Buyers are out, and trying to buy, but they don’t seem to be quite as successful as some of the more breathless news reports would lead you to believe. I have always liked the Pending Sales statistics from NWMLS because they represent the most recent monthly snapshot of new contracts on listed properties – i.e. a Buyer and a Seller have made a deal. But recently a lot of those ‘deals’ have not closed, the Seller has not gotten his or her money, and the Buyer has not gotten possession of the property. It appears that a lot of these current transactions, which are indicating a high level of Buyer’s intent to purchase, are falling out or being delayed for long periods.
Here is a chart built from NWMLS published statistics of Pending vs Sold data – the chart is built by taking a two-month moving average of Pending (previous month) vs Sold (current month) data. Note that this post expands on an earlier post by Ardell in her Sunday Night Stats.
Let’s call this chart the Fall-Out Ratio – we may want to keep an eye on it.
(Required disclaimer: Statistics not compiled or published by the Northwest Multiple Listing Service)
Historically the fall-out rate has been well under 10%, but then in early 2008 the fall-out rate started climbing like a rocket. Recall that we had the mortgage market meltdown in late 2007, and lenders started dramatically tightening their lending practices. Then we had the larger financial and business crash in late 2008, and more people started losing their jobs – and the other 90% got nervous. It was also in late 2008 that we started seeing a lot more short sales in our Seattle/Bellevue area. Recall that in a short sale, the insolvent seller is trying to avoid foreclosure by selling the property and getting the lender to accept less than is owed on it. That lender approval process is often slow and uncertain, and it certainly is contributing to this rise in the Fall-Out Ratio. Short sales may be 20% or more of our current sales activity, and those delays may also be a major contributor to why the average Days-on-Market measure isn’t dropping in concert with Months Supply. Other contributors to the fall-out rate would include failure to reach agreement on inspection, and failure of financing. I’m sure we’ll get a lot more insight on causes from the comments by our great RCG contributors.
Not sure if you saw it, but Seattle Bubble has been digging into this for awhile (though it’s interesting to see your numbers, as most of SB’s numbers are for 30 days, not two months).
Some of the top theories for the cause of this are:
– Short sales falling out (or buyers putting in offers on multiple short sales)
– definition of pending changing by NWMLS
– financing difficulties (non-locked rates, lending rules changing, etc)
– ?
See :
http://seattlebubble.com/blog/2009/05/07/one-in-three-q1-pending-sales-failed-to-close-in-30-days/
And for the follow on on at least one reason why SOME of them fall out:
http://seattlebubble.com/blog/2009/05/31/nwmls-mark-any-accepted-offer-on-a-short-sale-as-pending/
http://seattlebubble.com/blog/2009/05/11/recent-spike-in-pending-sales-due-to-change-in-definition/
Not sure if you saw it, but Seattle Bubble has been digging into this for awhile (though it’s interesting to see your numbers, as most of SB’s numbers are for 30 days, not two months).
Some of the top theories for the cause of this are:
– Short sales falling out (or buyers putting in offers on multiple short sales)
– definition of pending changing by NWMLS
– financing difficulties (non-locked rates, lending rules changing, etc)
– ?
See :
http://seattlebubble.com/blog/2009/05/07/one-in-three-q1-pending-sales-failed-to-close-in-30-days/
And for the follow on on at least one reason why SOME of them fall out:
http://seattlebubble.com/blog/2009/05/31/nwmls-mark-any-accepted-offer-on-a-short-sale-as-pending/
http://seattlebubble.com/blog/2009/05/11/recent-spike-in-pending-sales-due-to-change-in-definition/
I recently had lunch with one of my favorite Title Reps. He told me 50% of the transactions they have in escrow are failing. The vast majority of their paying business is in refinancing. Several of my colleagues have had short-sales in limbo for months and most of them have had many (if not most) of these types of transactions fail before closing.
