Short sale and foreclosure buyers talk about their recent Santa Cruz purchases
When Gary and Sara Strands took possession of their home, everything from the kitchen stove to the air conditioner was missing. Kitchen cabinets, doors, and lighting and plumbing fixtures were all gone. There were holes in the walls and the toilets were backed up because the previous owners had also taken the water pump.
The Strands purchased their Santa Cruz home from the bank a year and a half ago, after the previous owners lost it in a foreclosure. They recently had the home appraised (so that they could refinance and drop their interest rate down from a 5.25 to a 4.25 percent fixed rate), and found that the house appraised for $300,000 more than their purchase price of $525,000. The owners who lost the property in foreclosure owed the bank $879,000, and Wells Fargo Bank took a $354,000 loss on the transaction.
Sara Strand says she feels bad for the family that lost their home, but also lucky for the “amazing opportunity.”
Most of these kinds of purchases require work. People who are foreclosed on are dealing with loss, and all the sordid emotions that accompany it. Some become angry and strip the homes, while others let them fall into disrepair. Because Gary is a carpenter, the couple was able to do repairs themselves, avoiding the cost of labor. Still, they spent nearly $25,000 just to make their new home livable. If they had been unable to do the repairs themselves, they estimate that it would have cost them closer to $75,000.
It was a stressful experience, says Sara. When you sign off on a foreclosure, you are buying it “absolutely as is, leaving a knot in your stomach as you wonder whether anything else is wrong with the property,” she says.
On top of these worries, foreclosures can also be competitive. “If the list price is really good, then chances are it’s going to go over that and you will see multiple offers,” says Sabina Brown, an agent with Keller Williams Realty of Santa Cruz.
Bidding wars are common, and once a bid is accepted, sales go through quickly—the Strands went from offer to closing in just 30 days.
The upside to all of this, according to Sara, is that “you can score a crazy deal.”
Brown says there are two kinds of house sales commonly referred to as foreclosures. There are foreclosure auctions that occur at the courthouse steps, with no inspections, insurance or guarantees, and where buyers must have cash. According to Brown, investors are most likely to buy at a foreclosure auction, and auctions are not for the average buyer.
When a property is not sold at a foreclosure auction, it reverts back to the lender and becomes a lender-owned property. Some people call these foreclosures, but they are technically called REOs—“real estate-owned properties.” A purchaser who buys a “foreclosure” is typically talking about this second kind of property. The home was foreclosed on, and now the bank owns it. Not many properties are actually purchased at courthouse auctions.
In the time before foreclosure, some lenders choose to work with a homeowner who can no longer afford their home and allow the home to be sold to a new purchaser through a “short sale.” Short sales are so termed because the bank takes less for the home than is owed—the bank gets shorted. Short sales can take much longer than foreclosures and traditional residential real estate sales.
While purchasing foreclosures can be distressing, short sales can be even more so: Not only are a lender and a buyer involved, but also a seller who isn’t actually selling their home, but rather losing it. It can become difficult to get agreement. Short sales can be even better priced than foreclosures, and they tend to be less competitive, but buyers must be willing to wait as they can take six months to a year to close. And, as interest rates rise, waiting could end up costing more in the long run.
While waiting out the frenetic real estate market, Mark Garver, a Santa Cruz trial attorney, rented a cramped apartment on Santa Cruz’s eastside. For several years he squirreled away a down payment while enduring the incessant sounds of neighbors and rarely getting a decent night of sleep.
In June of 2010, Garver became a first-time homebuyer through a short sale. Now, Henry Cowell Redwoods State Park is just out the back door of his sunny mountain property, where plums, apples, wild blueberries and blackberries flourish.
Because of the timing, Garver was able to take advantage of an $8,000 federal and $10,000 state tax credit. But although the price was an advantage, Garver says purchasing a short sale property turned into a lengthy and complicated process.
“It doesn’t seem to be an arm’s length transaction, as it would be if you were simply dealing with an individual seller,” says Garver. “You’re dealing with the bank, and the party who is losing their home is also involved. It took six months from offer to closing. The bank didn’t seem eager to let us know what was going on. They did not seem motivated to close the deal.”
When Garver moved in, the house was covered in a dense layer of dust that took weeks to remove. But, the appliances and fixtures remained intact. He paid $475,000 for the home, almost $200,000 less than the previous owner’s purchasing price of $670,000 in 2005.
Currently, about half of U.S. homes sales are distressed—short sale, foreclosure or real estate owned (REO) properties—according to the Campbell/Inside Mortgage Finance Housing Pulse Tracking Survey. Santa Cruz County home sales mimic the national market, oscillating around 50 percent distressed sales.
While distressed sales spell tragedy for some, smoking deals are being had on the buying end.
Brown, of Keller Wiliams, says that her willingness to deal with short sales and foreclosures has kept her working through a tumultuous market. Patience is essential, too—her two most recent sales were to clients with whom she has been working for about three years. Buyers are nervous, and, as a result, they are staying in the market longer, Brown says. While it’s nerve wracking to watch prices fluctuate, Brown believes the market has plateaued. Still, she says there is no way to know just what the future holds.
“What I’m feeling the most right now is a lack of inventory,” says Brown. “Because home values are the lowest in Santa Cruz they have been in decades, there is less incentive to sell.” In January of 2011, 94 single-family homes sold in Santa Cruz County at a median price of $430,000 according to statistics from Santa Cruz County Association of Realtors.
In January of 2007, prior to the market’s downturn, sales of single-family homes were only slightly higher, but the median price was at $715,000, nearly $300,000 higher. And, four times as many options were available to buyers. Many people are waiting out the harsh downturn in hopes of selling when things pick back up. In the meantime, foreclosures and short sales are tiding the market over.
For Santa Cruz residents hoping to take advantage of the distressed housing market, like Garver and the Strands did, Brown recommends patience and diligence.
“Take your time, look around, [and] shop for the best interest rates,” she says. ”Get pre-approved with a lender so you know exactly what you can afford, then when you find something that’s perfect, you’ll be prepared to move. And, be ready to do the work that will be required.”
Photo caption: Home Sweet Home? Currently, about half of all U.S. home sales are distressed—short sale, foreclosure or real estate-owned, according to the Campbell/Inside Mortgage Finance Housing Pulse Tracking Survey.
Photo credit: Keana Parker
