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You Really Ignore Bank Sales?

Discussion in 'General Appraisal Discussion' started by Sean Wagle, Nov 26, 2003.

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  1. Sean Wagle

    Sean Wagle Sophomore Member

    0
    Apr 18, 2003
    Professional Status:
    Banking/Mortgage Industry
    State:
    North Carolina
    I read with interest a few months ago, a forum topic about how bank sales aren't considered arm's length transactions, and how lenders (and buyers/sellers/Realtors) throw a fit when a bank sale is included as a comp in an appraisal.

    But as a matter of "real life", I don't see how it makes sense to ignore them. A buyer bought the bank sale, and moved in. Ya think they didn't compare prices with the MLS houses?

    Here's a neighborhood in my area, with 6 sales this year in a given subdivision. All fairly similar age, construction and size.

    100K (MLS)
    94K (MLS)
    65K (dumped by bank for less than trustee deed)
    66.5K (dumped by bank for exactly trustee deed)
    60K (dumped by bank for less than trustee deed)
    75K (trustee deed.... whadda think the end buyer will pay?) <_<

    A house in the area went into foreclosure a few days ago, and the bank bid was $51K. And... I didn't buy it. One reason being, that I think I'd be competing with other 60ish thousand $ bank sales for the resale. :unsure:

    I suppose another argument could be, that somebody bought those 90+K houses. So it's "possible" to do it. But it's hard to put money into mere plausibility.
     
  2. Mike Garrett RAA

    Mike Garrett RAA Elite Member

    48
    Jan 14, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    Doing a manufactured house on 2.5 acres right now. The contract is in the mid $140,000 range. Three liquidation sales within 1/2 mile of the subject property....highest is $128,000. Real estate agent wants me ignore those sales and use sales of other manufactured homes more than 5 miles from this subdivision. She is using your logic....those sales are not valid sales. I just smile and type away....going to be unhappy campers on this one! :lol:
     
  3. Terrel L. Shields

    Terrel L. Shields Elite Member
    Gold Supporting Member

    741
    May 2, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Arkansas
    There is a joke in Adair County, OK about the largest landowner in the county being the Sheriff. It has a damping effect on prices.
     
  4. Tony in Ohio

    Tony in Ohio Member

    0
    Jan 15, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Ohio
    I did not read the comment you mentioned but heres my take.

    I donot use or give any weight to a transfer (sale?) of of a property to a lender at sheriff sale. Lenders send a representitive who typically has instructions to bid up to the amount of their lein on the property. If their are no other serious bidders, they often make a token or minimum bid. If there is another bidder they must seriously lowball since they usually have not had an interior inspection. If you (any reader) have never been to one, you should go and observe, now that we all have more free time.

    I can and do use sales of homes that have sold from a lender to a third party, especially if they were offered through the local MLS. How distressed the sale is will vary by market.
     
  5. Tony in Ohio

    Tony in Ohio Member

    0
    Jan 15, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Ohio
    I guess I should have used the preview feature to check spelling and grammer.

    Oh well, Happy Thanksgiving
     
  6. Oregon Doug

    Oregon Doug Senior Member

    0
    Jan 15, 2002
    Professional Status:
    General Public
    State:
    Oregon
    Sean - I'm not sure I understand your inquery so maybe I'm going at it the wrong way.

    I don't understand your term "bank sale", I think you are you refering to the market sale of an REO home via Warranty Deed. A sale via Trustee's Deed is basically how a home enters foreclosure and is not a market sale.

    Oregon Doug
     
  7. Richard Carlsen

    Richard Carlsen Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Michigan
    Tony

    I think your take is wrong. You have to go one more step in the process.

    They are not referring to the Sheriffs sales on the foreclosed property but the liquidation sale later when the buyer at the Sheriffs sales (usually the lien holder) liquidates the property to recapture what they can of the loan on the property. These are often put in the hands of brokers for marketing.

    What I actually look at is the asking price of any bank owned properties out there that are similar to the subject. The Principle of Substitution really comes into play when there are significant numbers of bank owned properties that would compete directly with the subject.
     
