REO's as comparables to non-REO

[hastalavista]

OR the buyer may have to, and the reason the lowest the bank will go is $210 may be in question as to their motivations in being party to the sale.

I addressed that possibility in my post, and provided a way to analyze it.
Your comment doesn't address my question of how a seller in a short-sale, whose lender is requiring him to pay his existing debt obligation (or a portion thereof) in excess of what the house is selling for, is providing special financing to the buyer who is not willing to pay any more, and who will move on to another substitute (at, presumably, an equivalent price).

But maybe I misunderstand you, because I thought you wrote that you considered all short sales to be situations involving special financing.

 

[AnonApprsr]

I love these discussions, reminds me of the comp-check discussions that were at their waning prevalence when I first started posting.

 

[DMZwerg]

For example, suppose an appraiser, on the very same day, is asked to appraise three neighboring homes ( for this purpose, assume same size and condition). 7 Cherry Lane, 9 Cherry Lane, and 10 Cherry Lane. The appraiser goes on the same day and inspects one after the other.

You want to Cherry pick and say what terms the sale of the comps occurred under don't matter for determining market value then let's Chery pick.

Let us say 3 identical properties are found to the subject, 7 Cherry Lane, 9 Cherry Lane and 10 Cherry Lane. 7 Cherry Lane was built 1 year before the subject and sold 11 months ago, 9 Cherry Lane is about the same age of the subject and sold 6 months ago, and 10 Cherry lane is almost a year newer than the subject and sold less than 3 months ago. All three properties identical to the subject in SF, quality of construction, lot size, etc. and all three are builder sales (yeah, really likely nowdays, but wasn't that uncommon just three years or so ago). Should the appraiser use these properties (that all sold new) as comparables? They were all marketed on MLS just like the subject but the subject was purchased originally maybe a year ago and the assignment is a refinance transaction. Do you use them without comment or do you analyze the sales & markets looking for properties that are not builder sales to try and determine what adjustments, if any, are necessary?

I remember reading about that exact "dilemma" before the market bubble burst and the wisdom then was that at least one comp should be a resale or from outside the development as otherwise the opinion of value would likely be a highball as there was generally a "new construction" bias as well as the fact that the builder sales might not fit the definition of market value (seller not typically motivated, etc.) and thus although "on the market" builder sales were not considered the same "fair" market, even if they dominated (over 50% of) the local market.

So, what is different about REOs (and to some, short sales) that suddenly they "are the market" and can be used without comment?
It is the same BS all over again, but often in the opposite direction.
You can use them, but you must explain yourself, especially if that is all you have. You can use them but you must adjust for the differences. You can use them, but they are proxies for actual comparables.

If you want to say, I don't want to use this REO or estate sale or builder sale because in my opinion it does not meet the defintion of arms length transaction, for example, that would be correct, but to say you do not want to use an REO or estate sale or builder sale because it does not represent market value, or fair market value would be contrary to the puropose of the apprasial ( which is to find market value for the subject, not to pick comps according to what the appraiser believes are market value sales, even if the sales meet the criteria of market value, that is not why they are supposed to be selected, or eliminated)

The terms can be confusing for sure though!

They are questionable at best even BEFORE you verify the sales, and the questions may remain afterwards.

Estate sale - is the seller "typically motivated" or not? Even if you verify they were how certain can you be.

Builder sale - seller typically motivated or not? Maybe they are MORE motivated to sell faster and at a lower price (especially in today's climate) because they need to get the property off their books to cut their loss and free up funds for the company to survive and thus are willing to cut deals. Heck, are builders EVER "typically motivated"? Can you verify the exact details?

REO sale - can you verify that the lender, at the time of sale, was not under extreme pressure to sell the property at any price? Are you certain the bank regulators did not have an order out to liquidate X properties off the books or the bank would be liquidated (aka, undue stimulus)? Up here at least 3 (fairly) local banks were liquidated in the last year or so by bank regulators and from the sound of it at least two of the three showed no signs of being in trouble before the order came down (third was obviously toxic) and at least one of the two never even closed its doors during the process. What do you really know about the actual motivations of the lender and what stimulus they may be under to sell? Note that motivation/stimulus is only ONE of the many questions I have with REOs.


In other words, even if REO sales were 100% of a particular market I would still say that each and every one under consideration would need to be analyzed and some comment made as to why they are the best proxies available. Furthermore some indication of what adjustment may be necessary to make them comparable to "fair" market sales would also need to be analyzed and some comment made (adjustment could be zero).

Hope that is clear enough for ya.

 

[DMZwerg]

I addressed that possibility in my post, and provided a way to analyze it.
Your comment doesn't address my question of how a seller in a short-sale, whose lender is requiring him to pay his existing debt obligation (or a portion thereof) in excess of what the house is selling for, is providing special financing to the buyer who is not willing to pay any more, and who will move on to another substitute (at, presumably, an equivalent price).

But maybe I misunderstand you, because I thought you wrote that you considered all short sales to be situations involving special financing.

