REO's as comparables to non-REO

[J Grant]

Undue stimulus is present. You can use them, if necessary, but you must always ask
Res Guy, I agree with much of what you posted, ( I think, not sure of some of the verbiage, who it pertains to)
A few points re thought process about the issues:

Market value does not change with the flavor of the day. REO sales present for the past 2 years and ongoing listing activity with REO's and projectiosn that they will continue for another 2-3 years is hardly the flavor of the day. It is the market many of us are appaising in. So yes, we don't change the defintion of market value. But we have to look at whether the sales/listings meet the definition of market value, and in the case of many REO sales, they do meet the definition of market value. The division amont appraisers as to whether or not they are arms length, as well as meeting the standard, revolves around a couple of words, one of which is undue stimulus.

Nowhere in the guidelines does it state "Undue stimulus equals an REO sale" . There are a few sentences that state that REO's MAY present an example of undue stimululs. In many market areas these days, they don't actually represent undue stimulus ( unless the lenders are auctioning them in one day sealed bids or the like ). Assuming that is not the case, that REO's are put on MLS etc, where is the undue stimulus? In fact, many private sellers, esp now, are under far greater undue stimulus. Yes, the banks have to sell the properties by a certain time frame. But the time window is actually pretty broad, they want them off the books in six months to a year, for example. Now, they may try agressively to sell them within 90 days, but if it is not sold, they are not under great pressure to sell that particular property and can easily keep it on the market another 90 days.

An appraiser should be looking at marketing times of REO's and non REO's, both listings and sales.

Re the question of undue stimulus, let's take two identical homes ( for this discussion), next doot to each other, 5 Cherry Lane and 7 Cherry Lane. 5 Cherry Lane is an REO sale. 7 Cherry Lane is a private owner sale. Which seller is under more durress? It is not always lender. Yes, the lender may have a goal of selling 5 Cherry Lane within 90 days, and needs it cleared off the books within six months. BUT, the same lender owns 3000 REO's nationwide. Whether 5 Cherry Lane sells in 30 days or 120 days is usually not critical to them. Now take the private owner of next door house 7 Cherry Lane . That owner may be a month behind on his mortgage and not able to pay next month. If he doesn't sell within 30 days, he will be in default. HE, is actually under more duress than the bank. 7 Cherry Lane is his only house, it is critical to him to sell in 30 days. Other duress motivations of sellers, death in family, divorce, job transfer, job loss, they bought another house and can't pay 2 mortgages etc.

Then there is the seller who is not under durress. That is fine, but are they even the typical seller in some markets? When the non durress sellers sell are their prices higher, and does it even matter?

Then take the buyers. They are typically motivated, and lets say they like both houses equally, 5 Cherry Lane and 7 Cherry Lane. Which will they buy? They might make offers on both, and see which one is accepted . That is how competitive REO and non REO sales are.


if the market sees a value difference in them. If they do, then an adjustment is necessary.

Yes to above statement in many cases.

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

The above, basically ignore REO sales is what some appraisers on this board are advising in their posts.

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 fits the definition stated on your FNMA form is misleading

I totally agree, research the market. But relying on a Zillow study that states the trend is for REO's to sell for 30% less is not researching the market!

 

[residentialguy]

and in the case of many REO sales, they do meet the definition of market value.

We part ways here. The bank has to sell. They don't have the option to keep the properties and decide to grow old in them and raise their kids and grand kids. There is more than just a desire, there is a necessity. The buyers are motivated differently, too. They know they have the upper hand with banks. REOs attract investment buyers. Why would they want to invest in something that is selling at market value? I see them buy a property in good condition and sell it for more. How can that be if they paid market value and turned it for a profit at market value?

You can call REO market value as defined in FNMA if you want. If it is the same as what the market would pay for a traditional sale, then there is no problem. If there is a variance, then it failed the test. Market value doesn't produce 2 values. Somewhere in that definition, something is off causing a different value.

Market Value is a non distressed sale. Period. That doesn't hurt the REOs or the traditional arm's length sale. It allows both to happen. To move the definition to now be the distressed sale, it prohibits the a non distressed sales from finace. I'm not trying to be an advocate of the seller, but I don't want to be the cause on a failed transaction because I gave a value as if it were a bank sale. The appraiser that does this is effectively forcing the seller to sell at a lower value of an REO, if they don't have a cash buyer.

If you have a traditional sale...say with 3 offers to buy at 300k. 90% are REOs and selling for 270k. If the appraiser ignores that the market values a traditional sale more and appraises it at what it would sell if it were a REO (270) and forces the seller to lower their price, they are now a key player and cause in the down turn of the market.

