REO's as comparables to non-REO

[Randolph Kinney]

The "go back in time, many miles out and use normal sales" brothers are back.

Yes, we missed them. Now, if they present a uniform means to use that approach and not just with distressed sales or unique properties, such as likely buyers in one area indeed consider another area miles away as substitutes and not just where "traditional" recent sales are, they would have agreement.

The "go back in time" approach is far less relavant in changing market conditions, the farther back in time one has to go to find a traditional sale.

Adjustments are done, in general, because the properties are not equivalent, market conditions are different, terms of sale are different, etc. The larger the adjustment and the number of adjustments demonstrate the lack of similarity as well as the lack of an accurate value judgement.

 

[J Grant]

I agree with Randolph.

The problem arises with words such as "typical". USPAP did not narrowly define typical. Since we are hired to analyize market forces in relation to value, one would think the meaning of typical would be taking into account the forces impacing value in the subject market area, be those forces "traditional" sales, REO sales, Short sales, etc.

Some people want to substitute the word traditional for typical. We all are more comfortable with the traditional, but that might not be what is impacting our market. For example, the traditional way for people to get the news used to be newspapers, and TV . Now, it is the internet as well. So if you were hired to do a study of how people currently get their news, would you just say TV and newspapers because that is tradtitional, and ignore the internet because it is not "traditional" ? The correct answer would be, "people are getting their news form a multitidue of sources, including the traditional newspapers, TV, and the internet, with a growing use of PDA's and portable media"

 

[residentialguy]

Not a hard concept, yet some are making it out to be. FNMA Market value is a static, never changing hypothetical value. What would the subject sell for if Joe owned the house and put his house on the market without undue stimulus, such as job relocation, going to lose the house, etc?

Joe decides to put his house on the market. It is saturated with REOs. Obviously, the REOs have driven the prices down. How much could Joe sell the house for with an adequate market exposure and no funky concessions, etc?

Any variance the market sees in the value of that type of sale over a REO sale, an adjustment is necessary to that REO comp.

 

[Terrel L. Shields]

Any variance the market sees in the value of that type of sale over a REO sale, an adjustment is necessary to that REO comp

nice to see one sane voice among the madness...yes yes yes

 

[hastalavista]

nice to see one sane voice among the madness...yes yes yes

Me too!

The "go back in time" approach is far less relavant in changing market conditions, the farther back in time one has to go to find a traditional sale.

Adjustments are done, in general, because the properties are not equivalent, market conditions are different, terms of sale are different, etc. The larger the adjustment and the number of adjustments demonstrate the lack of similarity as well as the lack of an accurate value judgement.

 

[Randolph Kinney]

Any variance the market sees in the value of that type of sale over a REO sale, an adjustment is necessary to that REO comp.

If there are enough "traditional" sales to make the adjustment, why use REO sales at all? Aren't you really saying that?

 

[J Grant]

FNMA Market value is a static, never changing hypothetical value.

Says you!! Where does it say that, anywhere, in USPAP or any appraisal guidelines, that the value is "static"? Show me one instance.

You, and some others on the board are intrepreting it that way, which is fine, but say, "MY interpretation of market value is that it is static, never changing hypothetical value"

The whole point of the term MARKET VALUE is that the value reflects forces of the MARKET, otherwise, the definition of an appraisal assignement would be, "establish a HYPOTHETICAL VALUE for the subject".

What would the subject sell for if Joe owned the house and put his house on the market without undue stimulus, such as job relocation, going to lose the house, etc?

Re, the stimulus they are asking about, is not whether there is undue stimulus on Joe's the owner of the sujbect!

We are supposed to analyize undue stimulus if it affects value of the COMPS, the competing sales, not the owner of the subject!!

If Joe Schmo is getting an appraisal for a refi, I don't go in his house and ask him if he is under undue stimulus! Why would I do that??????? The appraisal assignment is to find market value for the subject, not market value as defined by Joe Schmo, and his particular reasons for selling or refinancing his house.

And by the way, I have in real life turned down assignments from sellers re what they could "personally" get for their house, because that is a consulting assignment at that point and not an appraisal assignment and I was not comfortable doing that, I am trained to find market value, not adjust market value for what some owner "personally" wants for their house.

