Archive for the ‘Foreclosure’ Category
June 29, 2009
The folks at Redfin got into real estate to make the industry more efficient. But if anything, the market has just gotten less and less efficient. And most of it isn’t the Realtors’ fault but the banks. Banks selling a home don’t trust one another’s credit. They reject appraisals for a price that a buyer is willing to pay. They’re slow to put homes on the market, but aggressive about pricing other sellers out of the market, even as buyers are frantic to strike before the tax credit expires. The California economy is in the tank but we only have 4.2 months’ supply of listings.
I am not trying to talk the market up. (After years of saying that prices were too high, I was virtually crucified for saying, when no one else would, that prices in Southern California may be nearing a bottom; three months later, prices began to increase). And my point in writing this is not to blame the banks, who have good reason for an abundance of caution. My point is just to state the obvious: the market has become distorted so much that it is ridiculous to pretend that it is a free market. It is instead an oligarchy, controlled by the government and the banks to limit price drops, which in turn frustrates consumers and limits price recoveries.
Human nature being what it is, there are some folks who have already figured out how to profit from this skewed-up system in interesting and not entirely ethical ways. Here are just three phenomena in the real estate market that only make sense if it isn’t really a market at all:
1. Banks are hoarding listings to avoid writing down their losses: individual home-owners who want to sell can’t compete with the banks on price, and so hold their properties off the market. As a result, banks have effectively become the sole supplier of homes for sale in many distressed areas. We routinely see bank-listed homes with 30, 50 sometimes more than 100 offers. And yet even as sales volume in California is up 35%, prices are down 30% over last year, despite modest recent gains. Supply and demand have been slow to find a new balance because there is an enormous backlog of homes that could be sold, and most are not being put on the market. Banks have good reasons to withhold inventory: staff reductions, the need for repairs, concern about flooding the market. But another reason banks withhold inventory is that they can avoid acknowledging the loss on their books until someone puts a new price on the listing. Dribbling out the inventory may prolong the banks’ survival, but it means a recovery will take longer, too. The major source of uncertainy in today’s market is that nobody knows how much of the inventory iceberg is under the water.
2. Real estate agents may be hoarding listings to save them for their own buyers, doubling their commissions: the shortage of listings in a market where asking prices have not significantly increased distorts the incentives for real estate agents, too. In multiple Redfin Forums posts, several eagle-eyed consumers recently noticed that listing agents are accepting an offer on a listing literally one minute after it debuts on the the market. Then a month later, the listing agent returns the property to the market saying the previous sale fell through, and again immediately acccepts a new offer before anyone else can strike. The second time around, the offer is from a buyer represented by the listing agent, so she stands to earn double the commission. The concern is that the listing agent is hiding a listing from other buyers until he or she can find her own buyer. The fact that we’re even having these skirmishes over inventory suggests that the market is not doing its work; normally when there is a shortage of supply and an excess of demand, prices increase and supply increases.
3. Banks refuse to accept what the market tells them is a fair price for a home: for a long time, banks have aggressively priced their own listings to create a bidding war between buyers that results in final prices hundreds of thousands of dollars over the asking price. That was strange enough, but now in the Inland Empire our partner agents are seeing banks refusing to take the highest offer, for fear that the home won’t appraise for the value offered by the buyer. Rather than risking that a loan will fail because of the appraisal, the banks take a lower offer from an all-cash buyer. What this means is that the market establishes a price for the property and the banks on both sides of the deal — the one selling the property, and the other lending money to a would-be buyer — refuse to believe it. Now cash has always trumped other offers at nearly the same prices, but when we see a bank reject offers 10% or 20% higher it means that the credit markets are still hindering a recovery. Perhaps soon people will be offering two chickens and a goat for a house.
So what’s the solution? The government could require that banks receiving federal assistance put real estate up for sale within nine months of taking ownership, or at least mark the assets to market using the Case Shiller index where available; failing that, we should at least extend the home-buyer tax credit so that we don’t create demand exactly when the foreclosure moratorium reduced supply.
