REO's as comparables to non-REO

[J Grant]

YUP, brain freeze re departure rule!! Oh I miss it so much!!

 

[hastalavista]

if the market differentiates between REO and non-REO based on the listing status,
That would be extremely hard to prove.
So would your assumption that REO's automatically have "stigmas".

No, it isn't. I've appraised in many markets where there is no stigma at all and the buyers don't care if a property is REO or not (all other elements of comparison being equal)

I agree that many times, REO's may sell for less than non REO owned. But that usually has more to do with the fact that REO's are vacant and the seller might take less to sell them more quickly. That still does not automatiaclly eliminate them as comps. It also does not mean they sold less because of a "stigma", or "listing status"

No one is saying there is automatically a stigma (I'm beginning to sound like Res and DMZ :laugh.
By the way, how do you consider a non-REO comp that is vacant?
Many appraisers I know might give it least consideration in the value (point) reconciliation. Weighing how a comp fits in the reconciliation is part of the adjustment analysis too. Grid adjustments are explicit. Reconciliation adjustments are implicit.

I did sell RE, including HUD homes, quite a few years ago. There used to be a rule that to be a res apraiser you had to be a realtor first and it had some merit. We have to remember, the primary selection criteria for choosing comps is the principle of substitution, which comps most closely resemble the subject. IF an REO home closely resembles what a buyer wants, the agent will show it, along with a non REO home. These days, with REO's and short sales saturating many markets, it would be very hard to prove a stigma.

Your comments are focused to the difficulty in determining if the status of a property can be (a) identified as an element of comparison, and (b) if it can be measured so a unit adjustment can be determined.

I'm not saying it isn't difficult. I'm asking the question, if it can be identified and measured, then how does that market reaction (and therefore, market value) affect the appraisal of a property whose status happens to be one where the market has a reaction?

I'm confused here:

If you appraise a house that is REO owned, if you feel it has a stigma, and thus the standard you are going to use will differ from appaising it for the most probable price aka market value, then you have to invoke the departure provision, and state that on the report.

and I asked a question earlier on this point:

For an as-is market value appraisal of a stigmatized property, is the stigma an element of comparison that is considered in the valuation process?

If no, then the value is something that does not consider that as-is condition, no?
If yes, then the value is something that does consider the as-is condition.


The argument really is about the definition of market value (which has been the fundamental topic here).
If the definition of market value (as we use it in our GSE work) excludes influences such as listing status (which I am calling a stigma), then REOs should only be compared to non-REOs regardless if the market differentiates an as-is difference.
If the definition of market value includes the consideration of such influences, then the as-is value would also reflect that stigma.

This has nothing to do with the argument that a lender is, by default, under duress or is not arms-length.
It has nothing to do with cases where the lender is unloading the property for quick-sale purposes.
It has everything to do with how the market reacts to the listing status and if, by virtue of being an REO, the perception and expectations of the market are that those homes are worth less than one without the same listing status. We make adjustments for market perceptions all the time. Sometimes they are explicit (a line-item adjustment), sometimes they are implicit (given most consideration to the adjusted price of a particular comp for a particular reason; usually, due it being most similar).

Now, I thought I read somewhere that one of the authorities specifically (FHA, GSEs, VA, etc.) said when appraising a subject that is REO, non-REO sales should be used to determine market value. If there is such a citation and anyone knows about it, I'll accept that and admit my line of thought is incorrect.

I have read a lot of statements by the authorities that REOs should not be eliminated from consideration strictly due to their REO status, and that they need to be considered as part of the market.

Everyone seems to agree that, in cases where there is a difference in price reaction of REOs to non-REOs that cannot be explained by condition differences (they are the same), then an adjustment might be warranted. So, there doesn't seem to be much controversy that an adjustment can be made one way (comps that are REOs can be adjusted- and, usually upward, if the subject is a non-REO and the reaction can be measured).

Few (in fact, none as far as I can see) agree that the adjustment-arrow can go the other way: Non-REO sales can be adjusted downward if the subject is an REO if a reaction to the REO status can be measured. And I'm not sure anyone has agreed that no adjustment is applied if the Subject and Comps are all REOs if the market reacts to an REO difference (no adjustment as the reaction is presumably equal to subject and comps).