(RE, though a seller, whether Joe Schmo because he is losing his job, or a lender, because they need to get the loan off their books, may PERSONALLY be under duress, or some might say, have "undue stimulus" to sell, our job is to get market value for the subject, as if it were for sale on the open market, under the terms of typical market value. Now, if the seller, in this case a bank, wants to ignore the recomendation for market value and sell it for less, then so be it, I can't control that because my part of the job is done, providing market value. Likewise, if I did an appraisal for Joe Schmo and the underwriter turns his refi application down after the appraisal comes in because she called his employment and verifiied he was being laid off, it is not my problem, my assignment was to provide market value for his house, not adjust market value for his personal stimulus or non stimulus, or the bank's stimulus or non stimuls.

If I got assigned two appraisal orders, both for market value of 7 Cherry Lane on the same day, and one assignment was from a lender taking it back as an REO and one assignment was from a line of credit the owner had applied for, both appraisals would have the same comps and the same market value, the only difference would be the appraisal ordered by the REO department of a bank would have an REO addendum asking for listings, and asking to provide an opinion for a POSSIBLE discount to market value , if the subject were to sell within 60-90 days. But on the sales comparison page, the comps and market value are the same, why would I change it for an individual owner or seller? ( Ditto if the subject were under a contract of sale, the value doesn't suddenly change because the subject has a sale contract for X $).

 

[residentialguy]

FNMA Market value is a static, never changing hypothetical value.
Says you!! Where does it say that, anywhere, in USPAP or any appraisal guidelines, that the value is "static"? Show me one instance.

Several reasons. Here's a few:

1. the language used (undue stimulus, typically motivated) leads itself to describing a sale that is not a necessity to sell.

2. MV describes a "Fair sale". One party doesn't have an advantage because of the other's situation.

3. To use a moving definition, it's all over the board...no consistency. What value is the appraiser using...most probable price a REO would sell for because it's over 50%? Most probable price a traditional sale would sell for because it's not over 75% REO? No standards. What is their risk assessment going to be based on?

4. To use a moving definition, any time you move from the fair sale to a REO as the guide, you alienate the fair sale. Now you won't appraise Joe's home for what the most probable price the market will pay. Deal is dead or they have to lower the price, which causes a spiral down with all sales. FNMA is a lender...I highly doubt that they put in a definition of market value that would alienate the traditional homeowner selling his home

The whole point of the term MARKET VALUE is that the value reflects forces of the MARKET, otherwise, the definition of an appraisal assignment would be, "establish a HYPOTHETICAL VALUE for the subject".

Sorry, but they are asking for a hypothetical value. They want the value of the property as if it were the the most probable price of a sale that fits the exact confines of MV definition they gave you.

We are supposed to analyze undue stimulus if it affects value of the COMPS, the competing sales, not the owner of the subject!!

That's why I said to adjust the comps, not the subject. If there is a market aversion toward an REO sale over a sale like Hypothetical Joe's, an adjustment is called for.

If Joe Schmo is getting an appraisal for a refi, I don't go in his house and ask him if he is under undue stimulus! Why would I do that???????

I don't either. The mortgage company isn't asking about the borrower. They want the most probable price the house would bring if there were no undue stimulus, high motivations, etc

I do ask those questions of the comps, however.

 

[residentialguy]

If there are enough "traditional" sales to make the adjustment, why use REO sales at all? Aren't you really saying that?

If there are enough good 2 bath sales to make a bedroom adjustment, why should I use 1 bath sales if my subject was a 2 bath? The only time I would use a 1 bath comp is when I feel the 2 bath comp is needed to support another area that my 2 bath comps didn't have...view, quality, condition, etc. If I didn't need that, I wouldn't use them. Same with a REO.

I would look at the REOs and consider them. I would also state their presence factor in the market and their effects the may have on the subject in the 1004 MC and the neighborhood market conditions.

 

[J Grant]

I don't either. The mortgage company isn't asking about the borrower. They want the most probable price the house would bring if there were no undue stimulus, high motivations, etc

I do ask those questions of the comps, however

Finally, we agree on something.

That's why I said to adjust the comps, not the subject. If there is a market aversion toward an REO sale over a sale like Hypothetical Joe's, an adjustment is called for.

Basic appraising, always adjust the comps we never adjuste the subject.