Short Sales are "Liar Listings" on the Twin Cities MLS

August 26, 2008 By 8 Comments

Short Sale
Definition: a home sale where the seller owes more than what the home is worth and is asking the lender(s) to accept an amount that is less than the amount owed to them as payment in full.

The same problem continues to come up day after day and I finally have the time and focus to sit down and write about it.  For the last year now, short sales have become a common type of listing in our market and in markets around the county.  A short sale is a “Liar Listing.”  In most circumstances, the seller and listing agent place the home for sale at a price and terms that they have no way of honoring unless the bank(s) agree to that price and terms, which isn’t learned until long after an offer is submitted.  While some responses on short sales can come back in a week or two, it regularly takes 2-3 months or more for the bank(s) to come back with a response and that response is just as likely to be a “no” as a “yes.”  In fact, I find that through a combination of reasons, only about 1 in 3 offers on a short sale is likely to make it to closing.

A short sale is a “Liar Listing.”  In most circumstances, the seller and listing agent place the home for sale at a price and terms that they have no way of honoring unless the bank(s) agree to that price and terms, which isn’t learned until long after an offer is submitted.

A few months ago the RMLS of Minnesota, the governing body behind the MLS database used by REALTORS® throughout the Twin Cities, decided to implement a field called “In Foreclosure/Lender Owned.”  This field was meant to help clear up disclosure issues with these properties and help make it easier to do searches to either include or exclude these listings.  Unfortunately I believe that it has in many cases made things even worse.  Unfortunately the only properties that can be disclosed this way are properties that have actually received an official notice of foreclosure, so the seller has to be 2+ months behind on their payments.  Further, the seller can choose not to disclose it whatsoever.

There is a substantial difference between a short sale and a foreclosure in terms of the procedures for the offer and negotiation process as well as timelines.  More importantly, a bank/lender listing a home for sale at a specific price and terms will accept an offer at those price and terms, whereas a homeowner in a short sale situation has a lender who might accept an offer at those price and terms, might demand a much higher price, or accept no sale at all.

REALTOR® Code of Ethics:

Article 2
REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction.

Article 12
REALTORS® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations.

If a listing is in fact a short sale and the agent knows about it but does not disclose it upfront in the listing, I believe that they are violating the above two articles of our REALTOR® Code of Ethics.  Because they are listing a property for sale at a specific price and terms, if the seller has no intention of honoring that price without approval from a 3rd party from which they have not received any direction, then they are being dishonest about the listing.  Since a price and terms are required to be listed to have the property in the MLS, I believe disclosing the short sale in the MLS Remarks section is proper explanation saying in effect: “yeah, we need someone else to approve this but we’re hoping this will work.”  It at least prevents buyers and agents from wasting time on houses that they have no interest in making offers on.

The current disclosure field then in fact becomes a problem since you cannot use it on short sales that are not in foreclosure and lumps everything into one big basket.  When short sales and foreclosures (lender mediated sales) currently account for 30% of the sales in the Twin Cities, it seems crazy to have such a broad, vague and yet limited field hold so much responsibility for disclosure.

If I ran the RMLS of Minnesota, this is how I’d have it structured:

Field 1:  Short Sale: Yes/No
Field 2:  In Foreclosure:  Yes/No/Not Disclosed
Field 3:  Lender Owned:  Yes/No/Not Disclosed

These three fields would tell agents and buyers all they need to know yet provide the seller some privacy if they requested it.  While if the house is in foreclosure there might be some mechanics that require special attention in the transaction, it could be in foreclosure and not a short sale.  Even if it is in foreclosure, that can bring up questions about a seller’s right to privacy so offering a “not disclosed” field is perfectly reasonable.  Same thing with a lender owned property… I think in this case it is crazy not to disclose it upfront but from an ethics/disclosure issue I’m not at worried about it.  I’d love to only see “Yes/No” for lender owned.

Implementing this revised fields would be a boon to buyers, sellers, and agents.  Buyers looking specifically to buy (or avoid) these listings would be able to do so, sellers would only have qualified buyers schedule showings, and agents could better counsel their clients on the whole process and give better information to their clients.  Last but not least, it would allow Jeff Allen and I an ability to make future foreclosure and short sale reports that much more accurate and detailed since we could split sales activity into “short sale” and “lender owned” categories vs. the current compilation of the “lender mediated sale” category.  Think of the benefits!!!

Filed Under: Foreclosures and Short Sales, Info for Buyers, Info for Sellers, Market Stats, Opinion, Personal Experiences Tagged With: , , , ,

Minneapolis/St. Paul MLS Addresses Foreclosures & Short Sales… Kinda

June 10, 2008 By 2 Comments

The RMLS of Minnesota, which is the governing body of the MLS in the Twin Cities and is owned by the 4 local REALTOR associations, has made some policy changes in regards to the reporting of foreclosures on the MLS, effective on Thursday:

The “In Foreclosure/Lender Owned?” field:

  • Initially will be an agent-only field (not available on Customer reports or on public Web sites through Broker Reciprocity).
  • Options are: Yes, No and Not Disclosed
  • For NorthstarMLS, Foreclosure is defined as the homeowner being served official notice of foreclosure by a governing entity (does not include notice of default from the lender when payments are late).
  • If you select Yes, you certify that you have permission from the seller to disclose that the property is in foreclosure.
  • This field is being added in response to the large increase in foreclosure status properties and agents desire to more easily search them when the seller has agreed to disclose it.  Our goal is to initially keep this information on the MLS simple and rely on agents to communicate with each other regarding the details.
  • If you edit an existing listing after the implementation, you will be required to complete these fields before saving the listing.

