REO's as comparables to non-REO

[residentialguy]

What some appraisers are doing, is taking the defintion of MV alone, not related to the purpose of the appraisal (finding MV for the subject). They are taking the defintion and applying it to a criteria for comp selection, as you are doing

When trying to find the most probable price of an orange, it is usually best to use oranges as your comps. If oranges aren't availble, you can find out the price of an apple and then find the market variance of what the market will pay between an apple and an orange to find out the most probable price of an orange.

 

[hastalavista]

You missed point 4: "comparable property subject to reasonable adjustment"
4. REOs must be reasonably adjusted to be used. (Period)

I didn't miss anything.

But it is clear that our difference in opinions is based on how the definition of market value is applied in our work given (a) the market, (b) the intended use, and (c) the interpretation of the definition (you may exclude a & b and say there is only one interpretation of "c" :laugh.

So, DMZ, we are clearly arguing past each other at this point, which is not unusual on this forum. I respect your opinion. I admitted my argument is in the minority (and I may be the only one who holds it, which would put it in the extreme minority). I've also said:
A. If someone will post from some authoritative source where they instruct appraisers to only use non-REO sales when analyzing REO sale, or that the value of an REO should not be based on the price of REO sales, all other things being equal, then I'll happily and openly admit my line of thought is incorrect. I looked and haven't found such a statement. What I did find (and what I posted) are instructions that allow the use and consideration of REOs as comparables, but it is relatively silent on what to consider if the subject itself is an REO. Clearly REOs are not excluded from consideration as comparables. Not so clear is if the REO status is a legitimate consideration when the subject is an REO and where there is an identifiable and measurable difference in market appeal based solely on that status.
Perhaps you have access to such documents? And, I assume if the opposite is true (there is documentation that says they should be used and considered the best like-for-like substitutes without adjustments for status) you'd consider (and possibly admit) that your position needs re-evaluation.

B. I've said (and I'm not the only one) that it would be helpful for appraisers and users if some authority provided clarification in valuing REOs: Do they want the most probable price that the REO will fetch as-is (in its stigmatized condition, and Fannie itself uses the term "stigma"), or do they want the most probable price the REO will fetch as-if it were not stigmatized? That's a simple question that can be simply resolved, no?

Here is the definition of "stigma" from The Dictionary of Real Estate, 4th ed. (my bold):

stigma
An adverse public perception regarding a property; the identification of a property with some type of opprobrium (environmental contamination, a grisly crime), which exacts a penalty on the marketability of the property and hence its value.

Here is the definition of "elements of comparison" from the same source:

elements of comparison
The characteristics or attributes of properties and transactions that cause the prices of real estate to vary.

I am suggesting that the REO status of a property creates a stigma in some markets, such that the public perception extracts a penalty on its marketability and, hence, its value.
If I am correct, then the question becomes, "Should that stigma be considered as an element of comparison when concluding an opinion of value using the GSE Market Value Definition?"

Is it a stigma?
Is it a relevant element of comparison?
Is it considered when (1) concluding a MV opinion for GSE work and (2) when the subject has such a stigma?

 

[residentialguy]

A. If someone will post from some authoritative source where they instruct appraisers to only use non-REO sales when analyzing REO sale, or that the value of an REO should not be based on the price of REO sales, all other things being equal, then I'll happily and openly admit my line of thought is incorrect.

I said it. You'll find no one more authoritative than me! :new_2gunsfiring_v1:

 

[hastalavista]

I said it. You'll find no one more authoritative than me! :new_2gunsfiring_v1:

I like that! :laugh:

 

[J Grant]

Dennis, hi (we all must be slow lol to keep posting so much)

Re, you posted the definition of stigma, an opporbrium such as env. contamination or a grisly crime, how does that compare in any way with a home being an REO? Env contamination, or the suspicion of it, is a health risk. A grisly crime is often published in the newspaper and people in area will drive by the home pointing to it. In other words, a stigma is a "cloud" surrounding the home that will remain, at least for a period of time, after the new owner purchases it.

Compare that to an REO. There is no such thing, actually, as an "REO house". There is a house, and it is owned by a lender, and when it is sold, realtors and appraisers refer to it as having had an "REO sale". But once it changes ownership, no "cloud" of it having been owned by the bank lingers around the property.