Let me see ... is the seller a participant in the sale?
How about the lender?
Does or does not Condition 5 in the Definition of Market Value (FNMA form 1004) mention or not mention the words "granted by anyone associated with the sale"?
I just want to verify that I haven't stepped into a parallel dimension or something where the the definition might be worded differently

OK, now that we are square on that one could have successfully argued that the "granted by anyone associated with the sale" applies to the phase "sales concessions" and not to "special or creative financing", but then there is that pesky (*) after the word "concessions" and that states "*Adjustments to the comparables must be made for special or creative financing or sales concessions ...". If people had used that argument I would have pointed out that it was odd we have the phrase joined in one area but they are considering them separate in other, but that was not brought up. But as I recall that argument was not made, but rather most people just state that I am wrong on this because I am wrong on this. Great proof, eh? I may well be wrong, but stating opinion is not proof, which is why I respected the opinion of those who stated opinion as opinion (Mentor, etc.) and continue to debate it with those that are just telling me that I am wrong for being wrong's sake


So, let me go on a bit why I feel it is applicable.

Since the lender is seeking to get 100% of the debt owned then does the lender really care that much if they get it from the buyer or the seller? Does getting it covered in its entirety lead them to be more flexible on the negotiated price than if they have to write off the difference due to hardship? If they likely have different pressure based on what percentage of the loan they are getting then the price may be subject more to what the lender is getting rather than what the property is actually selling for. Further, the lender may feel pressure from the regulators to clear the loan BEFORE it is forced to foreclose and different lenders may have different corporate culture as to whether to short sale or foreclose as they may have different levels of questionable debt and such on the books. So, if each and every lender could well be under a greater or lesser amount of stimulus to sell, and may be under a different corporate culture, and this stimulus and culture can change week to week depending on what has happened lately and when bank examiners & regulators may or may not be due, how do you know what motivation and stimulus the bank was under at the time of the short sale (or REO)? Further, how can you determine that the motivation was typical at the time and the stimulus was not undue?

Right now some of you are wondering "well, can you tell that about any property?" Actually, that is one of the things I try to determine with my calls ... tends to work fairly well for traditional sales, but unless the agent knows the property was low-balled or the lender was being overly stringent I rarely get the same result when discussion short sales & REOs with agents. Condition I can get, and generally much better information on condition if the REO was in one of the varying degrees of "poor" condition (since there is nothing below "poor" whether or not the property is inhabitable in the least, whether or not it appears structurally sound, and what degrees of being gutted it was in all can generally be determined through discussion even sans pictures). So condition is easier to determine, but in a number of cases, even with supposedly traditional sales, I have been able to confirm whether or not the buyer was from out of town or seemed under extra pressure to close quickly, if the seller was unduly motivated (including 2nd home, already moved out, RELO, estate sale, estate sale with "needy" heir, etc.). Generally the agents don't seem to have as much info about a particular lender's motivation and stimulus at the time of the sale. Go figure.

So, I have moved from talking about special or creative financing to lender motivations and stimulus, which is not entirely strange as I see them as overlapping in part. The price of a short sale may be affected by the owner taking a personal loan to clear some part of the difference with one or more lenders connected to a particular short sale, and that would seem to indicate the price could well be affected by this financing of a personal loan on the owners part, and that is not standard for most properties and thus special or creative, even though the buyer's financing is not special or creative in the least. OK, I have come back full circle and actually explained my opinion of why a short sale may be considered special financing in greater depth. I know my local MLS lumps it there and I can comprehend why that is with logic. Why wouldn't I question the financing on any short sale and consider them in general to NOT be the same as a traditional sale?

 

[J Grant]

You misunderstood my post!! I said, an appraiser is sent out to appraise 7, 9 and 10 Cherry Lane, they are your subjects, not your comps!

Now you turned the three subjects into builder sales comps..

Imo builder comps are often less reliable than REO's, and when appraising in a subdivision, I always use at least 2 comps from outside and often more than that, inlcuding resale listings in the community if I can get them. Builder sales are unreliable not because they don't represent "market value", but because they have not been exposed to the market in the sense that resale homes are, re, homes listed in MLS and sold through owners or lenders or whoever owns them , they are not the builder. If an owner bought a home from builder a year ago, and now is selling it on the open market or has it listed on MLS, that is a good comp. A builder offers special fincaning through inhouse lenders and often sells with cash back as decorating allowances, all kinds of problems with builder sales. In answer to your question, it 7, 9 and 10 Cherry Lane were all builder sales, Iwould verifty terms (Same as if they were REO sales, but in my example they were three different subjects the appraiser was appraising the same day). I would probably not be using all three builder comp sales and would probably use two of them and find two more non builder sales and then add a resale listing in builder subdiivision to see market reaction through MLS.

We do agree on at least one thing, whatever comps we use, REO or Builder sale or whatever, yes verify and analyize the terms of sale. BUT WE STILL DON'T PICK SALES COMPS BASES ON IF THEY WERE "MARKET VALUE", BUILDER SALES ARE A POTENTIAL PROBLEM BECAUSE THEY HAVE NOT BEEN EXPOSED TO TYPICAL MARKET FORCES, RE LISTED ON MLS ETC.