The Tim at SeattleBubble has been quite articulate in questioning the future value of “pending sales” especially since the MLS eliminated the STI designation last year. The Real Estate Industry has been getting a lot of positive traction from the rise in pending sales; however, the proof of market strength is in closed sales.
The reality is, it’s not 2005!
I recently had lunch with one of my favorite Title Reps. He told me 50% of the transactions they have in escrow are failing. The vast majority of their paying business is in refinancing. Several of my colleagues have had short-sales in limbo for months and most of them have had many (if not most) of these types of transactions fail before closing.
The Tim at SeattleBubble has been quite articulate in questioning the future value of “pending sales” especially since the MLS eliminated the STI designation last year. The Real Estate Industry has been getting a lot of positive traction from the rise in pending sales; however, the proof of market strength is in closed sales.
The reality is, it’s not 2005!
Many buyers think they have a really good deal when a transaction has been signed by the seller at the offering price. The problem is many of these sellers just sign the deal thinking they can walk away from the balance owed just because the home mortgage is over the market value. Many of these transactions fail when the lender finally gets the short sale package from the seller requesting the short sale and the lender upon reviewing the package sees the seller has assets, i.e. no insolvency and it stops right there. If it makes it past that point many of these sellers are shocked when the short sale gets approved but they have to sign something that says they agree to make up the short fall at some point in time. The seller then kills the deal and lets the house go to foreclosure. The reason is that if the first lien lender forecloses Statutorily and there is a defiency then the defeciency the defieincy cannot be collected. I think that is why you are seeing a spike in foreclosures. Short sellers are realizing the reality of the situation and walking away. In the meantime the buyer has seen rates go up and these selcetion of inventory go down although in 190 days they can probably buy the home from the bank but the way that process works it might be six months or longer. Buying these distressed proeprties take time and persistence and you should not be attached to one house
Excellent comment, George. That is particularly true of the first mortgage. There is a recent case suggesting it may not be true for the 2nd mortgage. I don’t agree with it, particularly when the 1st and 2nd mortgages are held by the same entity, but that is the rarity vs. the norm. I also think the decision in the case was incorrect, as the judges were siding with the 2nd mortgage holder over the 1st, without considering the impact on the owner who was not part of the suit.
A short sale is a house that is not really for sale. I’m surprised they allow them in the mls for that reason.
Chuck,
A large number of sales that do close, are no longer closing in 30 days. So expecting closings in a 30 day period to compare to property going into escrow during that same period, is likely no longer realistic, even if they are not short sales.
It was determined short sales are a smaller per centage than reported.
What I would like to ask is why title companies have a big business in refinances. In my opinion title companies have raked in about as much as anyone could for Real Estate. I would really like to see some regulation in that industry. It’s a joke, a disaster, and an old boy network of winks, and nods.
The consumer pays for money manipulation to make it look like title companies do something.
It was determined short sales are a smaller per centage than reported.
What I would like to ask is why title companies have a big business in refinances. In my opinion title companies have raked in about as much as anyone could for Real Estate. I would really like to see some regulation in that industry. It’s a joke, a disaster, and an old boy network of winks, and nods.
The consumer pays for money manipulation to make it look like title companies do something.
Ardell – Your last sentence in comment #4: “A short sale is a house that is not really for sale. I’m surprised they allow them in the mls for that reason.”
Truer words were never spoken! In fact, when you think about it, the short sale process is “un-selling a house.” This is why I can’t understand why real estate agents would want to involve themselves in the process. 1) Short sales are beyond the scope of most agents’ area of expertise, 2) There are too many conflicts of interest inherent in the process, 3) Agents are in the business of selling homes, not un-selling them (at least that’s what I thought).
Recently, an escrow agent told me that after 3 1/2 months of hard work, a short-sale fell apart because the lien holder reduced the agent commission to 4%. The agents tanked the deal. What’s up with that? Short sales are a perfect environment for professionals to do the wrong thing rather than stick with what they know.
