REO Comps or non-REO comps

[Mike Garrett RAA]

The basic premise of appraising! A property is worth what someone will pay for it. Lets just suppose there were two identical houses, one being offered by an owner for, say, $200,000 and the other being offered by a bank (REO) for $180,000. If everything was the same...which one would you buy? If you say the one for $180,000, then you have just established a comparable.

Granted, most of the time, the REO will probably be in somewhat inferior condition. In fact, it might be in substantially inferior condition, but that could easily be adjusted for in the appraisal.

Failure to use REO properties, if they are present in your market, is...in my opinion, failure to recognize THE MARKET and that could and probably would cause your appraisal to be not credible and your subsequent appraisal report to be mis-leading.

Appraisers do not set value. We interpret THE MARKET. The market is the actions of buyers and sellers. Granted there are other caveats in the definition but, the above is basis. Something is worth what a buyer will pay and most reasonable buyers will look to the lower priced properties as a suitable substitute, especially in today's market.

IN MY MARKET, REOs are the market in many areas. Like it or not, until those properties are absorbed they will continue to influence values and appraisals.

 

[redfish]

I believe the bifurcated market you are seeing is caused by the agents directing people carrying around $8,000 of my money towards the Non-REO and ignoring the oppurtunities that abound in the REO segment.

 

[Mike Boyd]

Have you checked the non REO sales to see if it might have been a short sale? I know of several recent sales where the owner bought prior to the marketing bottoming out. Then, his business slowed to the point of his not being able to make the monthly payments. So, he sold out to an investor and took a significant loss. As far as I would be concerned, the motivation was similar enough. Also, look at it this way, there must be something about the non REO properties that made them that much more superior than REOs. In reference to STIGMA: I do not think that an REO has stigma as much as the other factors such as the required "as is" clause and the fact that disclosures are not needed. Also, maybe the APPEAL is inferior and your condition adjustments are not adequate. If you do proper adjustments, it should not make a value difference whether you use REO or non REO comps. In some cases, there could be FUNCTIONAL UTILITY adjustments. If all the cabinets are ripped out, the appliances gone, the heating/cooling system missing....can you really call that comp functional?

 

[Mile High Trout]

Good conversation

I like what Mike G. has said in the matter. It's all about buyer opportunity, and the principal of substitution.

Lots of Realtors question my use of comps that are short sales, or REO. But my position is covered by the argument of buyer opportunity.

When the distressed market is significant enough to be the majority of the market, or adversely effect the majority of the market which may not be distressed, those distressed sales have significant influence towards the marketplace.

I would keep away from giving adjustments just because of short sale, or REO. But stick with the tried and true, as stated earlier here. The short sales are typically in less appealing condition, and have usually not been prepped for sale the same way. Usually there are factors towards valuation that you can put your finger on, if you dig deep enough and call the listing agents if cards are not descriptive enough.

"Seller distress is apparent in this market, and typical valuation benchmarks are not as consistent due to distressed sellers. The appraiser has chosen comparable property sales from both the strong side, and weak side of the market of acceptably similar homes within strict bracketing peramiters, to best capture the......." Or alternatively: "The subject home is in great condition, and carries top appeal in the marketplace, comparisons with the several short sales noted below, were considered, but ultimately unused due to several factors, including curb appeal, positive maintenance....."

If there was only one single short sale, that buyer is buying at liquidation, and would correctly receive "instant equity" by purchasing in an opportunistic way. If there are many short sales, liquidation price has significant influence towards overall market prices, and in a way set's new benchmarks for the area. There is when the big drops happen, as sellers compete in increasingly saturated markets, and the "90 day" valuation continually drops with new listings.

 

[Surf Cat]

What the heck?! Why is everything such a freaking hassel. I'm sick of appraising.

My 11 year old says "What the heck?!" with such conviction that the above quote made me laugh.

I'm doing one just like this right now....everything's all over the place. ALL of the listings are short sales and are not indicative to what the most recent sales (arms length) show just 3 weeks ago. *Sigh* I just can't put a report together in a fairly reasonable amount of time lately....I have to input all these freaking comments explaining the crux of the matter/problem that the underwriter probably won't read.

What the heck?!!

 

[Mountain Man]

REO sales are distressed sales, have a stigma, repairs, a lot of trouble to get the loans closed, and buyers expect at least sweat equity if not entrepreneurial profit.


Market Value is defined as:
The most probable price which a property should bring in a competitive and open market under all conditions requisite to fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

• Buyer and seller are typically motivated;
• Both parties are well informed or well advised, and each acting in what they consider their best interests;
• A reasonable time is allowed for exposure in the open market;
• Payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and
• The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.


Soooo... which value did your client ask be appraised?

 

[CANative]

Subject, Pretty good condition, 1,300 sf 3/2 built in 1994. REO appraisal

Comp 1 - $307,500. No sale conditions (not reo or short sale) 1,400 sf 3/2 built in 1989. 94 days on market. Just close about a month ago. During the drive by comp inspection I noted they were putting on a new roof and there were new appliance boxes in the garage.

Comp 3, $209,000. Closed in April, REO. 1200 sf 3/2 built in 1988, 42 days on market.

 

[lovemyjob]

I think as long as the REO's are similar in condition to your subject and are the most recent sales, you have no choice but to choose them. If I were looking to buy and there was two homes side by side in the same condition, only one being an REO and the REO was much less expensive, your darn right I'd choose the REO, who wouldn't...

 

[Aprazr]

I did one recently in a gated community with 18 houses. ALL of them had been foreclsoed on, therefore, I used 6 of them as comps. and added 3 listings (all on the same street) This gated community was across the street from a well known Country Cub/golf Course.

Any of you run into 100% foreclosures, yet? Just curious.

Thanks to all!

 

[Tim Hicks (Texas)]

Lake Ridge Village in Cedar Hill has 98% foreclosures with typical $900,000 homes selling for $350,000 now. The truth is they shouldn't have been selling for $900,000 before and should be worth more than $350,000 now, but when there are dozens of foreclosure listings, several builder new construction abandoned properties, supply and demand takes over.


Boyd, Californians are crazy to pay that for cracker boxes.