Real Estate Short Sales (Lack of Transparency – Unfair to Buyers)

Posted: November 26, 2012 in Distractions and Barriers, Personal Finance, Real Estate
Tags: , , ,

Real Estate San Diego County
I’m a firm believer that a free and open market with minimal regulation will eventually work to correct itself. However, there are some times and some situations that just scream out to be regulated. I believe that we are in one of those situations now. With the high number of homes that are upside down in value, the foreclosure and short sale market make up a high percentage of the home sales in some markets. San Diego is one of those markets, so this post is based on personal experience and discussions with others who have been looking in this market.

There is a very big problem with the short sale market, it is not driven by a seller seeking the best price, it is driven by a realtor seeking the highest commission. In a normal Real Estate transaction, the seller is a key component of the sale. The seller want the best price, and and if multiple full price offers are received, the seller will try to select the best most secure offer. In a short sale the buyer is uninterested in the price, beyond making sure the bank will accept the offer. The buyer will frequently just turn the whole process over to their realtor. I believe that is where the process starts to break down. Once the selling realtor has that much power in the deal, there is a potential for corruption.

I’m not talking about fraud or widespread cases where the bank gets less money than they could, although a dishonest selling realtor could try to make that happen. In fact I’ve seen articles on “flopping”, where the seller and selling realtor conspire with a buyer to minimize the short sale price so they can flip the house and make a larger profit on the second sale. That is not the issue I see. I believe the banks have enough control, if they exercise it, to get a fair price. In our market, most short sale houses are getting multiple offers over the asking price and even multiple offers over the final appraised value. The banks are not suffering from unfair sales prices in these cases, they are usually getting paid for the full appraised value. The banks have put some controls on the process to protect themselves. They generally frown on or don’t allow sales where the realtor directly works both ends of the sale. They also set a minimum price that is fair based on at least a rudimentary self appraisal process.

My concern if for the fairness of the process to the buyers and buying realtors who have signed qualified buyers. Although banks don’t usually allow a single realtor to do both ends of the sale, they generally do allow realtors from the same office to work both the sale and purchase ends of the sale. I believe this gives realtors the ability to manipulate the situation so that they or at least their office get commission on both sides of the sale. I don’t believe they feel they are hurting anyone as the seller gets what they want, the bank is not suffering, and the eventual buyer is satisfied. However, I believe this hurts the buyer who is working with a realtor not in their office, and who feels loyal to their realtor. If you are unwilling to dump your realtor, your chances of getting the house are near zero! There was no open discussion of this in any deal that I was involved with, but I do know of people who were involved in deals like this. In cases where the buyer dumps their realtor, or never even engages with a realtor to avoid being locked out of these deals, the realtors who lose the ability to get a commission for bringing a qualified buyer with a strong offer.

My biggest issue with the current short sale market in my area is that it feels “slimy”. I called it that to one of the people I know who was able to purchase a short sale home. Then I felt my comment may have been offensive, so I said, “Well, maybe that is going to far…”. His response was that the whole process absolutely felt slimy. Although there were two realtors involved, the selling realtor was absolutely getting both commissions. The other realtor was only involved to get past the banks rules. If you are unwilling to dump your realtor, in our case she was a personal friend, then the process is also FRUSTRATING! I was getting to the point that I was planning to tell the selling realtor that the details of our offer would also be sent to the bank if our offer was not accepted. I’m not sure the banks would be set up to deal with this type of information, and they may not care as long as they are getting a price that matches the final appraised value.

Instead of banging our heads against the “short sale” wall for several more months, we finally decided to buy new construction. Very refreshing! You put your deposit down, and the house is yours. There are very few new homes being built in our area, so we were lucky to find a new house that met almost all of our criteria. We are now patiently waiting for the construction to be completed for that house. Much less frustrating than our experience with the short sale house market.

Although I don’t believe there will be new regulations to “protect the buyers” in the short sale process, if fraud is occurring in the form of “flopping” and other schemes, I hope the law makers also take buyers into consideration if they decide to regulate to protect the banks. The current short sale process gives the selling realtor too much power over the process. I’m not sure how that could be fixed. In some markets, even for some homes in our market, buyers are not as plentiful as they were for the homes we were interested in, so I don’t think you could eliminate sales where the buyer and seller both work with realtors from the same company. If you could, this would be the easiest way to fix the issue. So I think more transparency, or even requiring open bidding would definitely be steps in the right direction. Giving the bank more power in the transaction could also be helpful, they have a stronger interest in the sale than the homeowner. This is a temporary situation brought about by the real estate meltdown. It will eventually work itself out. Until then, good luck to anyone buying property in areas with a high percentage of short sale inventory.

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