Good comment, Tom, and I was remiss in not referring to the posts in Seattle Bubble – those threads are worth reading through. In the “One in Three Fail To Close” post The Tim does some nice analysis work on this, as always. But a key point in this discussion is the one in the Recent Spike post where The Tim says:
“However, last week reader “One Eyed Man
Good comment, Tom, and I was remiss in not referring to the posts in Seattle Bubble – those threads are worth reading through. In the “One in Three Fail To Close” post The Tim does some nice analysis work on this, as always. But a key point in this discussion is the one in the Recent Spike post where The Tim says:
“However, last week reader “One Eyed Man
Ardell #4 and James #7, I guess I have to disagree: Ardell – Your last sentence in comment #4: “A short sale is a house that is not really for sale. I’m surprised they allow them in the mls for that reason.
Ardell #4 and James #7, I guess I have to disagree: Ardell – Your last sentence in comment #4: “A short sale is a house that is not really for sale. I’m surprised they allow them in the mls for that reason.
David,
More regulation re Title would have to be State to State, as “Title” has a more significant role in “non-escrow states” where Title cost includes the closing function. When I first moved from East Coast to West Coast in 1998, it did look like duplicate charges, but I haven’t compared the total cost with non-escrow states recently. Used to be in non-escrow states, Title Company did the closing pretty much gratis except for 3rd party costs like County recording fees.
James,
A sale cannot #fail on commission issues. Agents are not party to the purchase and sale contract, and the commission is via separate listing contract that is not part of closing, except by “common practice”. If the escrow company won’t close it out, try moving it to an attorney based closing.
My guess is the payoff was such that the only way to “clear the table” was for someone to bridge the gap, vs the lender stating “4%”. The normal situation would be there is $320,000 in net proceeds after costs (including commissions) and the lienholder won’t accept less than $325,000. Someone has to come up with the extra $5,000 for it to close. While someone at escrow may say “if the agent’s reduce their commission by $5,000 we can close it” that is not the same as saying the sale failed on commission dispute issues. This is not true in all states. Some states include the commission amount as part of the purchase and sale contract between the buyer and the seller. CA did last I looked; but not WA in most cases, FSBO being the exception.
The mishandling of short sales happens when everyone is only talking about what the house is worth and what is owed, which is often irrelevant in short sale negotiations. The seller has to prove a hardship or sign a personal note for the difference, in most cases. The lienholder gets a full package that the buyer doesn’t see that indicates full financial position. If the seller is showing equity in another property or a stock portfolio, the gap is put there for the seller to pay it based on the financials, not the agents.
It amazes me that sellers still answer “yes” on Form 17 Seller Disclosure Statement on the first line that says “do you have sole authority to sell this home?” The answer is NO and that is why it is a house that is not really for sale. It’s the same as if a wife tried to sell a house without her husband’s consent…and no mls would let a listing like that get “in”.
James,
re “3 1/2 months of work”…I recently opened an escrow on a short sale for a buyer client. It became obvious to me, though not the listing agent, that it couldn’t close. I knew this by the end of the first week. We switched to a different property. Any agent or escrow should know if it’s a long shot or a safe bet pretty early on in the process, and the buyer deserves to know that all short sales are not created equally based on seller factors NOT what is owed vs. sale price. It’s not a numbers game where you see what sticks to the wall and make everyone work unnecessarily without being forewarned that this one is a “long shot”, so they can manage their time and resources accordingly.
Chuck,
In most cases there is no lender consult or approval to sell the property before it goes in the mls, consequently it is not listed in good faith. “Seller does not have “the authority to sell” should not be in mls.
For some mls services I would agree with you. Some mls services allow the seller to say “subject to seller finding suitable replacement housing”. Our mls does not allow listings with this type of contingency (many do) as it is potentially “not really for sale”. So making the exception for short sale properties with NO prior indication that the lender will consider a short sale, is inappropriate.
