REO's as comparables to non-REO

[KenAZ]

There is no "One Size Fits All"

You are the expert in the market. If the market is all REO's then that is what you use as comps. Going to a different neighborhood is never good. All you are doing is appraising the house "AS-IF" it was in that different neighborhood.

Your response should quote FNMA guidelines. You are to use the most similar in size, proximate and recent sales available.

Here are a few comments:

That sale 1.5 miles away, does not represent values in the subject neighborhood. It is too distant and is less reliable than sales in the immediate neighborhood.

REO sales are the market in the subject neighborhood. Going 1.5 miles away where there are non-REO sales, is an obviously a superior neighborhood, and would artificially inflate the appraisal value if used.
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It is a catch-22. If you are in a market of 100 percent REO sales, and go to a distant neighborhood in which there are plenty of non-REO sales, then what is the explanation. Why are there non-REO sales in the other neighborhood but not in the subject's?

If you use only REO sales in the immediate neighborhood, what would the subject sell for if it was not an REO sale? (Obviously unknown, because of lack of data)

You have the solution deep inside yourself. I figured it out when I purchased my home. I looked at all types of sales, and ended up with a short sale. It was the cheapest, but required a lot of patience and painful negotiations.

I figured out how much more I would pay for an REO over a short sale. I also figured out that the owner sales were too high, and basically for lazy people that are willing to pay more and negotiate less. (Very small percentage of the market)

The typical buyers I was competing against were those willing to buy an REO. The buyers looking for an owner sale in our market, just plain do not exist, unless the home is priced the same as the REO sales.

You have the answer. Pretend to be a buyer. Drive the listings in your own neighborhood. Look at the sales, REO, SS and owner sales. In my case, there were plusses and minuses for all three types. They all appealed to the same buyers, if priced correctly.

 

[Elliott]

One REO of 5 comparables ins't dispositive. Or two REOs of 5 sales.
But they influence the final value estimate and keeps it
from being based solely on the non-REO sales.

 

[DMZwerg]

You are the expert in the market.

On that we agree.

If the market is all REO's then that is what you use as comps.

Nope. You may use them to help develop an opinion of market value but they are NOT normally comps as they are not normally comparable to the value an appraiser is opining.

Let us say the subject is a 500 acre parcel and there have been NO sales of parcels of over 40 acres in a 50 mile radius in the last 5 years ... does that mean that 500acres of land is thus worth the same as the 40 acre parcels or would the smaller parcels merely be used to opine value even though they are not comparable.

Going to a different neighborhood is never good. All you are doing is appraising the house "AS-IF" it was in that different neighborhood.

Depends on WHY you go outside the neighborhood and WHAT you do with the information and HOW.

Let us suppose both NBHDs have enough REOs that a number of trends can be established, such as a REO/Normal sales price ratio. This could then be used to support an opinion of value that includes a number of REO properties in the report, not as actual comparables but rather as a starting point with them entered into the SCA matrix. The trap is including them in the SCA matrix and giving them weight as if they were actual comparables WITHOUT crunching the hard numbers and using supportable adjustments (adjustment could be zero but should be well supported with data).

Your response should quote FNMA guidelines. You are to use the most similar in size, proximate and recent sales available.

How is an REO similar to a non-REO?
They are often purchased for cash rather than financed, often have different typical buyers, and the sellers have completely different motivations and thus are not comparable. An appraiser may be able to quantify the similarities and differences, and in some limited cases they may be virtually identical, but appraisers need to comprehend the inherent differences and due sufficient research to support any adjustments.

That sale 1.5 miles away, does not represent values in the subject neighborhood. It is too distant and is less reliable than sales in the immediate neighborhood.

Specific case or in general?

I ask because with some rural properties adjacent TOWNSHIPS can be comparable competing neighborhoods and prospective buyers in some sub-markets may actually look at properties dozens of miles away to fins available properties in those sub-markets (hobby farms, gentlemen's estates, and so forth).

REO sales are the market in the subject neighborhood.

Even if REOs are 100% of all sales in the last year in a 1.5 mile radius in a urban area that does not make them "the market" for determining market value when the value desired is not distressed sale value (aka, value determined is "fair" market value).

They may well be all that is available locally but that would be like saying since there were no sales of duplexes in the time/area SFR sales ARE the market for two-family properties. Ridiculous. Wrong market.

Yes, a market can exist even though there have been no sales for some short interval of time. Mathematically, by examining the limit of the time interval as the length of the interval approaches zero, it could be shown that even though there were no sales between two seconds on a particular day there was still a market. Lack of sales do not in and of themselves negate the existence of a market.

