Men Like Ravenous Fishes Feed on One Another

Redfin Short Sale Policy Update: We’re sorry, Redfin no longer tours or services offers on short sales.

Like the bad-news boyfriend you can’t cut loose of, Redfin has gotten mixed up with a lot of short sales lately, where a homeowner is selling a house for less than he owes on his mortgage. At our peak last month, half of our Orange County clients were involved in short sales.

Plenty of buyers who get involved in a short sale still aren’t really sure what a short sale is. And plenty of brokers don’t quite know what to do with them, because they can be so time-consuming and complex, and have such a dim probability of success. As the Sacramento Bee reports, the ten biggest lenders in California approved only 872 short sales in January 2008; short sales in that month represented only 5% of “lifeline solutions” for people in a mortgage jam. The CEO of a short-sale tracking service described the prospect of some short sales’ closing as “a scenario that is absolutely impossible.”

Not surprisingly, many brokers just tell clients that short-sale listings aren’t really for sale at all. Which isn’t far from the truth: as The Wall Street Journal reported this morning, of the 65 deals Redfin put together last quarter, only three seem likely to close (though we just had another come through last night, making it four).

Often the whole cycle is a big waste of everyone’s time, which is one reason price discovery has been fitful and real estate markets take so long to recover: rather than sorting through what can be sold and for how much, predatory buyers chase after illusory deals in a Kafkaesque process of slyness, mirage and bureaucratic apathy. The whole destructive cycle brings to mind what an Elizabethan poet once wrote about the expulsion of foreigners from England:

By this pattern
Not one of you should have lived an aged man,
For other ruffians as their fancies wrought
With selfsame hand, self reasons, and self right
Would shark on you, and men like ravenous fishes
Would feed on one another.

(The name Redfin, and our perilous existence in the real estate market, often make me think of this poem.)

Because buyers so often pursue short sales to their regret, the question of our short-sale policy has occasioned the usual agonizing debate at Redfin over what we owe consumers who want to take a run at a short sale, and how we choose with whom we can profitably work.

In the end we haggled out a short-sale policy that focuses our energies on the deals that have at least a modest chance of closing. Having worked up a policy, we thought we’d compare notes with other brokerages about whether we made the right choices, and see what consumers think too. But first the basics, which you can skip if you’re a short-sale hotshot…

OK, First Off, What is a Short Sale?
My favorite explanation of a short sale from the broker’s perspective is on the NAR site, and there’s a pretty decent explanation for consumers on About.com, which is better for once than Wikipedia’s take.

A short-sale listing is one where the seller still owns the property, but owes more money on his mortgage than he’ll get from selling the property. This means the bank has to agree to the final sale price. So if a seller still owes $400,000 on a house he’s selling for $375,000, he hopes the bank will eat the $25,000 loss, and both the bank and the seller can walk away from the house and its loan. If more than one bank holds a mortgage on the property, each bank has to approve the sale.

Short sale listings are different than foreclosures or bank-owned properties. If the home-owner can’t sell the home through a short sale, the bank moves in for a foreclosure to try to sell the home directly, often in an auction. If the auction fails to turn up a buyer willing to pay at least what the bank was owed on the home, the home becomes Real Estate Owned (REO), where the owner is the bank. The bank then typically sells the property through a real estate agent; these listings usually re-surface in the MLS. Redfin supports buyers pursuing some types of short-sale listings but not foreclosures. Redfin supports buyers of REO listings except in the Washington, D.C. area.

How Do You Know If a Listing is a Short Sale?
The average home-buyer may not realize that the property he’s trying to buy is a short sale. Most listing agents identify a listing as a short sale in the agent-only remarks of the Multiple Listing Service (MLS), which brokers use to share listing information. MLS rules nearly always prevent Redfin and others from publishing this information to the web, in part because it embarrasses the seller, in part because nobody really was clamoring for that information until recently. (At some point, we might build a short-sales detectomatic into Redfin, where we warn the buyer that the seller is likely underwater based on the date and amount of the last sale. But there would be some false positives.)