While I applaud RMLS’s efforts on this issue, it seems to me that they’re missing much of the issue.  This new policy ignores the following:

Houses Listed as Short Sales on the MLS
These houses are listed at a price where they have negative equity at the closing table and the seller has no financial ability to pay the difference so the seller is asking their lender(s) to take less than they are owed (a “short pay” or “short sale”) as payment in full.  In many circumstances a house is listed on the MLS as a short sale far before official foreclosure proceedings have begun, so these situations are not covered by the new policy.  Since offers on houses in a short sale situation can take months to get a response back from the lender(s), it seems critical to me and my buyers that this information is clearly disclosed upfront… often my buyers have no time or no interest to wait around for 60-75 days for a 50/50 chance of a “yes.”  Since banks do not give a seller direction ahead of time on what price they’re willing to accept, the list price chosen by the seller and any offers submitted

Houses that are Lender Owned
Since the new RMLS policy takes into account only those houses that are in the foreclosure process, once the house is lender owned (also known as bank owned or REO), there would be no disclosure of it in this new field.  While responses from sellers of REOs are quicker, they can still take a week and come with 10-15 pages of “AS-IS” addendums, basically eliminating most disclosures and protections for the buyer and overriding most of the contract language that is used on the standard purchase agreement forms in Minnesota.  As such, some buyers have no interest in these properties and many others specifically want these properties since they can typically be purchased for substantial discounts to market value.

Considering that a little more than 1 in 4 of the sales occurring in the Twin Cities today is a foreclosure or short sale, it seems crucial to me that we have the best information possible on these properties and that they are easily searchable and reportable.  The current policy that the RMLS is implementing is akin to have a way to search for “one story” homes but not “two story” or “split level” homes.

Instead of the current policy, here’s my suggested solution:

Two fields on the RMLS:

Short Sale Subject to Lender Approval (with options of Prior to Sheriff’s Sale and Post Sheriff’s Sale)
These properties require the approval of the purchase agreement by the homeowner (easy to get) AND the lender (not as easy to get).

Lender Owned
These properties are repossessed by the lender via foreclosure or deed-in-lieu of foreclosure and the lender/bank is the only decision maker.

This would address all the properties in some stage of lender mediation and would make disclosures clearer to buyers and market data for all users of the MLS that much more reliable.

I’d love to hear thoughts from the public… please leave comments below.

Filed Under: Foreclosures and Short Sales, Info for Buyers, Info for Sellers, Market Stats, Opinion, Personal Experiences Tagged With: , , , , , , ,

Foreclosures & Shorts Sales Should Be Classified As Such on MLS

February 28, 2008 By 3 Comments

There’s a lively discussion going on in our office regarding foreclosures and short sales and their impact in this market.  I was going to call it a debate but typically a debate has two opposing viewpoints whereas of the people I’ve spoken to, we all seem to be in agreement: the MLS should add a flag for foreclosures and short sales.

Right now most agents do disclose if their listing is a foreclosure or short sale by saying something in either the Agent Remarks, Public Remarks, or Financial Remarks.  The problem with this method is that agents use 10+ different ways to describe it and can put the data in any of the three fields, making it rather difficult for an agent to either query only for those properties or exclude those properties.

If the RMLS would include flags such as “IS a short sale” and “IS a foreclosure” then agents working with clients that are specifically looking for those properties could easily find those properties for clients looking for them (thereby increasing exposure to those that want those properties) and could filter out those properties for buyers that for one reason or another they have expressed an interest in not considering.

Further, when doing a CMA or other market research, it would make it much easier to determine if one of the biggest factors affecting sales price today was associated with a particular property.

Part of the argument I’ve heard in the past on why we should not add flags to the MLS is that this is a short-term issue and we shouldn’t be so quick to rush in and change things for a short-term solution.  I’d have to disagree for the following reasons:

  • Foreclosures & short sales are certainly a much larger issue right now, but they have always existed and always will exist at some level
  • REALTORS are notoriously slow to adopt new technology/practices, but there’s no reason we have to be, this is an easy thing to program into our system and wouldn’t take more than a few hours to implement if it was given the go-ahead.
  • This is a material characteristic/fact of the property- as much of a characteristic as style, location, and price.
  • As even an entry-level DBA (database administrator) would tell you, your data is only as good as the person entering it, the consistency of the procedure used to enter it, and the way the data is stored.  By making it a simple “check box” we will guarantee that a search for this characteristic will include all properties, assuming the agent clicked the check box of course.
  • If we have this data stored consistently, it makes it much easier for the REALTOR community to parse the data for research purposes, which could allow us to provide the public and private sector with better market intelligence.
  • I’m a big believer in things being taken to their highest and best use.  The MLS is the best source of real estate information known to man but can be taken even further if we implemented even 1/2 the foresight that most startup companies employ.

A few hours now could save hundreds or thousands of hours over the next few years in painful manual processing and help keep our MLS relevant in changing market.

Filed Under: Info for Buyers, Info for Sellers, Market Stats, Opinion Tagged With: , , , ,
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