REO's as comparables to non-REO

[DMZwerg]

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 ?

FOR WHICH SEGMENT (or sub-market)?

I agree that investors (who plan to rent, rehab or flip) are probably the most typical buyer of distressed properties in general (and especially REOs) in my local markets.

I do not agree that they are a typical buyer on a non-distressed property in my local market.

I also do not agree that the ratios between investors and buyers seeking to purchase REOs and non-distressed are in any way, shape or form the same in any of my local markets.

So the answer is, when discussing typical buyers of non-distressed homes the answer is a resounding "no". They are NOT typical buyers of SFR homes purchased for owner occupancy (typical motivation for purchasing SFR homes)).

So that is issue number one, at what point do investors start to represent typical buyers.

Do they ever represent typical buyers of SFR homes may be a better statement. If that can be agreed upon then the subject of "when" can be broached. ASSUMING that they can be then I would say that this is true if and only if the buyer pools are sufficiently comparable, such that if roughly 90% of your SFR REO buyers are investors then if roughly 90% of your SFR non-distressed buyers are investors then they would be typical buyers under the assumption of that meaning of "typical". Problem is the serial flipping of vacant condos by speculative investors in Florida shows what can happen if a buyer that is not typically motivated is treated as a typically motivated buyer and is likely the best proof I can bring that investors are generally not typical motivated buyers of SFR properties.

 

[Verne Hebert]

Nicely done Grant. "IT" is all market. it is all market, given arms length in nature transactions.

Duress? The whole damn county is under duress (except government employees) or everybody is equally uneasy and urgent......how do you want to define it? Every body is moving backgammon pieces in their lives.

If REO are selling lower that the property next door, the "missing components" are the obvious..............risk........grief in the deal.............deferred or missing physical items resulting in lower condition, or risk due to as-is sale relying on a report of condition only.

The bank has no note, and is not forced to sell. The bank is the pro, mom and pop are the amateurs.

I used to manage an REO department for a major bank. I assure you, they are giving away the store.

Me the buyer is going to cut the best deal I can on 5 or 7 cheery lane....I can redefine it to cheery, can't I? They are both on the same street.

 

[J Grant]

Verne, I agree with you . It is all the market and a lot of people selling are under dursess, and in many cases more durress than the lender, who while they hold a non performing loan, do not have to make payments on it. They also often don't pay re taxes until sale, and sure as heck don't pay condo maintenance fees , they do pay insurance. They are actually these days more at leisure as to when they sell than many people facing job loss and other issues forcing them to sell.

Some posters here argue very eloquently for their opposite view point, it is like going in a circle debating them, though I respect their opinion I think they are looking at this the wrong way, but
I need to take a break for now go out and take care of some stuff in the real world maybe will write more later!

 

[J Grant]

Quick response before I go out
FOR WHICH SEGMENT (or sub-market)?
Why are you dividing the market into segments? The subject is in an area, the sales around it form the market. Some sales sell for less, some for more. We can make graphs that lake view homes sell for 30% more than non lakeview homes. We can makee charts that homes in poor conditon sell for 30% less than homes in good condition. The problem I see is when we make charts solely based on price . "Distressed sales sell for 30% less than non distressed sales." First of all, what is a distressed sale is open to intrepration, and secondly, how do you even find out what they are, and thirdly, do they relate to your subject at all?

First we have to separate distressed sales from homes in poor conditon ( they are not always one and the same). Assuming that in your market area for now, that they are the same, what does it prove? That distressed ( poor conditon sales) are selling lower than the subject? So are smaller homes sellng for lower. So are homes without pools, when the subject has a pool. One can make charts and graphs forever proving whatever one wants . What relation does it have to the subject, and the problem at hand, market value, what price will the subject bring when put on the open market? If the distresses sales in your area are in poor conditon and your subject is in good condition, don't use them as comps. But what happens when your subject is in poor condition, then you aren't going to use other distressed/poor condition sales, because your chart says they sell for less than good condition sales? Of course they sell for less, so the question is, if your subject is in poor condition, why aren't you using them? (re you is easier than saying an appraiser, as in, why isn't an appraiser using those sales)

If your subject is in good condition, and a number of REO sales are in good condition, why aren't you using them? Because a chart said that distressed sales are selling for less? But the chart was based on a mix of distressed sales in poor condition along with distressed sales in good condition, are the results reliable?

Re, the defintion of a typical buyer of SFR is ans owner occupant where does it specify that in the guidelines or USPAP...
USPAP refers to typical buyer and typical motivation, they dont' spell out that typical buyer has to mean owner occupant.

I think we tend to think of typical as owner occupant because it was that way for many years and we are comfortable with that definition .