For now, if you as a consumer see a short-sale listing while on tour with Redfin, we’ll tell you about it on the spot. Otherwise, you can ask by emailing the property address to askanagent (at) redfin (dot) com, or we can also let you know once we begin preparing your offer.

But Wait, Can You Get a Good Deal On a Short Sale?
You can, up to a point. The seller just wants to get out of the house, so he’ll be happy to take any price the bank will approve. Such artificially low prices prompted Redfin developer Michael Smedberg to observe in a meeting yesterday that short sales not only lower prices but falsely lower prices: banks will reject deals priced lower than what they could sell the property for themselves in a foreclosure. The bank has even less motivation to accept a short sale if the seller had to buy mortgage insurance when first getting the loan, which now encourages the bank to wait for foreclosure.

How Long Does It Take?
Short sales can take several months, depending on how long the bank needs to evaluate your offer. Right now the banks are pretty backed up, so we’ve seen delays stretch out to four months in places like Orange County. What makes this worse is that most banks have been selling their loans to Wall Street investors (how we got into this mess in the first place), who may now become involved in the short-sale approval process.

While the bank and its investors mull over your short-sale offer, other buyers can submit a competing offer on that property. If the bank approves your offer, it will usually ask you to buy the property as-is, refusing to allocate any money to repair problems discovered by the inspection. You won’t discover the problems until pretty late in the process, because nobody wants to pay for an inspection until the bank green-lights a possible deal. A lot of times, the seller stops taking care of the property as it spirals toward foreclosure.

While Redfin normally works on only one offer at a time, short sales take so long that we let buyers take a run at other types of listings while the buyer waits for word from the bank. You can usually abandon a short-sale offer at any time.

What Types of Short Sales Does Redfin Support?
In many cases, Redfin will not be able to represent clients in a short sale. We’ve had plenty of clients, frustrated after months of waiting for bank approval, abandon their offers. For a short sale to have a realistic possibility of bank approval, the seller must meet several criteria, which we now insist on; this is the list that we’d like some feedback from other brokers about:

  • Only one bank has to approve the sale: in other words, the seller has only one mortgage on the property. Many sellers in default will owe money on multiple mortgages to multiple banks, each of which has to approve the deal. In the line to be paid back first, one bank will be ahead of the other. In such cases, the second bank is likely to reject the deal because it’s the most likely to lose money.
  • The bank has confirmed receipt of the preliminary paperwork: the seller has stopped paying his mortgage, received a notice of default and sent the bank’s loss mitigation department the following:
    • a hardship letter and financial statements documenting the seller’s inability to pay his mortgage;
    • a preliminary net sheet showing what the proceeds of a sale could be after taxes and fees; and
    • a comparative market analysis (CMA) or an appraisal that establishes the home is being sold for a reasonable price.
  • There are no liens on the property: the seller doesn’t owe anybody else the money he’ll get from selling his property. If the seller has other debts, those debtors may put a lien on the property which positions them first in line to get money from the sale of the property. In these cases, the bank will almost never allow a sale to go through. The listing agent and the seller may be able to arrange to pay these debts in other ways, but not using proceeds from the transaction.
  • The listing agent has experience or training in short sales: the buyer’s ability to get the property will depend in large part on whether the listing agent can facilitate negotiations between the seller and the bank’s loss mitigation department. If the listing agent has no experience closing a short sale or training in this complicated process, the deal will likely take much longer and be much more likely to end unhappily. If the listing agent has neither the experience nor the training, Redfin will only work on the transaction if a short-sale service is involved to support the listing agent.

Anyway, those are our criteria. But other brokers must have thought about which short sales they’ll support and which they won’t, when representing buyer or seller; please let us know what you think. Of course, we’d love to hear from consumers too.

Bonus video, courtesy of a Friend of Redfin:

Photo credit: Timokuilder on Flickr.