You are starting to use different language now from appraising....proxies, traditional sales, are not the lexicon of appraising, fair market value is a business term rarely used in appraising, same as liquidation value and proxy for a comp? What is that?

This thread is becoming endless, and needs the preamble from the Twilight Zone, "you are entering another dimension of time and space..."

 

[J Grant]

Furthermore some indication of what adjustment may be necessary to make them comparable to "fair" market sales would also need to be analyzed and some comment made (adjustment could be zero).

We never adjust comparable sales to other comparable sales, we adjust comparable sales to the subject.

 

[residentialguy]

You keep saying an appraiser has to use comps that meet the definition of market value, and for a while I even went along with it as its sounds correct.

m2:

Quote:
Originally Posted by DMZwerg
ResGuy and I have not said NOT to consider them, we have stated that one should not USE them without sufficient analysis & comment including appropriate adjustments (which could be zero, as we repeated 5-6 times each on a different thread).

Worth repeating...again

How many times do we need to repeat this?

NO ONE HAS SAID NOT to consider them, we have stated that one should not USE them without sufficient analysis & comment including appropriate adjustments (which could be zero), as we repeated over and over again.

 

[residentialguy]

Furthermore some indication of what adjustment may be necessary to make them comparable to "fair" market sales would also need to be analyzed and some comment made (adjustment could be zero).

We never adjust comparable sales to other comparable sales, we adjust comparable sales to the subject.

Except for the condition of sale. That always must be market value as defined.

 

[Terrel L. Shields]

Further, the lender may feel pressure from the regulators to clear the loan BEFORE it is forced to foreclose and different lenders may have different corporate culture as to whether to short sale or foreclose as they may have different levels of questionable debt and such on the books. So, if each and every lender could well be under a greater or lesser amount of stimulus to sell, and may be under a different corporate culture, and this stimulus and culture can change week to week depending on what has happened lately and when bank examiners & regulators may or may not be due, how do you know what motivation and stimulus the bank was under at the time of the short sale (or REO)?

exactly...so how do I calculate that??? paired sales?

Simply put, REOs make *&^% poor proxy for "market value" under the best of circumstance and would require adjustment UP in all but the worse of bad markets imho. And measuring how much is a dart board exercise.

 

[DMZwerg]

You misunderstood my post!! I said, an appraiser is sent out to appraise 7, 9 and 10 Cherry Lane, they are your subjects, not your comps!

I understood you perfectly and did indeed turn it around because your example was irrelevant AFAICT. The subject could be an REO, short sale, estate sale, RELO, or a burnt out husk and the definition of market value would not change if using the form 1004 and except for a difference for "as is" compared to "as repaired" the exact same comps could be used for each appraisal for (fair) market value.

Now you turned the three subjects into builder sales comps..

Imo builder comps are often less reliable than REO's, and when appraising in a subdivision, I always use at least 2 comps from outside and often more than that, inlcuding resale listings in the community if I can get them.

Actually, I would say they are equally unreliable proxies and thus why I too use at least some resale listings outside the subdivision.

Builder sales are unreliable not because they don't represent "market value", but because they have not been exposed to the market in the sense that resale homes are, re, homes listed in MLS

Builder sales here are typically listed through MLS so that factors is less applicable.

and sold through owners or lenders or whoever owns them , they are not the builder.

and the difference between a lender selling an REO and a builder selling a new construction is exactly what? :icon_twisted:
Now maybe you start to comprehend my point in that REOs (like builder sales) are not "typical" and have motivations and such that need to be analyzed and addressed. woohoo

We do agree on at least one thing, whatever comps we use, REO or Builder sale or whatever, yes verify and analyize the terms of sale. BUT WE STILL DON'T PICK SALES COMPS BASES ON IF THEY WERE "MARKET VALUE", BUILDER SALES ARE A POTENTIAL PROBLEM BECAUSE THEY HAVE NOT BEEN EXPOSED TO TYPICAL MARKET FORCES, RE LISTED ON MLS ETC.

Sure we do. If we have sufficient to support market value with fewer adjustments then that is what we are going to use because they appear more reliable. It is when we don't have as much choice they we start to think about ways to use non-traditional sales as actual comps and subconsciously start looking for ways to MAKE them fit as comps and with less analysis and need to fiddle adjustments.

You are starting to use different language now from appraising....proxies, traditional sales, are not the lexicon of appraising, fair market value is a business term rarely used in appraising, same as liquidation value and proxy for a comp? What is that?

Well, each and every time I use a term straight from appraising in this thread people start trying to tell me an orange is blue and posting the definitions don't help, so as Mentor used "proxy" so did I as that is a good enough term to use for properties that are often used as "compa5rables" but are not actually comparable for some reason (like they don't meet the definition of value you are appraising to). The term "fair sale" is straight from the Definition of Market Value in the FNMA term so if you don't comprehend "fair sale" or "fair market value" then you likely should not ever do mortgage appraising, and liquidation value is used in both real estate and finance (which are derived from the same field if you didn't know ... read your history of England during the colonial period, especially dealing with manors, sheep & Scotland).