 

[residentialguy]

But relying on a Zillow study that states the trend is for REO's to sell for 30% less is not researching the market!

:new_shocked: Wow...who said they only relied on Zillow?

 

[J Grant]

We are in agreement about a lot, except for this,

We part ways here. The bank has to sell. They don't have the option to keep the properties and decide to grow old in them and raise their kids and grand kids.

Not many sellers intend on staying in their house growing old/raising grand kids. If they were going to do that, why are they selling? I guess you meant, that if a private owner doesn't sell, they can stay in the house and grow old and raise grand kids? That is an outdated model of an owner, though there are owners who keep a house to grow old in, but those folks aren't selling their homes!

That leaves, as competition to the subject, the people that are selling their homes. In any market, the reasons private owners sell vary widely, from people wanting a diff community, diff schoold district, wanting to move near family, down sizing, expecting kids and needing more space, to losing their jobs/facing foreclosure, to job transfer, to divorce, to death in the family , to being underwater on their home and wanting to get out before value drops further, all kinds of reasons.

In many of the above scenarios, a private owner is under as much pressure to sell in a specific time frame, if not more so, than a lender. In any event, no matter what their motivation, private ownes in areas where there are a number of REO's and short sales as competition have to face the fact that buyers are going to be looking at their home, and most likely the REO across the street. Thus, even if an owner starts off at a higher price, they often end up reducing their price to competitve levels to sell in this market.

There is more than just a desire, there is a necessity. The buyers are motivated differently, too. They know they have the upper hand with banks. REOs attract investment buyers

The REO's do attract investors. So, the question is this, if investors are buying 30-50% of homes in an area, aren't they now a typical buyer ? (I say something in cases like this such as, "Buyers in subject market area are both owner occupants and investors" .
So that is issue number one, at what point do investors start to represent typical buyers. That issue aside, they sometimes buy for long term appreciation and to rent, not just for short term flipping. Even if they are buying for short term flipping, they still represent at times typical buyers. Now what has happened is most banks are trying not to sell immediatly to investors, that window of opportunity is closing for investors. Most REO listings state something like "not accepting investor bids first 30 days on market" or similar language. Many times, investors and owner occupants are competing for the same homes.

The typical buyers/sellers , market impact etc is a complex issue and one that needs close attention on each assignment.

 

[DMZwerg]

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.

What you stated (or rather, misstated) is, to me at least, even more amazing.

Let us start from the end of your statement and work our ways backwards:

1. I work some markets were over 2 miles IS the "immediate" neighborhood and the market is often defined by multiple townships. I generally call them "rural markets" but condemning ANY appraiser for exceeding an arbitrary distance without qualifying the statement is misleading at the very least. Due to the lack of comparable sales I have, at times, had to go up to 18 miles away for the SCA matrix (and defined in the narrative that this was outside the normal market) just to find REO "comps" for the "as is" value on a foreclosure ... the non-REO "comps" (all but one outside the township) were equally as interesting to find. So, lose the hard mileage border bub, as it is ridiculous to some of us who work rural markets. :laugh:

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.

There is a HUGE difference between "considering" and "using" REOs, just as there is a gaping chasm between stating that if something is used it must have an adjustment and somebody replying that the person in question is obviously ignoring them. "If you use them you they must be adjusted, even if that adjustment is zero" to me at least implies the person is tracking the difference and knows what adjustments they would have to make on average.

Further, as somebody who does some appraisals where an REO addendum is called for I can say that there is a HUGE range of differences in condition between REOs and since, at least locally, REO properties are generally "so mercifully free of the ravages of" interior pictures it is often much more subjective as to exactly what the interior condition is compared to non-distressed properties that, again at least locally, have photos of all major rooms often from multiple angles as well as often having real text as to what was recently updated (rather than filled with statements like "PRICED BELOW ASSESSMENT!!!" and such in all caps like many REOs).

So, if REAgents comments are telling about the huge difference between them (as noted by statements such as "NOT A FORECLOSURE", "Not a short sale" or "Not bank owned") even in markets most people here would qualify as dominated by REO/foreclosure & short sales then there is obviously still a definable difference between the sub-markets (non-distressed, REO/foreclosure & short sale) as even the REAgent lingo is recognizing it. That means there is a difference between a market dominated by REO & short sales and a market driven by REO & short sales. I have seen examples of both and can recognize the difference. Your market may well be driven by REO sales but as I have seen markets where over 95% of sales were distressed sales (REO, short & estate sales) and could tell the difference in the local market that it was not REO driven I know that there is a difference and that no single hard line between the two exists.

