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.