Recently Redfin limited the types of short sales they service. To some this may seem “anti-consumer” in that we are limiting the choices of what our customers can make an offer on. However, I believe this is the most pro-consumer thing Redfin has done since rebating 2/3rds of its Buyer’s Agent Commission.

Here’s why: By making an offer on a short sale property there is a very large chance that you are offering to buy real estate that isn’t really for sale.

Let me elaborate:

I assisted clients with making offers on approximately 10-13 short sales over the last 9 months. Out of those transactions, all of them were accepted by the seller, but only 1 closed. Given this success rate, I should either be fired instantly or there is a fundamental problem with short sale listings.

Here is what I believe is wrong with short sales:

• Most short sales are signed around instantly by the seller, giving the buyer false hope that the transaction has a high chance of success. In reality, most sellers who are in short sale will sign any offer they receive.
• Most short sales have two lien holders on the property.  While the first lien holder generally approves the short sale within 3-6 weeks, the second lienholder will often sit on the contract for months at a time. Why? A second lien holder has the most to lose in both a short sale and foreclosure auction. In essence, they will get little to nothing. However by stalling a short sale, they can postpone the first lienholder from foreclosing on the property while simultaneously using their debt collection goons to scare money out of the home owner.
• Most MLS’s do not have clear guidelines on how a short sale transaction should proceed.  Many thanks and blessings upon Jeff Coop and NWMLS for giving us a form to clarify these issues; however most MLS’s are not clear how transactions involving a short sale should handle earnest money, inspection timeframes, appraisals, etc. There are times when buyers will deposit $5000 - $10,000 Earnest Money, spend $400 on an inspection, and $450 on an appraisal, only to find out that the bank had no plan to even consider an offer at the seller’s list price.
• Most agents don’t file their Hardship package, BPO (Broker’s Opinion of Value), and Estimated HUD before listing a short sale. These things are absolutely mandatory for a loss mitigation department to consider a short sale; however most listing agents do not file these things until after they receive an offer on the property. One of the easiest short sale transactions I ever did was because the listing agent had taken the time to file these documents beforehand, and had actually gotten the list price pre-approved prior to listing the short sale! We closed in 30 days.
• Most buyers have misconceptions about what is involved with purchasing a short sale. At the start of the transaction, a short sale seems like a dream come true. “I will by this house at a firesale price and have instant equity as soon as I move in,” many buyers say.  In reality, short sales generally take 3-6 months to complete, during which time buyers are left in a limbo-land about their real estate future. Many times agents will go for weeks or even months with no communication at all from the banks. In the meantime, interest rates change, other potential properties come and go, and the buyer becomes frustrated with the entire process.
• Buyer’s have no control over whether their transaction closes.  There are few times that a home buyer will feel more out of control then during the purchase of a short sale. A bank will not talk to a buyer about the progress of approval. The bank won’t even talk to the buyer’s agent about the status of approval. And in some rare cases, the bank won’t even talk to the listing agent about the status of approval. This means that the only thing a buyer can do is sit and wait…. and wait…. and wait, while their home purchase is decided by someone who is 4-5 people removed from them.
• Many homes in short sale have other liens and judgements attached, including back child support, mechanics liens, court judgments, and the like. If the seller can’t pay their mortgage, they likely can’t pay these. If this is the case, one of two things has to happen: 1.) the buyer pays the judgments/liens, or 2.) They have to be negotiated along with the mortgages to be removed or reduced.
• Most Short Sales simply don’t close. Although there is no way to get complete data from my MLS (homes are just noted as short-sales in the agent-only remarks, there is no data field for them), I have done some unscientific study of the closing rate in the Seattle Area (King County, Pierce County, and Snohomish County). Here is what I found:
  • There are appx 989 short sales on the market
  • In the last 6 months appx 351 short sales have closed
  • In the last 6 months appx 692 short sales have expired or were cancelled
  • There are appx 524 short sales that are currently subject to inspection or pending (i.e. waiting on lien holder approval)
  • Assuming that 1/4th of the STI or Pending short sales close (which I think is generous), and that 1/4th of the expired or cancelled short sales relisted, it appears that about 23% of homes that are listed as short sales in the Seattle area actually close.

Once again, this is an unscientific study run on a Saturday morning in my pajamas - but you get the point: If you write 4-5 offers on a short sale, you get might get 1 of them to stick. Here’s the rub: If it takes about 3-6 months for each offer to be accepted or rejected, it could take a home buyer up to 2 1/2 years before they can get a short sale to actually close! Do you know anyone who is willing to wait that long?

Given these issues (and probably many others), Redfin has limited the short sales they service to those with the highest chance of success. Successful short sales tend to have all of the below qualifications:

• Homes with only one lien holder (mortgage)
• Homes in which the hardship package has been filed by the seller/listing agent
• Homes in which the listing agent has had experience with short sales
• Homes with no other liens or judgments other than the mortgage

Once again, I wholeheartedly think this policy does right by our customers - because like most agents, we want to help our buyers purchase homes that are actually for sale - not homes with just a yard sign in the front yard.