If you’re a buyer, all you need is adequate provable income and decent credit and, with little or no money down, you can buy a new home at a great price—and with a historically great interest rate. It’s a fiercely competitive buyer’s market right now in the lower price ranges, and to get into a home at these deflated prices, you have to boost your odds by making strong offers on multiple properties at the same time.
A strong offer is one with loan preapproval, evidence of cash to close and terms that will help a seller want to accept your offer over that of another buyer who may be competing with you. It may seem like a contradiction to have to make stronger offers in a buyer’s market, but the number of buyers is increasing rapidly, which means, as a buyer, you really have to put your best foot forward.
As I write this article, there are 370 active and contingent listings of single family, three-bedroom, two-bath homes in Santa Rosa, priced at $320,000 or less. Similarly, in Napa, Calistoga and St. Helena, there are 93 homes listed for less than $420,000. Keep in mind, this doesn’t include condos, homes with only one or two bedrooms, or prices above $320,000 and $420,000, respectively. Of the 370 listings in Santa Rosa, 190 are contingent, which means offers have been accepted and buyers are doing inspections and working on completing their loans. This is a clear indication that the market is hot, hot, hot!
Although many of the homes available in the price range referred to above are bank-owned, many are also short sales. The main difference between buying a bank-owned home and a short sale is that in a short sale, the homeowner still owns the home and must ask the lender to accept an offer that’s lower than what’s owed. The application and review process by the bank can take as many as 90 days to complete, and after all the waiting, the offer could still be rejected.
The details of the short sales process are too extensive to cover fully here, but suffice it to say that if the owner isn’t able to bring in the difference between the sale price and what they owe, it’s up to the bank to decide if there’s justification to accept the lesser amount. So, if you’re making an offer on a home listed as a short sale, be prepared to wait—and don’t fall in love with the house, because you may not get it!
Unlike short sales, bank-owned properties are often only available for a few days, and many of them will sell well above their list price. As a recent example, a three-bedroom, two-bath home in a very nice Santa Rosa neighborhood listed for $259,000 received 21 offers and sold for $327,000. That’s more than 20 percent higher than the list price. This same home sold two years prior for $479,000. Had that same home been listed as a “short sale,” it may have had only two or three offers submitted to the bank along with the seller’s short sale application, and it could have remained contingent for three to four months. It’s better to make offers on bank-owned or non-short sale homes, even though the competition on short sales isn’t as fierce (it’s likely that you may have little or no competition on a short sale offer).
If you can get into the market now, you could buy your first home with good income and little down payment and, as values rise over the next several years, build a stable equity position in your primary home. If you’re ambitious, you could turn your home into a rental and move yourself up the home ladder in a few years, having initially used little or no money down (to buy the first house).
Some pessimists say home values could drop another 5 percent to 10 percent, but in this writer’s opinion, we may already be at the bottom of the market as far as prices go. Don’t hold out too long or bet on values dropping much more. If you do, you may miss the bottom. Prices in this market are driven simply by what banks are willing to take to recapitalize the losses on homes they’ve taken back in foreclosure—or what they’re willing to negotiate in a short sale to avoid foreclosure. Recently, several banks and investors announced they’re not considering short sales anymore. They’re simply refusing to negotiate with homeowners, preferring to take the property back in foreclosure as a Real Estate Owned (commonly called REO) asset.
Either way, it means the same thing: Real estate is affordable again. Why? Banks and investors want their money back. Once a bank takes a property back in foreclosure, it’s absorbed the initial loss for the loan that went bad, and the property then converts to an asset, which needs to be sold quickly to recapitalize. A bank or investor will calculate overall losses on the initial, foreclosed loan and then make decisions to sell (and for how much) based on how much loss is currently held against its REO asset portfolio. It follows, then, that the sooner it can get the illiquid asset of a home off its balance sheet, the better.
For now, individual home sellers must compete with bank- and investor-owned REO listings and short sales. It may be some time before traditional market forces come back into play, giving sellers a “normal” market in which to sell. So for now, if you can, hold on tight.
