Confusion and Lack of Disclosure Make for an Inefficient Market
An Everett Herald article reports that despite the growing number of housing forclosures, there isn't much actual buying activity at auctions on the front steps of the county courthouse. Also, there is plenty of risk for bargain hunters to make a serious mistake. Here is what I wrote:
If buyers at a foreclosure auction can easily not know what it is they are buying (ie: a second mortgage with outstanding debt vs the actual property unencumbered) then the market is not operating efficiently. Many potential bidders would justifiably be unwilling to show up. Since these auctions take place outside the county courthouse, this would be a legitimate service of government to set standards for full and understandable disclosure. Unfortunately, the entire real estate titling system is unnecessarily complex. No doubt this is due to layering of laws and practices over the years without thought as to how it makes the buying process more difficult. There is probably very little incentive to simplify it and make it transparent to people who buy a home two or three times in their life. The complexity provides an opportunity to charge for expertise and to hide flimflammery.
If buyers at a foreclosure auction can easily not know what it is they are buying (ie: a second mortgage with outstanding debt vs the actual property unencumbered) then the market is not operating efficiently. Many potential bidders would justifiably be unwilling to show up. Since these auctions take place outside the county courthouse, this would be a legitimate service of government to set standards for full and understandable disclosure. Unfortunately, the entire real estate titling system is unnecessarily complex. No doubt this is due to layering of laws and practices over the years without thought as to how it makes the buying process more difficult. There is probably very little incentive to simplify it and make it transparent to people who buy a home two or three times in their life. The complexity provides an opportunity to charge for expertise and to hide flimflammery.
posted by Glenn Harvey at 1:01 PM
3 Comments:
Well said, Glenn. What are the next steps to make that a reality?
Actually, Glen... These properties are listed in the paper for several days with plenty of opportunity to for potential buyers to perform proper research prior to placing a bid. It really is not tough to take a property tax ID # to your local escrow office to figure out if there are any outstanding debts or leins against said property. It is all about buyer beware. I do agree that it is unfair, yet unfortunatley, this is the "American Way". The same greedy attitude that put us in this mess to begin with.
Tawnya
I’m not an expert in real estate, so I am viewing these foreclosure auctions from the perspective of a typical consumer who might be in the market for a bargain but sees this process as far too risky for the uninitiated. The article noted that there were not many buyers for the available properties. My point is that the two may be related.
Tawnya, I reject the idea that acceptance of something that is “unfair”, as you admit, is the “American way”. The American Way is to innovate and problem solve. And, from a purely economic view, anything that increases the extent of the market will increase profit for those who have something to sell.
The current process is a throwback to the Middle Ages when towns hired “criers” to make official pronouncements because most people couldn’t read. The idea of having to show up outside a government building with a cashier’s check for several hundred thousand dollars in your pocket to make an all-or-nothing-now-or-never deal is going to set off warning bells in the minds of most prudent buyers. And, having the information buyers need to make an intelligent decision (such as outstanding liens, mortgages and other encumbrances) scattered in different locations, often needing expert interpretation and sometimes unavailable (like what the inside of a building looks like if it is still occupied and considered a private residence) is not conducive to understanding the real value of a piece of property and is quite likely to lead to costly mistakes.
Leo, some things that could be done to reduce the risk of these kinds of transactions and in the process increase the number of people who are willing to participate might include:
Make information about a property easily available in one location. Counties already have some of this information available online at different web search engines. However, it is often just raw documents requiring interpretation and doesn’t give dollar amounts. Contrast this with the kind of information given by WA Labor & Industries to homeowners who are considering hiring a contractor. In one location, homeowners can learn if the contractor has industrial insurance, a bond, needed licenses, liability insurance and see the contractor’s history of violations. This is good information that can help the homeowner avoid unanticipated liability or shoddy workmanship.
It should be the responsibility of the seller (in this case the bank that owns the foreclosed property) to make a standardized and easy to understand financial disclosure including any liens or other encumbrances – in the same way that any seller is required to disclose significant information about a property they offer for sale. The seller should be held accountable for the accuracy of that information.
Make the inside of the property available for viewing.
Do away with the “steps of the courthouse” anachronism and have the auctions handled through the normal real estate sales system where a buyer is represented by an agent and properties are advertised in a way designed to sell rather than just meet legal specifications. Rights of the owner who is in default could still be preserved. In the 1970s, HUD used to conduct bidding on repossessed homes where buyers could look at the properties. After making a small deposit, they could make sealed bids through their agents and arrange financing. The winning bid would be announced several days later. If the deal fell through with the winning bidder, the next in line’s bid would be accepted.
I’m sure there are other improvements that experts in the field of real estate could suggest that would make the deal more transparent, reduce risk for the buyer and increase the number of people willing to participate.
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