  8. Ghost Rider

    Ghost Rider Senior Member

    0
    Apr 27, 2003
    Professional Status:
    Banking/Mortgage Industry
    State:
    Connecticut
    Richard is dead on with this one - it's going to depend a LOT on the market that you are in, which is why geographical competancy is a very important part of USPAP.

    My theory when it comes to Bank sales, foreclosure sales, etc is this: They don't fit the basic definition of market value. Market value is based on the most probable price that would be arrived on based on having similarly motivated buyers and sellers involved in the transaction. Most lenders that foreclose on a property, then sell it on the open market do not meet that definition. They just want to clear the property off their portfolio, and get rid of it - Banks do NOT like the carrying costs of holding a foreclosed property (Property taxes, insurance, cost to have someone check the property, utilities in the winter to keep pipes from freezing, etc) and as such, many times they will be willing to take less than full market value to just get rid of it. It's important to remember that with bank transfers, the seller (in this case, the lender) isn't concerned about the equity position in the property (if any) and being able to protect that position - all they are concerned about is getting out of the transaction and breaking even.

    The exception to this is in areas where foreclosure rates are high, and the sheer volume of foreclosure sales affect the rest of the market. Thats when the theory of substitution really comes into play. In most areas, where the sales of REO/Bank owned properties make up an extremely small segment of the market, they typically don't have a signifigant affect on property values. When they start increasing in volume, they can "make the market" and your typical seller will be forced to compete with the REO sales, which can cause a HEAVY depression in Real Estate values, and devistate a market - You really need to know whats happening in the area to properly complete an appraisal in a market like this.
     
  9. Sean Wagle

    Sean Wagle Sophomore Member

    0
    Apr 18, 2003
    Professional Status:
    Banking/Mortgage Industry
    State:
    North Carolina
    Doug: I'm in agreement with Richard and MHMerriman. Yes, the trustee sale price (what happened at auction) has little to do with the market. It's the end buyer price (what the bank sells it for) which I'm referring to. This is just one section of town. There are other areas where I rarely see foreclosures, and when there are, bidders show up at the courthouse to scoop them up.

    Although, I might add, that the "auction" price doesn't exist in an economic vacuum. It costs a lender at least $1000 in attorney's fees to conduct a foreclosure. And by the time a house goes to sale, that mortgage may have been in default for close to a year. $6000 in overhead for an entry-level home is quite common.

    Whether the lender decides to try and recover those costs at auction, (including them in its opening bid) is determined by how low the balance of the loan was, the condition of the property (usually not too well maintained) and how many foreclosures have been ocurring in the area.

    In a buyer's market, the bank may have piles of REOs already. It could ask for even less than the balance owed, and eat the overhead costs too... in the hope than an investor will bid for it.

    When you've had a big, filling meal, how much would YOU pay for coffee and dessert? :p
     
  10. xmmcsmielr

    xmmcsmielr Junior Member

    0
    Feb 4, 2002
    REOs as comps were discussed on the A.I. Forum during the past several years. As I recall, the conclusion there was that these types of sales do not meet the definition of market value, as another post on this Forum pointed out.

    And, even though there be multitudes of REOs in a market, the answer to using REOs as comps, according to some on the A.I. Forum, was still "don't"! They explained that marketing times for non REOs had to be extended to reflect eventual absorption of the large number of REO listings.

    Part of the A.I. discussion involved Resolution Trust REOs, which were purchased shockingly low, then resold within a relatively short time at much higher prices.

    The A.I. set of email reviews pointed out that condemning government agencies should not use REOs to arrive at prices paid for seized private property, and that tax value protests should also not use the REOs to arrive at "market value" assessments.

    In spite of that, I look at each individual situation. I agree with many of the posts on this Forum, in that a flood of REOs in a market area determines that market, particularly if marketing times for non REOs have to be extended to over one year.

    For example, some of the manufactured house districts in Tucson's metro area have supplies in MLS that are way over one year. In one case, there were enough listings for over two years, at the past year's average monthly absorption rate. In that report I used five REOs and one non REO as comps, saying in a text addendum that I included the REOs, because out of 14 sales, 11 were REOs with over a two year supply of listings.

    If that type of market study is not according to Hoyle, then I guess I missed the mark.
     
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