And banks themselves obviously need to require listing agents to keep a listing on the market for a minimum length of time — say three days — so the market can do its work. But as for banks that refuse to accept a price for fear it won’t be supported by the appraisal, we shouldn’t worry. We’ve all had enough of banks being pressured to make deals they’re not comfy with. If we get the inventory on the market when the buyers are ready to buy it, the market can start to do its work again.
March 9, 2009
For many home-buyers, REOs are an opportunity for a bargain. Short for “Real Estate Owned,” REOs are bank-owned properties (also known as foreclosures). Already this year, 39% of Redfin’s offers in Southern California have been on these homes, while the entire East Bay market’s REO sales are up 103% year-over-year. Real estate news site Inman News recently published a report on bank-owned inventory reporting that “the foreclosure market ‘is the housing market’ in 2009.”
What does this mean for you the buyer? You can get a deal on an REO, but be prepared to pay for repairs and work with banks managing large inventories of these homes.
Lifecycle of a Foreclosed Home
- The home-owner realizes he can’t pay his mortgage and may try to sell his home, in which case:
- If the sale price is less than what he owes on the mortgage, it’s a short sale, subject to their lenders’ approval—check out our earlier post on short sales.
- If the home doesn’t sell or the bank doesn’t approve the short sale, the bank forecloses on the property.
- When the owner is 3 months behind on his payments, the property is foreclosed upon and the banks try to sell it at an auction for at least the amount of money owed on the loan. The NY Times recently posted an article on foreclosure auction frenzies.
- If the property fails at auction, the bank takes ownership and their asset manager hires a real estate agent to list the home for sale in the MLS (Multiple Listing Service) database much like any home for sale.
If you’re looking to buy a distressed property, REOs are your best bet. With short sales and foreclosure auctions, there’s a lot more stress without much guarantee of actually buying a home. REOs have reached their final resting place in the banks hands, are listed in the MLS and ready to sell.
Searching for REOs on Redfin
To search for bank-owned properties on Redfin, click on Prices, Beds… next to the search box and check MLS-listed foreclosures and bank-listed foreclosures.
Redfin shows all the homes for sale, but only provides service for MLS-listed foreclosures. We don’t service bank-listed foreclosures not in the MLS (the ones with the purple house icon 
). Another good resource is RealtyTrac, where you can search for all types of foreclosures for a fee of $45/month. Check out this post in our forums for more information.
Touring: Buyer Beware
As with any home you like, be sure to see a REO in person. On your tour, pay close attention because it’s up to you to spot issues with the home. The bank won’t be paying for any repairs. If you decide to make an offer, the bank isn’t required to give you disclosure documents that describe the condition of the home—they’re always included in California and Washington when you buy from an individual owner.
REOs are Priced to Sell
We found that on average, the REOs Redfin helped people buy in the last nine months in Southern California were 17% cheaper per square foot than non-REOs, 29% cheaper in the Seattle area, and 44% cheaper in the Bay Area. Note that this price differential reflects the fact that REOs are often sold in less desirable neighborhoods, while homes sold by individuals are often in nicer areas and sell for more. For more information, check out this recent USA Today article on the concentration of REOs by county across the US.
Redfin data man Arthur Patterson pulled these numbers from Redfin’s listing database from May 16, 2008 – February 15, 2009. We only include Southern California, San Francisco, and Seattle deals since our East Coast markets haven’t yet closed enough REO deals to make sound conclusions.
When to Offer More Than List Price
Banks set competitive prices to move their inventory, so there’s a good chance there will be multiple offers on the home. If the home is in good condition and priced well; expect to get caught up in a bidding war. In Southern California, regardless of the condition of the home, you can almost always expect more than 10 offers—Redfin agent Joyti Goundar has seen as many as 105! Forget about low-balling.
In the Bay Area, Redfin agent Miawand Bayan reports that:
There will be on average 3-7 competing offers on a property. If the REO is in great condition and priced well, you can expect to see as many as 10-20 offers. This means that you can’t come in at 80-85% of list and expect the bank to automatically accept your offer.