Discussion

  • http://www.RainCityGuide.com/author/ARDELL ARDELL

    Hi Glenn,

    We closed one in January and the timeline followed my intitial prediction exactly, so my clients were not frustrated by the process. We had the buyer client on that one.

    About 2/3rds of the way in, my client got a little confused, so I wrote this post for him. Your readers and clients may find it helpful.

    http://www.raincityguide.com/2007/12/13/should-you-buy-a-short-sale-property

    I also planted St. Joseph under the sign (while The Seattle Times took my photo). That may have helped :)

    The other short sales I have done were back in the last bad market, which was a long time ago. I’ve never had an unsuccessful one yet.

    My criteria is that the house has to be the best house for my client. They have to want that house, not just “a bargain”.

    I have received a few offers to represent large investor groups, but I have turned them down. Since I think the market is going to decline further, and possibly for 3-5 years, I do not think there are any true bargains out there, short sales or not.

    But for someone who needs to sell or someone who wants to buy, I won’t shrink away from a short sale. It depends on the motivation of the buyer and or seller.

    We will walk away from a short sale seller if they want money under the table, and many of them do. The minute I catch the seller lying; I walk.
    If you even smell a hint that the buyer is passing money to the seller off the HUD 1, RUN!

    The hardest one I did had five lienholders including 5 years back condo fees. The seller’s lawyer wouldn’t come to closing because he said it would never close. It did. I represented the seller on that one and it was a long time ago.

    Most of the problem right now has more to do with the policies that many brokers are putting into place that almost guarantee failure. A bank does not approve a short sale. They approve a payoff. Until everyone “gets that”, expect to see many and most fail.

    The “contract” is not subject to lender approval, as most seem to think. The lender(s) approve the payoff…not the contact. Not the sale price; the payoff. So don’t expect final lender approval until an hour before it closes, and don’t think the buyer can start lining up their ducks AFTER they get “lender approval”.

    Every contract is subject to lienholder approval of the payoff. It’s just that most payoffs equal the amount owed. Nothing different in a short sale except the payoff is a moving target and “short”.

    There are several other specifics that will pre-determine success or failure. All have to do with the seller and his willingness to move forward, if the bank won’t forgive the shortfall. If the seller has other property with equity, and is not willing to move forward unless the bank forgives the shortfall…don’t get into it.

    Bring the wife to dinner. We’ll toss it around along with some salad.

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    Good advice Ardell, as always. If the buyer really wants the house, you can always make a deal happen (especially if you’re Ardell!).

    And dinner sounds good. I’ll email you about that soon…

  • http://timbauer.bauerfive.com Tim Bauer

    Glenn,

    I have been researching you and RedFin over the past few days and have done a short summary of the keys I saw in your business based on a few webcasts you did (Scoble, Keynote @ Bloggers Connect). Would be curious on your thoughts if you have the time (if I am over or understanding keys to your business). Here is the link.

    http://timbauer.bauerfive.com/2008/04/18/redfin-making-more-with-less-possible/

  • http://www.stevethorneonline.com Eleanor Thorne

    RedFin has a very unique model – that I think will do well in my marketplace (Raleigh,NC). We are not in a downward market – and do not have the experience (for the most part) to negotiate these transactions. However, just like with everything else – it’s about the expectation set for the buyer and seller that make a deal work! Great info!

  • Eric Heller

    Thanks for the excellent bonus video Glenn! For all of those who want to see how that was done, there’s a great article here: http://www.digitalartsonline.co.uk/news/index.cfm?NewsID=10149

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  • Tom McCarty

    Short sale listings in the ms should be banned for the most part. Agents that take them seem to ignore laws and act selfish

  • http://www.bayareabankreo.com Russell

    I know what you mean Tom. We find that, here in the San Francisco Bay Area, potential buyers run into too many snags and run-arounds with the whole short-sale purchase process.