 

[residentialguy]

There was an appraiser, ResGuy or something like that, in MN that was a proponent of using traditional sales only and if you did use distress sales, to adjust for them.

Maybe you can look him up on the forum and ask him how he does it.

Hey, I heard that! :laugh:

***whacks Randolph***

 

[residentialguy]

Most of the sales in the past 6 months are REO's (not short sales). The broker wants me to go outside the neighborhood (as far as need be) in order to use only non-REO's for comparables. He suggested using a comp that was 1.5 miles away and out of the neighborhood. The REO's in the immediate neighborhood are in the same condition and are selling in the same amount of time as non-REO's. What does everyone else do? Am I ok using REO sales? I have looked on fanniemae.com for info but haven't found anything on this subject. If anyone can lead me in the right direction for more info i would appreciate it.

You say "most of the sales". Do you have any traditional arm's length sales in the area? What is the market like 1.5 miles away? It is common to pull comps 1.5 miles away when you don't have a good comp. And a good comp goes beyond physical characteristics of the home.

The estimated market value MUST be a value that is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, 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: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) 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

You can use REO sales...but if the market sees a variance in value between an "as-is" vacant bank owned sale, where they have the advantage over the seller because they know they have to dump the house, then an adjustment will be needed for that variance. That variance, should there be one, must be supported by the market. REOs are tough to figure out. The agents don't have a clue. I've seen identical basic townhomes, similar condition, both REOs...sell $50K apart within the same time frame. Motivation of a REO seller? Good luck.

What about the buyer and seller of your sale? Do they fit the definition of market value? They are the market as well. While I would never suggest to use the subject as your main source of proof, it can be a good indicator of value where you can check it against your comps. If you see a discrepancy, more investigation is needed, imo. Either something is off with the subject, or something is off with your comps. Great caution is advised that you don't become biased to your subject because it is your subject. You don't want to "target" the purchase price. But it is a market indicator. How would another appraiser treat your subject's pending sale, if he were doing a refi on a similar property?

 

[Randolph Kinney]

Hey, I heard that! :laugh:

You have been derelict in your duties on the forum. Many threads (recently started) are all about saturated markets with distressed sales. Get in in there and tell them your secret. :new_all_coholic:

 

[J Grant]

Some of what I am reading here is amazing. The appraisers not using REO comps in an REO comp driven market (when they are most similat to the subject,) and instead are going 1.5 miles or 5 miles etc to find non REO comps, I think your values are going to be misleading. There is another thread under urgent about Chase and appraisers not using REO comps when warranted. Even FHA has now come out with an opinion that REO comps should be considerd when they are a strong presence in the market. I think the appraisers ignoring REO comps when they are direct competition to the subject are not interpreting market value correctly. They are dividing "the market" into REO and non REO comps. Who told them to do that? Who said the market should be divided like that? They are dividing "the market", because in their opinion, REO comps are "distress sales", and don't meet the standard for arms length transactions. In many markets, distress is the typical motivaion now for selling, both REO and non REO. And if distress or duress is present in a lot of seller motivation, it is typical of an area . Similarly, if many buyers in an area are purchasing REO sales, they are typical buyers now. In many markets, the same buyers are looking at REO and non REO.

Appraisers relying on studies that "REO's sell for less than 30% of "the market", where are you getting these studies from? Are they reliable? Do they relate to your subject? If you are running the data, how are you asking the computer to separate REO and non REO sales?

Even if such as study is reliable and pertains to the subject area, it is not a good guide to what a residential appraisal is asking for, which is market value, defined as "what is the most probable price the subject would get if put on the market the effective date of the appraisal? " If the subject is a 1200 sf 3 bedroom house in Cherry Hill Subdivision, and 1/2 the comps are REO's, with same square footage condition as subject, they are competition for the subject. Buyers are not going to run around saying, "the subject is not an REO , therefore I will pay 30% more".

The studies are flawed. If buyers are truly paying 30% less for REO's in an area, than something is wrong. If the terms of sale for REO 's in that particular area is so different than for regular sales, then I would agree, don't use them. But if they are on MLS with typical contracts , why are people paying less? Because they are in worse condition than the subject? If they are in that much worse condition, then yes, they shouldn't be comps, just as any other terrible condition home is not a good comp for a good condition home. But if the REO comps for the subject, in similar condition, are sold on MLS, I doubt they are selling for 30% less than "the market". In most areas where enough REOs and short sales are present to impact market activity, "the market" has already been affected by price, therefore, to artifically divide it in a study nobody is asking you to do, separating the market into non REO's and REOs; is creating a double adjustment. And when I say nobody is asking you to do that study, it is not a case that I am too lazy to do such a study, it is that by doing such a study, you are deciding to divide "the market" into REO'
s and non REOS. which now artifically divides an area market up into two markets, and thus leads an appraiser to ignore competitve sales and start going out of the area for non REO sales when there sales all over the subject street that are REO's, I think these reports are providing misleading values for the subject .

