Seattle Bubble

Tomorrow we’ll have the monthly foreclosure report for May, but today here’s a comment left by “Ross” in the reporting roundup last week that deserves to be highlighted. Ross recounts his experience attempting to buy a bank-owned (i.e. – foreclosed) home:

On a foreclose property I was watching, here’s my experience:

• Last purchase price (2006) – $550K
• Loan amount – $495K
• Estimated peak pricing – ~$600K.
• Property foreclosed in August 2008 to bank.
• Local broker starts marketing the property in Sept 2008, initial price @ $550K. He specializes in BPO/REO sales.
• I noticed the property, and since I rented on the same street, knew the area. But $550K was too overpriced.
• Price drops approx ~$25K – $50K every month, usually around the 10th of the month.
• By December, price is $425K.
• Jan 09 price is $390K, we offer $300K on Feb 2. Bank rejects the price. We counter @ $325K, bank agains rejects the price with little explanation (’too low’).
• Feb price drops to $375K, we re-offer $325K. Bank rejects.
• March, price drop to $350K, we again re-offer $325K, Bank counters at $340K. We stay firm at $325K and tell them our next offer will be lower (which gets the listing agent really upset and writes a slightly nasty reply that we’re behind the curve and the price is amazing blah blah blah).
• April, price drops to $325K, we again offer $325K and think we’re a shoe-in this time. However, before accepting our offer, bank pulls the listing and sends property to be auctioned at a REDC auction (www.auction.com) taking place in early May.
• We attend auction in early May at the Meydenbauer center, and win the property for 370K [correction: $270k] + 5% premium (going to the auction house), “subject to seller confirmation”. We place 5% non refundable earnest money (cashier’s check) and wait for “confirmation.”
• After approx. 3 weeks, and no response, our buyer’s agent lets us know the property is back on the market at 325K, and apparently this is our auction rejection notice.
• We re-offer 325K for the property and this time get acceptance in principal.
• Now comes the one-sided buyer’s addendum with a whole bunch of gotchas: bank only need supply “insurable title”, rather than “marketable title” (not being familiar with title matters I had to consult 2 attorneys on the difference). $100-per diem fee for later closing. Contract says seller will not pay any transfer or excise taxes. and a whole bunch of other verbiages that generally protect the bank, give them the right to back out and screw over the buyer.
• I bring the addendum to my lawyer who makes several changes. Submit offer and addendum with changes. Bank will not accept any changes (actually, they’ve outsourced the sale to a 3rd party who does not have the authority, supposedly, to accept changes). I ask that the decision be escalated. Reply is that a new addendum can be added and they will consider changes on new addendum, but no changes will be accepted on their addendum.
• Listing agent keeps telling us that he has other backup offers and even rejected one at 10K above asking (yeah right, nevermind his legal fudiciary duty to the seller to take the best price) and that he is doing me favours (yeah right) and generally rushes the process. I am not easily rushed.
• Much back and fourth ensues, and we finally get the legal matters sorted out more or less to my satisfaction (I accept some compromise based on my belief that the bank actually doesn’t want to keep paying carrying costs on the property and wants it to be sold =)
• Inspection and resale cert are acceptable.
• Locked in a mortgage rate of 4.25% on a 30yr fixed /w 1/2 pt & 25% down (lucky timing!)
• Closing date set in mid June and we should make it to close, I hope!

My conclusions (as a first time home-buyer):

• Bank have very poor and slow process.
• Bank actions almost make things seem like they don’t really want to sell their property.
• Their basic strategy appeared to be a Dutch auction: start the price above market value and drop price monthly to find a market clearing price. The problem is that the market was largely dropping with them, and so they could have sold the property much earlier and probably at a higher price if they had simply started the price at a realistic level and had some flexibility to accept lower than asking price. The Dutch auction strategy would work very well in a appreciating market, as each month’s appreciation will probably cover at least carrying costs.
• Auction process was a waste of time, money for the seller and an annoyance to buyers (and kept the property off the market for ~1 month of peak season, (i.e. May)) Side note: properties at the auction where financing was available (read: not in horrendous condition) generally sold for 40-50% off peak market pricing. I’m not sure if they were expecting a miracle, not sure why the bank sent the property to auction if they weren’t serious to sell.
• My wife became very frustrated with this process and was pushing me to just walk away several months ago. She has utter disdain for the seller and takes things personally.
• In the end, I got a property for approx 45% off peak pricing, record low interest rates and I should qualify for the federal tax rebate. I personally expect the overall market to also fall about 40% in the long run, though would not be suprised to see an overshoot in the short run.
• I calculated “fair market value” by averaging out comps from the early 1990s based on county records, adding 3%/yr for inflation and determining a fair price for this property would be around $325K – $375K. So my offer was not based on bubble pricing.
• In the long run, I don’t expect this property to make money, beyond inflation.

What experiences have you had dealing with banks on the buying end? Is Ross’ story a familiar one? Everyone knows that short sales are a pain and take a long time, but are just as many people having difficulties purchasing bank-owned homes as well?

Lets hear your stories.