The “cleaner” the offer, the better. Banks won’t be open to any special arrangements regarding repairs in your negotiations; so be prepared to put your best foot forward. In terms of financing, banks are usually the most responsive to buyers with conventional mortgage loans and 10 – 20% down payments.
When to Negotiate
When an REO has been on the market for 30+ days, the banks may be more likely to negotiate below list prices. But, this could also mean that the home isn’t in great shape. And remember, the bank won’t be paying for repairs. Seattle agent Trevor Smith notes that sometimes it can be unclear how much banks are willing to negotiate—it often depends on how much internal pressure they’re under financially to get their loan money back. But, as foreclosed inventory continues to pile up in the coming months, banks may continue to lower prices as supply increases.
The table below shows the average sale price to list price ratio for Redfin’s REO deals compared to non-REOs for the past nine months. You can see the bidding war effect in Southern California as REO homes sell above list price.
Redfin Agents with REO Experience
If you have questions on what to offer on an REO property, Redfin agents will help you with local pricing guidance. To help you to find an agent with REO experience, we pulled data on the number of signed REO offers our west coast agents have worked on since January 1, 2009:
*In Seattle, the REO surge is just starting to hit. Special thanks to Redfin Seattle agent Allie Howard who urged us to write this post to educate customers about REOs and provided great insider information.
Preparing Your Offer
Each bank selling REOs has different policies for handling the offer process. Sometimes, the bank’s asset managers, who are responsible for selling the property, require that their own lenders issue the pre-approval letter that accompanies the offer. You can still switch lenders later, but there won’t be much time to get a second one on track. This could make it more difficult for you to get a different lender for the REO purchase.
Verbal, Instead of Written Negotiations
Once you submit your offer on the standard MLS Purchase and Sale Agreement form, almost all counter-negotiations will proceed verbally between you and your agent, the selling bank, and the listing agent; in a normal transaction, these counter-negotiations are typically done in writing.
Our agents report that they’ve been involved in negotiations that can take anywhere from a few days to a week depending on the responsiveness of the selling bank and their listing agent. Normally, these negotiations take less than 24 hours with an individual seller. But once you come to agreement, the process often goes faster since banks are eager to sell homes. We found that Redfin REO deals in the last nine months close on average one week faster compared to normal transactions in our West Coast markets.
Addendums
After an agreement is reached verbally, most banks will sign and return the original Purchase and Sale Agreement along with an addendum on their own forms. Addendums include:
- The “As-Is” clause—you’ll be buying at your own risk and the bank can’t stress that enough.
- Shorter Financing Contingency period—you’ll have around 15 days to get your loan approved once the offer is accepted and banks usually have a $100 a day penalty if this doesn’t happen on time.
- Shorter Inspection Contingency—you’ll get around 10 days to inspect the property and still be able to withdraw your offer.
Banks can easily take advantage of their position by crafting the addendum according to their own interests. For example, Redfin agent Rachelle King noticed that her client’s $10,000 closing credit failed to show up in the addendum. In this case, the bank addendum stated that any changes made would nullify the entire document. But, Rachelle took charge and got the bank to add the closing credit anyway.
Inspections
Sometimes, the bank will require you to do a formal inspection of the property before you put in an offer—an up-front cost of $400 – 500. But most often, you’ll proceed with the inspection once you agree on the deal. Since the inspection contingency period is often shorter with REO purchases, make sure to move quickly. If utilities like water and heat are shut off, you’ll need to shell out $100 – 200 to get the property de-winterized.
Appraisers will be more conservative than ever: they may raise issues with the home that could become conditions of your loan. Southern California Redfin agent Anna Nevares says “repairs oftentimes must be required by the lender in order for the bank to consider doing them. Even then, the buyer sometimes must complete the repair on their own, prior to close of escrow, with the bank’s permission, but at the buyer’s liability and risk of not closing escrow.” Repair costs are often in the thousands in Southern California: Joyti Goundar recently had a client who had to pay $6,000 for a termite inspection.