 

[J Grant]

And a good comp goes beyond physical characteristics of the home.

Not to a buyer ,in most cases. The buyer is looking at the physical characteristisc of a home, they are not moving in or dating the seller. People here keep posting about seller motivation, buyer motivation is actually more important and drives the market and can not be ignored. Most banks now are very proficient at handling REO and even short sales, the process is faster and much more straight forward than it used to be, and not all owner occupied sales are quick to close , and can in fact close slower than REO sales as REO's are vacant. IF a buyer is paying slightly less due to dealing with a bank, just weight the non REO sales more, or make an adjustment but most time an adjustment is not needed.
There is much less of a stigma now, or non, for buying REO.

The estimated market value MUST be a value that is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, 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: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) 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

The above many REOS meet the defintion, there is not specical or creative financing, the buyers and sellers are well informed, and if enough banks sales are present, their motivation for selling becomes typical in an area. Undue stimulus is not really present, the sales have already been taken back by the bank, and a bank perferring to sell in 90 days is not exactly undue stimuls. ( plus, again, if present in predominate number, what used to be considered undue stimulus is now a typical motivation). Plus, many sellers are subject to undue stimulus, especially these days, they are behind on their mortgage and need to sell before they go into foreclosure and many other scenarios. I think apprasiers have to understand the markets they are apprasiing in, there are areas of course where it is not applicable to use REO comps, but to not use them when they are direct competition to subject not in some cases analyzing the market properly.

 

[Metamorphic]

You have been derelict in your duties on the forum. Many threads (recently started) are all about saturated markets with distressed sales. Get in in there and tell them your secret. :new_all_coholic:

So I wasn't the only one that noticed!

 

[residentialguy]

I think the appraisers ignoring REO comps when they are direct competition to the subject are not interpreting market value correctly.

Do you have a link to someone saying that we should ignore REOs? I missed them. Thanks!

In many markets, distress is the typical motivation now for selling, both REO and non REO. And if distress or duress is present in a lot of seller motivation, it is typical of an area .

Market value does not change with the flavor of the day. Undue stimulus is present. You can use them, if necessary, but you must always ask if the market sees a value difference in them. If they do, then an adjustment is necessary.

Similarly, if many buyers in an area are purchasing REO sales, they are typical buyers now. In many markets, the same buyers are looking at REO and non REO.

No argument there. Now, would they pay the same price?

Appraisers relying on studies that "REOs sell for less than 30% of "the market", where are you getting these studies from? Are they reliable? Do they relate to your subject? If you are running the data, how are you asking the computer to separate REO and non REO sales?

Good questions. Equally good is "are appraisers relying on the very potentially false premise that absence equals no value?"

Even if such as study is reliable and pertains to the subject area, it is not a good guide to what a residential appraisal is asking for, which is market value, defined as "what is the most probable price the subject would get if put on the market the effective date of the appraisal? " If the subject is a 1200 sf 3 bedroom house in Cherry Hill Subdivision, and 1/2 the comps are REOs, with same square footage condition as subject, they are competition for the subject. Buyers are not going to run around saying, "the subject is not an REO , therefore I will pay 30% more".

You're dictating the market, not listening to it. You're a just messenger.

The studies are flawed.

Always investigate and verify, but never ignore the evidence...otherwise, skip the analysis and just give them your opinion.

But if the REO comps for the subject, in similar condition, are sold on MLS, I doubt they are selling for 30% less than "the market".

I've found that to be true here, too. Esp in saturated areas. The more saturated, the high "pull" it has on traditional type sales. I have found 30%+ variances in area of higher end homes where REOs are infrequent.

In most areas where enough REOs and short sales are present to impact market activity, "the market" has already been affected by price, therefore, to artificially divide it in a study nobody is asking you to do, separating the market into non REOs and REOs; is creating a double adjustment. And when I say nobody is asking you to do that study, it is not a case that I am too lazy to do such a study, it is that by doing such a study, you are deciding to divide "the market" into REOs and non REOS. which now artificially divides an area market up into two markets, and thus leads an appraiser to ignore competitive sales and start going out of the area for non REO sales when there sales all over the subject street that are REOs, I think these reports are providing misleading values for the subject .

I believe you are confusing someone researching the market to verify that they are truly comparable with ignoring. To not research the market and provide an estimated market value that doesn't fit the definition stated on your FNMA form is misleading, since it is most likely a different value.