first, but actually it is - for the long haul. It's good that our values are more insulated than that.

There are a few pre-foreclosures here, a few going to auction, and a few that are bank owned. (Those are the three main stages.)  Can a real estate agent, preferably a Realtor, help you to buy one of them?

It depends. If you are an investment buyer, and don't intend to live at the property you are purchasing, and the home is owner occupied, and a notice of default has been filed, the answer is no. This is a consumer protection situation, intended to keep a distressed homeowner from suffering at the hands of unscrupulous, wealthy buyers.

If you are planning to buy and live at the residence (a 1-4 place such as a duplex, triplex, fourplex, condo, townhome, patio home, or house), then an agent can assist you with either a pre-foreclosure purchase OR a bank owned sale. There is really no role for a Realtor in helping you buy at auction.

Let's talk about the three main stages:

(1) Pre-foreclosure: the homeowner is unable to continue making payments to the bank or lending institution. This may be due to illness, job loss, divorce, or other problems. The owner may or may not have had a "Notice of Default" filed. If the NOD has been filed, the clock is ticking and a "trustee" at the bank has begun foreclosure proceedings. If not, you only have to worry about the loss mitigation department. The two divisions may or may not be talking to each other, so it gets trickier after the NOD has been filed, (If there is a NOD, it is recorded and may show up on a preliminary title report or property profile.)

If a seller wants to sell during this time, a real estate agent can help by listing the home at a realistic price and procuring a buyer. Hopefully, the home can sell, the debt can be paid in full, and the owner's credit is not harmed.

Often sellers will contact an agent to sell the home, but sometimes they don't. For whatever reason, most owners in trouble never call the lender at all (big mistake, the lender could potentially wait for a few payments, called forbearance, or modify the loan, but without placing that call, it will surely go from bad to worse). But a large portion of sellers in trouble do list their homes and they can be found on the regular multiple listing service, or MLS.

Sometimes, sellers need to unload a property but the market will not bear enough to pay the bank off. That's what I've been running into in parts of San Jose. In those cases, the home goes on the market as a "short sale" and the agent tries to assist the owner in obtaining permission from the bank to sell and tranfer home without the bank being paid off in full. This is a short sale (and it does damage the seller's credit, but not as much as a foreclosure).

The vast majority of short sales do not go to closing, but proceed to foreclosure. The reasons are enough to fill a book, but sometimes because the homes are overpriced and sometimes because the bank does not respond fast enough. Some lending institutions are better than others. In one case I heard about recently, a listing agent obtained an offer just 1% below list price, but the lender took 3 months to respond. By that time, prices had dropped between 5 and 10% in that neighborhood, so the buyers no longer wished to pay the amount they originally offered. The list price was then dropped by about 8% and the agent had to obtain offers all over again. Who lost? The bank lost more than anyone else: a straight 10% cost for dawdling. (In fairness, they are massively understaffed and overworked. They are kicking themselves by not hiring more qualified people to stem the losses).

So a Realtor could help a buyer in this short sale scenario - to a degree. A buyers agent cannot make the bank hurry up and respond. The buyers agent cannot even talk to the bank. The listing agent may do so only after the seller has signed an authorization form. So there's some frustration and a sense of being out of control that goes with the territory.

Many listing agents don't know how to do short sales. I cut my teeth on a few in the early 90s and they weren't a lot of fun. But now there are huge numbers of them so it's a different game. In response to this crisis, a new business has emerged: short sale intermediaries. These folks have created a niche market of doing the go-between from the agent to the bank. They are the ones who stay on hold half the day, who specialize in knowing what the lenders need and require before someone actually verbalizes it. Because they specialize in this, their closing ratios are far higher (but still not guaranteed). (Call or email me if you would like more information on this.)

(2) Auction: if a home doesn't sell in pre-foreclosure or as a short sale, then the foreclosure process moves forward and the home will be offered for sale at auction. An agent can't help you here. If you wish to purchase a home at auction, realize that it will be offered at a price to cover all leins or debts, and it is often placed at a price the regular market will not bear. The auction situation presents special difficulties too. First, you cannot inspect it - you may look from the outside, but that is it. Second, unlike with the first or third scenarios (pre-foreclosure or bank owned), there is no contingency period in which you can change your mind and back out of the deal. Third, you need cash!  And fourth, if you buy it and it is still occupied by the former owner or tenants, you will be responsible for the eviction process. For all these reasons, homes rarely sell at auction. They usually move on to REO, and are back on the market, placed on the multiple listing.

(3) Bank owned properties offer the opportunity to inspect but do not provide most disclosures since the bank is not a seller who's lived at the property. When a property is REO, an agent will handle it very much like a regular listing and it will be available to view. Banks are highly motivated to unload these properties but like any seller, will not go for an offer half the value of the property. Homes are virtually always sold "As Is".

If you are wanting to buy a home in Los Gatos, and you want the help of a real estate professional, that is possible with the short sale or preforeclosure situations, and it is possible with REOs too. There are not a lot of these distressed properties on the market here right now, but there are a few and some of them are quite nice and are listed on the MLS. There are pros and cons to buying at each stage, risks and benefits. If you attempt to purchase a short sale, realize that you may or may not be able to close - through no fault of your own. If you buy a bank owned home, you may not learn everything you'd have liked to know (for instance, if there was a death on the property, problems with neighbors etc.). And understand that a Realtor cannot help you at auction, or if you are an investment buyer trying to purchase an owner occupied home in which a notice of default has been filed.

Would you like to talk more about buying or selling your home? Please call or email me. I'm here to help.

Mary Pope-Handy, Realtor,  CRS, ABR, e-PRO, SRES, ASP, RECS, CNHS, ACRE
Helping Nice Folks to Buy & Sell Homes Since 1993 - 15 Years Experience
Co-Author: "Get The Best Deal When Selling Your Home In Siicon Valley"
Keller Williams, Cupertino, CA  (Silicon Valley)
877 397-5391 (Direct/Toll-Free/Fax);   408 204-7673 (Cell)
www.PopeHandy.com    www.ValleyOfHeartsDelight.com   
Mary@PopeHandy.com