I think they should move to “letter on file from lienholder indicating a willingness to consider offers”, at minimum. That would force the seller to provide the short sale package from the seller side to the lender in advance of offers being made.
As Jillayne has indicated time and again, often the lienholder will not release the seller from future obligation at the end, and that is what causes the sale to fail. Our paperwork at present has no place where the seller indicates UP FRONT what their position will be if they are presented with the option to close IF they sign a note for the difference. There is really no reason this has to wait until the sale fails 4 months in, only to find out that because the seller has the means to pay, but won’t. There should be a “letter on file that seller agrees to sign an unsecured note for the shortfall, if needed for the sale to close”. Then the agents and the buy can better calculate the odds of it closing, and more will actually close.
The reason many are failing is not the bank’s fault, as many of these issues could have been foreseen, but the right questions are not being raised prior to the property being listed in the mls in the first place.
Chuck,
In most cases there is no lender consult or approval to sell the property before it goes in the mls, consequently it is not listed in good faith. “Seller does not have “the authority to sell” should not be in mls.
For some mls services I would agree with you. Some mls services allow the seller to say “subject to seller finding suitable replacement housing”. Our mls does not allow listings with this type of contingency (many do) as it is potentially “not really for sale”. So making the exception for short sale properties with NO prior indication that the lender will consider a short sale, is inappropriate.
I think they should move to “letter on file from lienholder indicating a willingness to consider offers”, at minimum. That would force the seller to provide the short sale package from the seller side to the lender in advance of offers being made.
As Jillayne has indicated time and again, often the lienholder will not release the seller from future obligation at the end, and that is what causes the sale to fail. Our paperwork at present has no place where the seller indicates UP FRONT what their position will be if they are presented with the option to close IF they sign a note for the difference. There is really no reason this has to wait until the sale fails 4 months in, only to find out that because the seller has the means to pay, but won’t. There should be a “letter on file that seller agrees to sign an unsecured note for the shortfall, if needed for the sale to close”. Then the agents and the buy can better calculate the odds of it closing, and more will actually close.
The reason many are failing is not the bank’s fault, as many of these issues could have been foreseen, but the right questions are not being raised prior to the property being listed in the mls in the first place.
Good comments, Ardell. Our favorite camel form, Form 17 doesn’t allow for a condition on the sale with its “sole authority to sell” phrase, but the NWMLS Listing Agreement form clearly does with its Line 6 “Seller has the right to sell the property on the terms herein” along with a check in the Third Party Approval Required/Short Sale box.
Your last paragraph is perhaps the most important one “many of these issues could have been foreseen, but the right questions are not being raised prior to the property being listed in the mls in the first place.” At least the folks going through the CDPE training have been thoroughly drilled on this stuff, and should be able to decide whether they can take a viable listing from their seller clients, and should be able to advise their buyer clients whether a purchase transaction has a reasonable chance of succeeding.
As usual, I’m late to the comment parade.
James said he was told by an escrow agent “that after 3 1/2 months of hard work, a short-sale fell apart because the lien holder reduced the agent commission to 4%. The agents tanked the deal.”
OK, there’s a few layers of hearsay in there, but if a real estate agent insists on taking 0% instead of 4% for “3 1/2 months hard work” he (or she) deserves every nickel.
As usual, I’m late to the comment parade.
James said he was told by an escrow agent “that after 3 1/2 months of hard work, a short-sale fell apart because the lien holder reduced the agent commission to 4%. The agents tanked the deal.”
OK, there’s a few layers of hearsay in there, but if a real estate agent insists on taking 0% instead of 4% for “3 1/2 months hard work” he (or she) deserves every nickel.
Last week I learned of another sale that fell through for the same reason but at a different condo community; this time 525 Town Lake. In this case the HOA receipts at 525 Town Lake are 36% under budget. Expect prices there to drop as a result. But be careful not to get lured just by the low prices as there is potential risk in buying in a community where the HOA is unstable or at financial risk. I’m not saying not to buy there, just know what you’re getting into and know potential risk before doing so.