The following items are usually paid for by the home-owner in a normal transaction, but often get overlooked with REOs. Expect to pay extra for:
- Overdue utility bills
- Unpaid Home Owners Association dues
- Septic inspections
- Re-keying the locks and ordering new garage door openers
- Torn out cabinets
- Holes in the wall
- Dirty diapers in the well!? Yep, it’s true. Seattle agent Trevor Smith once closed on an REO where the disgruntled previous owners left a little surprise in the water supply.
The Bottom Line…
The process can be stressful, but stick it out and you can get a good deal on the home. Check out Redfin’s forums in Los Angeles/Orange County, San Francisco, San Diego, and Seattle for more recent REO discussion. What else do you think buyers need to know about REOs? We’d love to hear from you. We’ll compile what we learn into a set of best practices to help future buyers.
Other REO Blogs & Posts
Here are some links to some helpful REO blogs out there:
And here are some links to interesting blog posts and recent news on foreclosures:
December 23, 2008
We just published a table showing the percentage of listings being sold by a bank. But then we began to wonder: what percentage of properties in an entire city are actually for sale at the moment?
This is not an easy question to answer, because you have to count up all the properties for which we have tax assessor records and compare that to all the properties for sale in the MLS, on bank websites and on for-sale-by-owner websites.
Enter the great Arthur Patterson, a hyper-intelligent, near-mythical creature roaming the Redfin office in his socks at 7:15 a.m., oddly pleasant but always precise, and undoubtedly capable of assembling an atom bomb before breakfast.
Arthur helped put together the table below. He asked me to note that the percentages are probably a little too high, because our tax-records aggregator always misses a few properties but the margin of error is still less than 5%.
What immediately jumps out is how few homes are for sale compared to the number of properties available the city of San Francisco, where there are plenty of rental properties and the inventory of single-family homes is still slim.
At the other end of the spectrum, nearly 1 in 20 homes are for sale in Chicago, so there’s a lot of turnover in the heartland.
[And many thanks to Redfin reader Kim for her comment on our photo of a Burmese python: "I suspected my x had once again fallen into the hands of the law."]
December 15, 2008
I was signing checks today when I noticed that our bill for obtaining bank-owned listings that have not yet appeared in the MLS (that is, those that are marketed on bank’s websites but not yet by a real estate agent, usually because the bank just took possession) in November had increased 123% from what it was in October. This was noteworthy because for the past year, what we pay has remained relatively steady.
Since we pay by the record, this means that, for the markets we cover, the number of bank-owned listings not in the MLS has, in one month, increased 123%. Possible theories:
- The September and October credit crisis created a new spate of foreclosures.
- Banks have suddenly balked at hiring real estate agents to list their assets in the MLS, perhaps in part because real estate agents are now slower to take on poorly maintained, costly listings
- Our data provider is bilking us (this is extremely unlikely, as we check the bill carefully)
What’s your theory?
April 30, 2008
One Sunday morning last fall, my great friend Conan, a debonair former nose-tackle who often advises me to get in touch with my feminine side, called to ask about using our site. It took half an hour to convince someone who knows I would never lie to him in a million years to run a search on Redfin. And almost all that time was spent on one simple question: “do you have all the homes for sale?”
“Great question,” I said as real estate inventory has somehow become one of my favorite subjects, second only to “how popular I was in high school,” gossip, my many grudges, and what different drugs are like. “We have all the broker-listed homes for sale.”
“And that’s ALL the homes for sale?”
“Well, technically there’s always a few sold by the owner, without a broker. It’s called FSBO.”
“Yeah?” Conan said. “You don’t have those?”
“No.”
“Is that it?”
“And there’s also stuff in foreclosure, that’s been repo’d by the bank, before the bank has hired a broker to put it in the MLS.”
“Yeah?” Conan said. “Is THAT it?”
“And there’s always the possibility that you could sell your place to your cousin, without ever putting it on the market. We wouldn’t have that either.”
“So basically you’re saying you kind of suck,” Conan said. We had now come to very familiar ground in our 20-year friendship.
“Yeah,” I said. “But everyone else sucks too. Many suck worse.”
In the background, I could hear Conan typing in his first search.