"A market DRIVEN by REO sales will typically consist mostly of panic sales and is most typical in markets dominated by non-standard uses such as 2nd homes or such where the homes are primarily investments rather than in areas where the market is primarily full time occupation. Such an REO driven market will typically continue only until the market has righted itself."

See, nice & simple with no hard definitions of numbers, distances, durations, or percentages of homes that are REOs or non-distressed. I expect that there are parts of New Orleans and parts of Detroit that are still in the process of "righting themselves".

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.

Who told them not to?
If a difference exists a difference exists.
Same as with condition, style, quality of construction, GLA, lot size, and so forth.
But there is one added factor with REOs, short sales, estate sales and such ... the definition of market value.

Who told you the definition of what is a "typical buyer" has changed since 2001?

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.

"60 for whom and 40 for whom?" - Support your local Sheriff

Are typical buyers of REOs looking to rehab/flip, rent, or owner occupy?
How about typical buyers of non-distressed properties?

In many markets, the same buyers are looking at REO and non REO.

Same individual buyers or same buyer pools?
Thus my statement of "60 for whom and 40 for whom" as although a particular buyer or even pool of buyers (owner occupation, rental investment, rehabber, flipper-investor) may be looking at both there is often a HUGE difference between what is the typical buyer for an REO, a short sale, an estate sale, a RELO, and a non-distressed sale.

• Even in local markets with 50%+ REO sales I have noticed flipper & rehabber activity locally therefore there is a difference between typical buyers & sellers of REOs and non-distressed sales. This is most obvious in analyzing actives and checking what/when the previous sale was and who the seller was. As long as there is still even an anticipation of increased value by investors (flippers & rehabbers) then there is still an obvious difference in motivations and typical buyers as investors (renters, flippers, rehabbers) gobble up most of the available REO properties.
• In examining local REOs I note that 90%+ sell for cash rather than 10% or less of non-distressed sales, thus it is obvious that the buyer pools, as a whole, have different motivations.
• Back to analyzing the actives I often note few if any REOs actually available for sale (often less than 10%) even in markets where 25%, 50%, 75% or even 95% of sales in the last year were distressed sales ... either sellers of non-REOs are that stupid or there is a different dynamic going on in the motivations of the sellers. There may also be a difference in the motivations of the buyers in each case, but that logic does not follow this point (but it does when financing is looked at in my second point)

So, at least locally there is a marked difference. I have just highlighted some ways the difference can be detected even if the sales prices do not make as much sense.

Finally, here is a point I would reiterate that many people who avoid using REOs may want to throw back at you:
Even if you can not discern between the motivations of buyers of REOs and non-distressed sales there is also a HUGE difference between the typical sellers and THEIR motivations. Remember the definition states that "buyers AND sellers are typically motivated" therefore, if the motivations of the seller differ then ALL non-distressed properties would have to be excluded if REOs are not excluded.

Buyers are not going to run around saying, "the subject is not an REO , therefore I will pay 30% more".

Have you talked to any real estate agents lately while confirming your comps? That is almost EXACTLY what I am hearing from them (Buyer reason: "Did not have to do anything", "Was relocating and could not afford to wait", "Looked at other homes but this one didn't need anything", "Did not want to have to fix anything up", etc.) I hear it all the time that the TYPICAL buyer of a non-distressed property did not want the troubles & hassles distressed homes bring, did not want to have to worry about being foreclosed on & evicted from a property they paid cash for (happened locally and hit the paper), and so on.
Over half the agents I talk to state that is EXACTLY one reason the buyer stated point blank for purchasing a (non-distressed) home.
When calling to confirm REO sales, on the other hand, I hear statements of "purchased to rehab", "purchased to flip", "purchased to rent" and to date have only twice heard of somebody purchasing to live in (handy man that looked forward to the work, and the other was my cousin who is a contractor).

Yeah. Same typical buyers and motivations of buyers and sellers. Sure.

 

[J Grant]

DMZ, we are actually in agreement about some things and I agree about some of what you wrote above. Yes, there are often times when further distance comps are the correct comps/most competitive, and I do that when needed and in your rural example of course. My comment was directed to appraisers ignoring similar comps to subject just because they are REO's and going two miles away to find less similar properties that are not REO's.