Again, what I am stating is this: to be consistent with a definition of market value that includes listing status of the subject is not a consideration, the element of comparison I'm talking about (the listing status of the subject) cannot be considered. Although it affects the subject's price and how market-participants react, it is not a consideration in the valuation of the subject in an as-is appraisal.
I can accept the above without much hesitation if I can find a definitive source that states that. Despite all the experienced opinions that have been presented in this thread (and I mean that sincerely), it is, as DMZ correctly pointed out, opinion without authority. :new_smile-l:

And, I'm not automatically assuming that REOs always get an adjustment, or that there is always a difference in price or market reaction, or that differences, if they do exist, can always be credibly measured.
In cases where the difference does exist and is an element of comparison used by market participants in their purchase-decisions, is it relevant to consider when the subject's most probably price in the market is influenced by that condition?

Finally, most stigmas affecting a property disappear once the stigma is removed. Sometimes this takes a relatively long (months if not years) amount of time. If an REO is a stigma, then it disappears over time as well; just over a very short-period of time because it is removed upon consummation of the transaction. :laugh:

 

[hastalavista]

Note that Fannie recognizes that an REO or short-sale may be categorized as having a "stigma". Yes, this section deals with an REO as a comp and not as the subject:

Part B, Origination Through Closing
Subpart 4, Underwriting Property
Chapter 1, Appraisal Guidelines, Appraisal Report Assessment
January 27, 2011
Printed copies may not be the most current version. For the most current version, go to the online version at
http://www.efanniemae.com/sf/guides/ssg/. 545
The appraiser is responsible for determining which comparables are most appropriate for the assignment. Fannie Mae expects the appraiser to account for all factors that affect value when completing the analysis. For example, if the appraiser believes a foreclosure sale or a short sale is an appropriate comparable, then the appraiser must identify and consider any differences from the subject property, such as the condition of the property and whether any stigma has been associated with it. The appraiser cannot assume it is equal to the subject property. A foreclosure or short sale property may be in worse condition when compared to the subject property, especially if the subject property is new construction or was recently renovated. The appraiser must conduct the proper research in order to complete the assignment and provide an accurate opinion of market value.

 

[J Grant]

Dennis, we do agree on some points, but I did find a few points in your last post confusing.

You referred to an "as is" value of the subject and then talked about stigma, as I understand it "as is" refers to condtion, such as sold "as is", and not subject to repairs or completion.

Re, when the REO is the subject, and the appraiser is assigned to appraise it for MV, (which most assignments are), I do not treat the fact that the subject is an REO any differently when it comes to selecting my comps, in other words, I don't try to select only REO comps, nor exclude them either. I use the same principle of subsitution for selecting the comps...if my subject REO is in poor condition, I will use comps in poor condition , if subject, even though an REO, is in good condition, I look for homes in good conditoin. This search might yield both REO and non REO comps. . I do not adjust the non REO comps "down" to the subject for stigma, because, l, in my market at least, I really cannot assume the market reacts to the REO as if it had a stigma , and because I am appaising it per MV (see below) I sometimes give either REO or non REO sales more weight depending on report. I would give an adjustment for conditio of sale if one were warranted.

In any event, I guess I am confused on a point...when we do an appraisal on a home and the assignment is MV, we make an assumption about the subject, re, what is the most probable price it would it bring on the open market on effective date of appraisal, if it had a sale not subject to undue stimulus etc...for every subject, it can be an assumption contrary to fact, re, if we are appraising a house for refinance, it is not really "for sale", yet for purposes of MV, we make the assumption that as if were on the markt as of x date with a sale not effected by undue stimulus etc.

So, we created a theoretical assumption about a refi subject as if it were a sale. Why are the rules different for an REO? In other words, the def of market value "theoretical sale", is the same as the def of market value "theoretical sale" of the refi subject, so doesn't that take precedence over who owns them in real life ( whether a bank or person,) and whether or not they are "really" for sale ( re, the refi subject is not for sale, but we appraise it as if were subject to a sale of MV terms on the effective date of the appraisal.