A few minutes after our call ended, the U.S. real estate market collapsed, putting more inventory in a gray market of foreclosures. And we soon began working with I-don’t-have-an-office-number-just-a-cell-phone middle-men, data-scrapers and offshore aggregators to get our hands on every home for sale we could find, minus outdated garbage, copyrighted information, stuff that wasn’t really for sale, and teasers where consumers would have have to pay someone else for the address.
This culmination of this effort is the latest version of our site, live since 6 a.m. this morning, which has bank-owned foreclosures and for-sale-by-owner listings alongside all the listings from the Multiple Listing Service (MLS). It’s a little controversial, and lots of fun to play around with and of course we think it’s beautiful too.
Not that even now the new version of Redfin has all the homes for sale – we only had enough money to get data on foreclosures once the bank owns them, but not before, when they’re up for auction. For the markets we serve, we should have more real estate listings than anyone else. And the foreclosure data we do have is unique, because we give the foreclosures’ actual addresses and bank contact information, which other sites require you to pay for. Redfin is the only site we know of that aggregates bank-owned properties for free.
We’ve hit up more than 50 for-sale-by-owner sites for their inventory, with only two major gaps: Zillow and craigslist. Zillow is, we hope, coming soon. Someone offered us a craigslist feed, no questions asked. But when we emailed craigslist about it, Internet god Craig Newmark confirmed this was a violation of the terms of service. What was incredible about his reply was that it took exactly three minutes and it came from The Man Himself (Craig Newmark rocks).
On other fronts, we’ve fixed up our URLs for Google, and juiced up our MLS integration again, in both Boston and Southern California, so that we can get comprehensive inventory updates every 15 minutes (our only laggard MLS integration is now in Ventura County). While we were at it, we grabbed more open-house data, let people search for open houses, and upgraded our email notifications to tell people when their favorite listings change prices or sell. Next up, the data team is hoping to get photos of very-recent past sales.
But for now we’ve also made it more obvious how to search for data on past sales, a sweet feature that Redfin has always had but which no one ever knew about because it used to be hard to find. No longer! For the markets we serve, you can easily see what any home sold for between last week and 20 years ago (the lag is often more than a week, depending on how long it takes the transaction to record).
What does this all add up to? As our press release explains, the new version takes us deeper and deeper into Freakish Depth, which is our strategy to build the best real estate site by getting the best data. Because we’re a broker in the thick of doing deals, we have access to data as it’s being recorded. And unlike lead-generation sites, we want people to use Redfin to go all the way, getting everything they need to buy the home without having to talk to anyone or pay anything.
The strategy started in January with super-low-latency-MLS integration, bird’s-eye views, two new estimates, Excel integration, neighborhood boundaries and comparable listings. Then we got deeper with listing statistics, which analyzes where the traffic for a listing is coming from, and how inventory levels in the neighborhood have changed.
A gratifying subplot of all this is that the MLSs with whom we have sometimes jousted worked with us on this release. One MLS guided us on how we could show different types of inventory without violating the rules. And another provided the square footage data we’d been asking for. It’s still a delicate balance, sharing data among competitors, and working within a common set of rules to protect the different brokers’ clients.
Which makes us all the more careful not to screw things up. For years, we’ve wanted to add inventory to Redfin’s site, but have hesitated out of respect for the brokers who share their listing data with Redfin, many of whom have legitimate concerns about properties for sale directly from banks or owners. In the end what swayed us was:
a. the consumers who want above all else to see all the homes for sale,
b. the market, where in places like San Diego 40% of the sales have been foreclosure-related,
c. guidance from some of the MLSs we work with.
Hopefully, we’ve found a way to show consumers more information without causing any harm to other MLS members. We’re going to roll out flat-fee services in the next few weeks to work with buyers on for-sale-by-owner and foreclosure properties, but we won’t help anyone go around a listing broker if one has been hired.
Many thanks to all the engineers, product managers and customers – a San Francisco focus group talked us into buying the addresses for foreclosures — who came together to create this site. We worked awfully hard on it, some of us through occasionally daunting circumstances, and are anxious to see how you like it. We hope there aren’t too many bugs. And please, spread the word!
*PS: we may add auction properties in the future but in that case we would have to require users to pay an extra fee to see the address.