Buyer/seller motivation, I wrote more on thread above your last post. Particularly about the issue that some areas investors do reprsent a pool of tpical buyers.

one reason the buyer stated point blank for purchasing a (non-distressed) home.
When calling to confirm REO sales, on the other hand, I hear statements of "purchased to rehab", "purchased to flip", "purchased to rent" and to date have only twice heard of somebody purchasing to live in (handy man that looked forward to the work, and the other was my cousin who is a contractor).

If above reprsents a large pool of buyers and ongoing activity in an area, then buying to rehab flip, rent, etc, represents typical buyer motivation for some buyers in an area. If they are not the buyer pool for your subject, because your subject is in better condtiion and they are buying homes in poor condition, then the homes they are buying are not comps anyway, due to condition ! So in that case, I would write something such as "there are a number of investors buying in subject area, however they tend to buy homes in poor condition, many of which are REO sales. The subject is in good condition, and therefore the investor sales are not used as comparables"

Even though we disagree on some points, I appreciate your insight and well thought out response!

 

[residentialguy]

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[DMZwerg]

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

I think he is stating that some people have talked in the past about excluding REOs in (some of) their searches and does not comprehend the difference or reasons why. I will explain it if you don't mind.

I have have graphs of local market data going back to Jan 2003 for most of the greater markets I work in. When the crash hit locally my municipal graphs seemed to be telling me one thing and analysis of local markets (even those with 25%-75% distressed sales) seemed to be telling me something else entirely. The municipal market graphs were showing declines in excess of 25% yet the local neighborhood analyses were showing that non-distressed prices were stable over the same period as were the prices of distressed sales. The only difference was the RATIO of the sales. For that reason I started tracking municipal graphs for the whole market and then the market sans most of the distressed sales (those that could be eliminated by checking NOT boxes in special financing & such) and saw a world of difference between the two graphs. So, if my municipal graphs are showing a definable difference and my local analysis is showing a definable difference why wouldn't I exclude REOs and other distressed sales in some searches? Not saying I don't CONSIDER all sales (I run the full search first, paying close attention to the most proximate sales and generally include them for analysis as potential comps) then run comp searches EXCLUDING those properties I don't consider comparable (like most distressed sales). I typically find a number of "hidden" distressed sales, sometimes not apparent until confirming the potential comp with the listing or selling agent, but like other search parameters it cuts through a lot of the extra BS. Hope you didn't miss that I had already selected the most proximate sales for consideration before eliminating REOs as I often want to consider the most proximate REOs even if I reject most, I mean the property next door IS the property next door no matter how else it may not be all that comparable. :icon_mrgreen:

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

Yep, and it is generally only very limited markets where the answer is "yes".
I have heard of a few discussed but the most noteworthy is military housing where virtually every sale and purchase is a RELO and the lender is identical for all loans (aka, the VA). I loved it when one poster tried to claim that market as proof of no difference in REOs (exact same buyer pool/motivations and the only difference in seller was that either it was a soldier that had already moved and was selling it as a RELO or was the VA, the agency that holds the mortgage on virtually every property in that 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.

But is the change in value because of the market saturation or because the ratio of rental properties to owner-occupancy has shifted in the neighborhood? One of the reasons inner city neighborhood prices are often much lower is, in part, to the ratio of rental properties is much higher. There is a huge difference between a market where 5% of the homes are rented (or vacant) compared to a neighborhood where 95% of the homes are rented (or vacant). The shift may start at 10%, 25%, 50% or such but generally at some point things change and may go through different plateaus and such. During the boom we saw a number of Milwaukee neighborhoods start to shift and rise in prices as the ratios changed along the borders of "bad" neighborhoods, then start to shift back as owner occupancy ratios started to decline a year or so after the "bust".

In other words there may be many factors involved, not just one (REO sales vs non-distressed sales numbers), and thus the differences may vary for those reasons as well.





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 fits the definition stated on your FNMA form is misleading.[/quote]

 

[residentialguy]

Hey DMZ....good to see ya!

But is the change in value because of the market saturation or because the ratio of rental properties to owner-occupancy has shifted in the neighborhood? One of the reasons inner city neighborhood prices are often much lower is, in part, to the ratio of rental properties is much higher. There is a huge difference between a market where 5% of the homes are rented (or vacant) compared to a neighborhood where 95% of the homes are rented (or vacant). The shift may start at 10%, 25%, 50% or such but generally at some point things change and may go through different plateaus and such. During the boom we saw a number of Milwaukee neighborhoods start to shift and rise in prices as the ratios changed along the borders of "bad" neighborhoods, then start to shift back as owner occupancy ratios started to decline a year or so after the "bust".

