A wrinkle in the time/space continuum

Photo from Gizmodo

This week marked the validation of a facet of Einstein’s theories, the existence of gravitational waves.  In looking at artist conceptions of how the average non-astrophysical Joe could understand what the scientists were celebrating, I couldn’t help but think of the Red Dwarf episode where a rift is created in time/space, and members of the crew from two different dimensions are able to interact.  The paradigm of Dave Lister’s birth is only created by an interaction outside of normal time lines.  For those who have not watched Red Dwarf 1) I’m sorry that this introductory paragraph means little and 2) do yourself a huge favor and rent the discs on Netflix.

Realities are shifting now as well in the real estate market.

For a year or so, we have been dealing with a shortage of available houses.  This has been driving up prices and causing no end of headaches for buyer’s agents who are putting in multiple, multiple offers/client, only to find out they are 5th in line and the top of the heap are either cash investors or flippers who can still make money, even at a higher purchase price.

Part of this inventory shortage has been the deliberate decision by banks to delay release of REO’s back onto the market.  For clarification, REO stands for Real Estate Owned, which means bank owned or homes which have been foreclosed on.  Everyone knows where there is a house which has been vacant for several years, somewhere close by, right?  Well all that sitting and not being sold has contributed to the shortage.

In the current seller’s marketAt the time this post was written, the Seattle market was favoring the seller, sellers are delighted there is a shortage, as their property does not sit long on market.  They are also generally commanding better than fair market value.  This also benefits the banks.  When they do release the REO’s, they command a better price than if they had simply been part of a bigger stream of choices for the buyers.

And now a twist in how things have been going.

For time immemorial, or at least before the Internet, REO’s were given to a real estate Firm to list and sell.  Agents were able to access the properties for their clients just as if it were a private sale, and life carried on.  Recently the banks have begun releasing REO’s, but not in a way which is

  1. tracked by the MLS
  2. available to real estate brokers to promote to their customers
  3. noticed by neighbors

So how is this happening?

Online auctions

Banks are sending their REO listings to auction sites, bypassing the agents and offering buyers who know where to find the auctions, the chance to snatch a bargain.  Only are they?

This past week I spent a good deal of time untangling a client from an online auction.  By the time they had “won,” they owed the bid price, which was $10K more than they had hoped to pay, plus a 5% Buyers Premium Fee.  The fee, which is larger than the FHA requires for a down payment, was not to become part of the down payment, was not able to be financed or folded into the home loan and was solely for having provided an online auction of 4 days.  That is some good money, if you can make it.

So who can make it?  Obviously you have to have an in with the bank.  Oh wait, it helps if the auction site is part of the bank conglomerate.  All the money goes to the bank and everyone is happy, except the buyer who overpaid and will never recoup their 5%.  In my client’s case they were looking at over $11,500 in fees.  That’s crazy!

Who else could get these auction listings?  Last night I got a call from someone referred to me by a technical recruiter.  They were moving here from San Francisco and needed to get in the house hunt quickly.  They sent me a couple of listings they had been looking at.  I walked them through the state of the market to explain why most of the listings had already gone pending from the day before.  One thing jumped out at me though.  They asked about foreclosed houses in a specific area, and I did not find any on the MLS.  They sent me a link to Julia.com [not the real name], who had a foreclosure auction going on.  No, the property was not listed on the MLS.  Yes, it was obscenely below market value as a teaser, and no, I could not help them because you had to be registered to look at the auction.  Please note that MLS listings must be fair market value, otherwise the agents are subject to discipline and get fined.  The teaser strategy does not apply to bank property not listed on the MLS.  The prices you see on those sites is not the price they will sell for!

Oh lordy, lordy, lordy.  This is where you really put your hand up in the air and say, “BUYER BEWARE!”

I can understand the bank’s not wanting to pay commission on their properties (to be truthful, which seller does?), however walking into a minefield of playing by the bank’s rules is somewhere you want to tread very carefully.

So here is a small bit of common sense to think about before rushing into an auction site: If the deals are so amazing, why are there reserve amounts, and why can’t you know them? 

Banks have a minimum amount they are willing to take, which is generally around fair market value.  Appraisers are sent every 6 months to determine what that fair market value is, so the house that opened at $40,000 for a 4 bedroom, 3 bath,2300 sq ft home with a pool, is not going to sell unless the price gets above $380,000.  The hope is that people will either be convinced that this is such a great house, they’re willing to go higher or more likely, that a cash buyer will sweep in because a lender will not be able to get it appraised for a higher selling price.

Even if the sale price is at fair market value, beware of hidden fees and when they occur.  I was able to save my client $2,500 because I told them, “DON’T PUSH THE CONFIRM BUTTON.”  Legal contracts have very real monetary consequences, and if you do not know what you are doing, at least offer a competent agent a flat fee to help you get through the process, or hire an attorney to advise you of the legal ramifications of your actions.

This is pretty uncharted territory for most homebuyers.  Sure, you can do a For Sale By Owner (FSBO) transaction and in most cases, it is the two private parties agreeing to specifics, while neither really knows what they are doing.  Because they are primarily amiable and face to face, you don’t hear too many horror stories of them going south.  I do not anticipate the same will be true of bank-direct-to-buyer-via-auction stories.  At best I anticipate states’ Attorneys General will issue guidelines for predatory fees.  At worst, I anticipate a string of lawsuits by would be homeowners who got stung.  Spoiler alert: the banks win 98% of the time, and that is a discussion for a different time.



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