The AZ Rep reported today about problems at Summit at Copper Square. I’m not privy to the financial matters at Summit but I will say this; the owner David Wallach is very hands-on and working hard to see the high rise condo building through these tough times. He is currently renting out condos at very very competitive prices (contact us for details or to see the condos). The added cash flow from the rentals will hopefully keep things afloat. It’s amazing what a difference just a few months made during the boom/bust cycle. Summit delivered condos starting roughly December 2007 and closed approximately half the units. If construction had finished six months earlier I think that most of the condos would have closed. But then again, if construction had been completed six months later I bet only 10% of the condo buyers would have closed.
Ya know, I’d never heard of Copper Square. So, I did some research. Man, the internet is cool.
“I would avoid the Summit at Copper Square. Poor build quality, bad management, non-responsive developer, and you’re right next to the train tracks with train horns blaring at all hours. Bad deal all around; and I hear that there are still lawsuits pending against the developer.”
http://www.city-data.com/forum/phoenix-area/296648-working-downtown-phoenix-curious-about-moving-10.html
So I did some more checking and read about how people bought a condo and the parking wasn’t included. I bet he sure is renting them out at good prices, since you’ve got to pony up another 30K for a parking spot.
This is what buyers on the internet do. Research. Sometimes it just leads to a lot of junk. Sometimes, it leads you to newpaper stories about how developers give you brochures that say, “valet parking” and 3 years later say, “Gimme 30K.”
How do you sell a condo downtown in Phoenix without parking?
Answer? You don’t. Better get another 30K mortgage if you want to sell. Seems they were going for ~305K a little while back. Some are for sale for 240K now.
Boy, sure makes me want to check that place out and move right in.
I live at The Summit and know Mr. Wallach personally.
First of all, the construction quality is top notch and the finishes are all high end. Their IS parking, and the reason parking in the building was sold separately was to give us owners a real value of (1) our unit and (2) parking. Most developers bundle it together so that you really do not know your value. While I believe everyone bought parking, it was not required.
As for the lawsuit, their is one against the property from the General Contractor, which was caused by the bank that financed The Summit being closed by the government at the tail end of construction. If you read the articles, and really know what is going on, you would know that the developer and the GC are in contact with each other and trying to work it out.
There is a train next to The Summit, but within the next month the train horn will be quieted as part of a “Quiet Zone,” which Mr. Wallach has been working on for the last 4 years.
As you said, the internet can be a wonderful place, but first hand knowledge is even better. You would do yourself a favor and tour The Summit if you ever come to Phoenix…you will find it to be one of the best condominiums you have ever been to.
Ya know, I’d never heard of Copper Square. So, I did some research. Man, the internet is cool.
“I would avoid the Summit at Copper Square. Poor build quality, bad management, non-responsive developer, and you’re right next to the train tracks with train horns blaring at all hours. Bad deal all around; and I hear that there are still lawsuits pending against the developer.”
http://www.city-data.com/forum/phoenix-area/296648-working-downtown-phoenix-curious-about-moving-10.html
So I did some more checking and read about how people bought a condo and the parking wasn’t included. I bet he sure is renting them out at good prices, since you’ve got to pony up another 30K for a parking spot.
This is what buyers on the internet do. Research. Sometimes it just leads to a lot of junk. Sometimes, it leads you to newpaper stories about how developers give you brochures that say, “valet parking” and 3 years later say, “Gimme 30K.”
How do you sell a condo downtown in Phoenix without parking?
Answer? You don’t. Better get another 30K mortgage if you want to sell. Seems they were going for ~305K a little while back. Some are for sale for 240K now.
Boy, sure makes me want to check that place out and move right in.
Just discovered your site! Great RE info. I would agree that failed short sale attempts are the reason for the misleading stats.