 

[hastalavista]

So, we created a theoretical assumption about a refi subject as if it were a sale. Why are the rules different for an REO? In other words, the def of market value "theoretical sale", is the same as the def of market value "theoretical sale" of the refi subject, so doesn't that take precedence over who owns them in real life ( whether a bank or person,) and whether or not they are "really" for sale ( re, the refi subject is not for sale, but we appraise it as if were subject to a sale of MV terms on the effective date of the appraisal.

It only makes a difference if the listing status is a legitimate element of comparison to consider, and if that status has a unidentifiable and measurable market reaction, and if its consideration is excluded by the definition of market value we use in our GSE work.

The 3rd if is the big question, which is directly related to the Definition of Market value.

 

[Mr Rex]

I think some of the litigators might argue that the contract price is a more important indicator of market value, regardless of other external stimuli.

 

[residentialguy]

You referred to an "as is" value of the subject and then talked about stigma, as I understand it "as is" refers to condtion, such as sold "as is", and not subject to repairs or completion.

That's correct. Your appraisal has nothing to do with the seller. As-is refers to having no repairs or completion needed. You are appraising the house as it stands.


A Dad could sell his 500k house to his son for 100k. You wouldn't find similar types of sales and give the house a market value of 100k, would you? No...they are asking for the market value as a fair sale (as defined)

Same with concessions. Seller could have 25k in concessions. That has nothing to do with your est market value. You wouldn't adjust the comps because the subject had concessions. Now, if the comps have 25k in concessions, then you would probably adjust for those. (regardless of whether or not the subject did)

 

[hastalavista]

Here is what I found (so far) regarding FHA's position:

A-2 Sales Comparison Approach Typically, the Sales Comparison Approach is the most applicable approach to estimate the market value of a REO property. Appraisers may utilize sales comparables from other REO transactions only when such sales are deemed to be the best available for the market area and they meet all of the following criteria:
• located in the subject neighborhood or reasonable proximity
• comparable property subject to reasonable adjustment
• sold with a willing buyer and seller
• exposed to the market for a reasonable period

Appraisers are reminded that an explanation, as well as support, must be provided for any adjustments to the sales price of comparable sales that exceed the guidelines set forth in Revised Appendix D: Appraisal Protocol, pages D-31, D-68, D-98 and D-127, attachment to Mortgagee Letter 2005-48. Inclusion of vacancy rates, rates of foreclosure and a discussion of foreclosure sales in the subject’s market area may be used as additional support for reliance on sales of other REO transactions.

Do not use distressed sales such as Sheriff Sales. These sales do not involve a willing seller nor are they exposed to the market under normal conditions. The resulting value indication derived from the use of such sales is not consistent with the definition of market value.

This quote appears to imply the following:
1. REOs can be used as comparables (provided they meet the criteria).
2. REO sales can be between willing participants (buyers and sellers); so the argument that all REOs, by definition, have unwilling participants (the seller) is contradictory to this point. Clearly, from FHA's perspective, some REO sellers can be "willing".
3. Distress sales are identified as being "Sheriff Sales". The statement implies that REOs are not always considered a "distress sale".

 

[hastalavista]

Here's the only other interesting item regarding FHA and REO properties I can find:

REO properties are to be appraised "as-is". The Dictionary of Real Estate Appraisal, Fourth Edition, Appraisal Institute defines an "as-is" value as follows: "The value of specific ownership rights to an identified parcel of real estate as of the effective date of the appraisal; relates to what physically exists and is legally permissible and excludes all assumptions concerning hypothetical market conditions or possible rezoning." The "as-is" value is the market value for the property as it exists on the effective date of the appraisal.

Does the part of excluding "hypothetical market conditions" extend to assuming that the subject property is not subject to the market condition/reaction that may be attached to its REO status?
:laugh: No, even I wouldn't go that far! (but maybe someone else would?)

 

[hastalavista]

That's correct. Your appraisal has nothing to do with the seller. As-is refers to having no repairs or completion needed. You are appraising the house as it stands.

I'm suggesting that as-is means as-is; including any physical condition, appeal, stigma, or other relevant elements of comparison.