As appraisers, we dont' get to pick and choose market particpants. We may not like it that investors are buying and renting out, but if enough of them are in an area, they are a typical buyer. Would you talk to realtors and get information that doctors in Mercedes are buying in an area and that they pay more, and then do a chart that shows they pay more, and then decide to not include any sales to them because they paid more and are driving prices up? If enough doctors in Mercedes are buying homes in an area, then they reprsent a part of typical buyer activity in an area. We don't get to pick and choose who the buyers are, though one can make charts and excludieg entire sections of buyers , then one has produced a chart that says what you were looking for, aka doctors are paying more, yes okay we can prove doctors are paying more, but they are part of the market, so now we exclude them because they make more money than typical and thus are paying more than the "typical " buyer would? Where does it stop?

I agree that investors (who plan to rent, rehab or flip) are probably the most typical buyer of distressed properties in general (and especially REOs) in my local markets.

I do not agree that they are a typical buyer on a non-distressed property in my local market. I also do not agree that the ratios between investors and buyers seeking to purchase REOs and non-distressed are in any way, shape or form the same in any of my local markets.

What is the definition of words distressed and REO as you use it.. are distressed homes the homes in poor condition, or are you counting as distressed any home sold as an REO, even if it is in good condition?

 

[AnonApprsr]

I'd love to see some of you appraise in some of the places I appraise. You'd have 0 sales to work with.

 

[residentialguy]

No one here is suggesting to not take into considerations the other variances, such as condition, size, view, etc. After those adjustments are made, you're left with a more concrete answer to whether or not there is any aversion (or preference) to an REO.

We, as appraisers, must try to pick and choose market participants that most represent MV, as defined. If they are few and far between, it doesn't mean we get to change our SOW to reflect different motivation or stimulus and it doesn't meant that they are one in the same. As someone said earlier, 'The definition of "market value" is not "the value based on the predominant type of sales activity."'

The gage to measure against is that of a sale, having no undue stimulus to be a sale where neither party is assumed to be under any compulsion to engage in a transaction, nor to be under any duress - a fair sale. This point suggests that although willing to engage in a transaction, the parties are under no pressure to do so. Compulsion to engage in a transaction by a party to a transaction usually works adverse to that party's interests. A "motivated buyer" is likely to pay more than a rational price to acquire an asset. On the other hand, a "motivated seller" is likely to sell for less than he or she would otherwise accept for the sale of an asset. If this added stimulus leads to a variance in price from a fair sale, then this variance may be adjusted in order to reflect the most probable price of the subject in a fair sale. A distressed sale fails to meet the test of "market value," particularly: "The buyer and seller are typically motivated" and "the price is not affected by undue stimulus

I'd love to see some of you appraise in some of the places I appraise. You'd have 0 sales to work with.

Hey Anon...good to see you. I've had plenty. The other day I did a lake front property...not one other similar sale on that lake. I've had to go back 2 years and out 25 miles. No one said they were all going to be cookie cutters. That's why they pay us the big bucks! :new_smile-l:

 

[Joyce Potts]

If and when your subject becomes a short sale or foreclosure/REO, what would be the proper data group and analysis at that point and why would it be different or would it be different?

If the lender didn't care about quality control or risk assessment with regard to the colateral, why would they even bother to order the appraisal in the first place?

I crack myself up. Why do they order the appriasal at all? We all know they didn't give a rats arse -- it was all the appearance of compliance because when they're loaning and investing other people's money, it's all about up front profits. Wait -- they won on the long term NON-CONSEQUENCES TOO -- despite their recklessness.

Such a deal.

 

[residentialguy]

I don't do that kind of work, but I would imagine they would use the REO data group, since that's what the sale would be and they would price it accordingly. However, we've seen many wacked listing prices on REOs...thanks to clueless BPOs, bots and shady listing agents.

Lenders have their risk management in place. They have an idea of how much of a hit they're probably going to take from MV that they defined for us to appraise at...should they acquire the property.

 

[Verne Hebert]

I did an FHA SFR last month in a micromarket of entry level homes. In the prior 6 months, 7 sales, all REO. Inventory is in balance. Average Exposure period 153 days.

There is no question what the market is, in this case. The market. And we know what it is comprised of, precisely.

 

[J Grant]

I treat REO subject and non REO subjects the same, I choose or exclude either REO , short sales, or regular owner sales, according to the market and competition to the subject . When I do REO appraisals for the lender, the only thing that is different is the REO addendum, where they ask for listings, as repaired value ( if there are repairs), and usually a second value if sold in 60-90 day marketing time. The first part of the appraisal, the comps on the grid etc is exactly the same as any other residential appraisal, grid the comps, cost approach etc.