In other words there may be many factors involved, not just one (REO sales vs non-distressed sales numbers), and thus the differences may vary for those reasons as well.

So if only 5% of sales were REOs in that neighborhood (where 95% of the homes are rented), the variance between the REO and Trad would not change if 90% were REOs?

 

[DMZwerg]

Re the question of undue stimulus, let's take two identical homes ( for this discussion), next doot to each other, 5 Cherry Lane and 7 Cherry Lane. 5 Cherry Lane is an REO sale. 7 Cherry Lane is a private owner sale. Which seller is under more durress? It is not always lender. Yes, the lender may have a goal of selling 5 Cherry Lane within 90 days, and needs it cleared off the books within six months. BUT, the same lender owns 3000 REO's nationwide. Whether 5 Cherry Lane sells in 30 days or 120 days is usually not critical to them. Now take the private owner of next door house 7 Cherry Lane . That owner may be a month behind on his mortgage and not able to pay next month.

Motivated seller / not typical motivation

If he doesn't sell within 30 days, he will be in default. HE, is actually under more duress than the bank. 7 Cherry Lane is his only house, it is critical to him to sell in 30 days.

Or not, I know of a number of homeowners that are 6+ months in arrears without there homes being foreclosed on, or being put up on the market as a short sale, etc.

Other duress motivations of sellers, death in family,

Estate sale, which I discuss with the REAgent and try to determine if the seller was more motivated than a typical seller or not. If they are I will either reject the "comp" or at least give it much less if not no weight, just like an REO or short sale.

divorce,

Which, if I pick up on when confirming the sale with the REAgent, I will try to determine if the seller was more motivated than a typical seller or not. If they are I will either reject the "comp" or at least give it much less if not no weight, just like an REO or short sale.

job transfer,

Which, if I pick up on when confirming the sale with the REAgent, I will try to determine if the seller was more motivated than a typical seller or not. If they are I will either reject the "comp" or at least give it much less if not no weight, just like an REO or short sale.

job loss,

Which, if I pick up on when confirming the sale with the REAgent, I will try to determine if the seller was more motivated than a typical seller or not. If they are I will either reject the "comp" or at least give it much less if not no weight, just like an REO or short sale.

they bought another house and can't pay 2 mortgages etc.

Just so I don't repeat "add nausea" I will comment on. This is one of the most common "highly motivated seller" type I typically hear of (that and estate sales). The main difference is that estate sales are often of properties that were well maintained but dated and the "bought another house/condo/moved" properties are generally more up to date. How motivated the seller was is an important factor, and this may not be apparent just based on DOM. RELOs for jobs out of state often are the most distressed just like "buyer coming in from out of state and needed a house now" are often the most highly motivated buyers. Often exact adjustments can not be determined, but I can get a feel for how much weight the sale should bear. :icon_mrgreen:

Then there is the seller who is not under durress. That is fine, but are they even the typical seller in some markets?

"As in the ski resort with the girls looking for husbands and husbands looking for girls the answer is not as symmetric as it first may seem." :laugh:

Is "typically motivated" code for "whatever is most common for the market" or does it have a more consistent meaning and everything else is not "typical"? What exactly does "typical" mean in this context? If "typical" means "Ozzie & Harriet typical" than REOs are right out because the seller is not typical let alone typically motivated, and all those special cases you mentioned above are right out as well because "typical" means "fair/full/normal market" not "current market average/mode/median/mean/most".

The second question is whether appraisers could be valid interpreting it either way?

The final point is that this definition of "typical" has been discussed on this forum in over a dozen threads now that I am aware of, and people are still interpreting it in two different ways!

Then take the buyers. They are typically motivated, and lets say they like both houses equally, 5 Cherry Lane and 7 Cherry Lane. Which will they buy? They might make offers on both, and see which one is accepted . That is how competitive REO and non REO sales are.

For the same price? The non-REO, because closing will not take 3+ months of anguish, they won't have the extra trouble getting their FHA loan through as the bank quibbles through 3 extra parties about the cost of fixing the loose rail, they don't have to worry about the city taking over the property in the middle of negotiations (because why various lenders were trying to figure out who had the dominant claim (and actually found the papers)) for non-payment of property taxes, and they don't have to worry about some other bank coming in and foreclosing on a second loan on the property with a claim 11 months later even though they paid cash ...


BTW, yes, I have heard of all the preceding happening, as well as the owner challenging a foreclosure for lack of paperwork proving the lender's claim of ownership.