    Better to locate those Bank REO properties right as they are listed in the county records, and grab ‘em up, right from the bank. Banks are often taking just a measure over the previous loan amount.

    More info at http://www.bayareabankreo.com

  • http://macgecko.blogspot.com/ Greg

    No: short-sales, 2 trust deeds, bank-owned, etc…
    It seems Redfin has many restrictions on what they will not allow, however they do list every type of homes they don’t allow. Since a large majority of people do have a 1st & 2nd loans, and the fact that Redfin most of the time does not say if they home is a short sale or bank owned what are your customers to do? We are definitely not trying to be difficult but we are not psychic and have to go on what information Redfin lists. We can’t see all the hidden information on the MLS that your agents can. It’s not our fault when we inquire about a listing that is a teaser price and if your agents think the listing is bogus then Redfin should not list it. Suggestion perhaps Redfin should remove homes that they will not bother with and that way the service would not be so frustrating to use and your agents would not have to keep telling people Redfin can’t not help them.

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    Great point. We wish we could identify short sales Greg, but most MLSs mix them in with other types of listings. Often the agent-only view, which MLS rules don’t allow us to share with clients anyway, doesn’t indicate whether a sale is a short sale. As a result, every broker struggles with clients who want to buy a home that is difficult to buy. Our only option has been to call the listing agent before showing a property or putting in an offer, to make sure the home has a reasonable chance of being bought by anyone prior to the foreclosure auction.

    Regards, Glenn

    Glenn Kelman, CEO, Redfin

  • Dave

    Has the success ratio on short sales increased since this article was posted? I have been wondering whether the reality of the current market conditions is sinking in across the board and causing lenders to be more willing to accept short offers.

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  • http://annchildcare lousie

    How long does it to get an answer back if you want to buy a short sale?

  • http://annchildcare lousie

    We put in a offer in on June 8,2008 and have not heard anything.

  • http://www.shortsaleway.com/short-sale-negotiating-service.html Jon Christopher

    Short sales are key to surviving in this down market. Because home values have dropped a short sale is the best way for someone to sell a house that is worth less than what is owed.

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  • http://www.optionnext.com Kathy

    The key to a good short sale (in my opinion) is a good loss mitigation firm. They know what they are doing and how to get the bank to accept a reasonable compromise with the best interests of the homeowner and broker in mind. They have more man power and can get the short sale property settled and sold much quicker than doing it yourself, and you still get paid for your client. optionnext.com or email kruthford@optionnext.com

  • Elizabeth

    I found a house that I like, but it’s a short sale. I’m still considering making an offer, with the understanding that it may take a while to hear back. My question is, should I offer the full asking price? I’d prefer to make s lower offer, probably 5% below asking price, but don’t know if that’s reasonable to do. The house is priced pretty fairly and similar to comps in the area although most other houses are larger or on less busy streets, so it’s tough to compare.

    thanks.

  • Danielle Loranger

    I’ve just put in an offer on a short sale and then found it on redfin. Interesting thing is that there are 2 mortgages on the property and the listing agent is obviously clueless about short sales. Hmmmm seems like redfin’s short sale policies are not really being enforced. I know it’s difficult to double check these things but about 90% of the short sale listings I’ve found on redfin in my target neighborhood are in violation of at least 2 of the 4 restricitons listed in this blog.

    Oh and for Orange County, CA buyers it’s common to find short sales listed for less than 50% of the amount of the mortgage(s) on the property. The one I’m going for is priced at 180k and has almost 400k in mortgages on it. 65 days on redfin and I’m the second person who even scheduled a viewing. Depressing for sellers GREAT for the buyer.

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  • http://www.apartmentshere.com Austin Apartment Locators

    Short sales are very popular. I almost bought a house that was in one one time.

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  • Chim2539

    my sister did a short sale on her condo last yr however she has two lenders. the buyer was her tenant for years and the RE agent did the transaction on her behalf. i asked her abt the 2nd lender and she said if they come after her, she would declare bankcruptcy. can she do that?