In fact, these days, it is considered smart by savvy buyers to purchase an REO, and an owner can brag to their friends about what a good deal they got . So unless subject is in a snobby exclusive area or the like, it is very difficult to prove a stigma for an REO sale.

Evidence that REO's tend to sell lower is not evidence that they sold lower because of stigma. Most often, REO's sell lower because (some of them) are in worse condition than surrounding homes, or because they are vacant and the lender is willing to sell them for less for a quick closing, or because (in some areas), investors tend to buy them. These factors imo are more provable to adjust for than stigma.

 

[J Grant]

I didn't miss anything.

on what to consider if the subject itself is an REO. Clearly REOs are not excluded from consideration as comparables. Not so clear is if the REO status is a legitimate consideration when the subject is an REO and where there is an identifiable and measurable difference in market appeal based solely on that status.
B. I've said (and I'm not the only one) that it would be helpful for appraisers and users if some authority provided clarification in valuing REOs: Do they want the most probable price that the REO will fetch as-is (in its stigmatized condition, and Fannie itself uses the term "stigma"),

Above, Fannie uses the word stigma when applying it to a comp, they adivse that IF the appraiser can prove a stigma for an REO comparable, then they should adjust for it. They did not address stigma as it might relate to a subject.

I addressed the issue of stigma in above post for clarity. Please read my above post, I do not believe a "stigma" exists for REO's in most markets, and that even if REO's tend to sell lower, that it is most often not due to "stigma", but to other factors, such as vacancy or condition.

If an appraiser takes an assignment to appraise a home that is owned by a lender (referred to as an REO), and at the top of the USPAP form, is the purpose of the appraisal, "appraise the subject for market value", then isn't that what the appraiser agrees to do? MV is the most probable price. If the appraiser decides to deviate from the SOW of MV, then what are they trying to find, the "lowest possible price the subject would bring"?

If the appraiser decides to deviate from a report stating they are appraising for MV, and instead sets out to find the lowest possible price, don't they have to disclose that in the report?

Re Dennis, I believe the issue of when the subject is an REO is addressed in the FHA blurb you posted back on p 27 or near that page of this post?

All I can add is that I have appraised hundreds of lender owned (REO) subject properties in the last two years. (slowed down now, why I am posting so much). I appraised each one for MV , just as the FIRREA form said at the top under the word USPAP, it has the statement that the purpose of the apprasial is to provide a MV for the subject.

 

[hastalavista]

Re, you posted the definition of stigma, an opporbrium such as env. contamination or a grisly crime, how does that compare in any way with a home being an REO? Env conatimantion, or the suspicion of it, is a health risk. A grisly crime is often published in the newspaper and people in area will drive by the home pointing to it. In other words, a stigma is a "cloud" surrounding the home that will remain, at least fora period of time, after the new owner purchases it.

Compare that to an REO. There is no such thing, actually, as an "REO house". There is a house, and it is owned by a lender, and when it is sold, realtors and appraisers refer to it as having had an "REO sale". But once it changes ownership, no "cloud" of it having been owned by the bank lingers around the property.

Once it changes hands, the stigma is removed.
Not all stigmas are "lingering". Some stigmas can be remedied by correcting the issue. This is discussed in detail in R. Bell's "Real Estate Damages" text (AI).
And, as I posted, Fannie uses the "term" stigma in its discussion of REOs.

In fact, these days, it is considered smart in many cases to buy an REO, and an owner can brag about what a good deal they got etc. So imo, unless it is a very exclusive area or the like, it is very difficult in most markets to prove a stigma for an REO sale.

That may be true in all of your markets. Not so hard to support in many of mine.

Evidence that REO's tend to sell lower is not evidence that they sold lower because of stigma. Most often, REO's sell lower because (some of them) are in worse condition than surrounding homes, or because they are vacant and the lender is willing to sell them for less for a quick closing, or because (in some areas), invesotors tend to buy them. These factors imo are more provable to adjust for than stigma.

I never suggested that. I've always referred to "like for like".
I also posted on the case where a house is vacant and how I see many appraisers handle that when it appears to affect the marketability.

If you are suggesting that the existence of an REO stigma may be difficult to credibly support, I have no argument with you. That can be (and I would say "is") true in many cases.

If you are suggesting that there is no such thing as a "stigma perception" attached to an REO, I'd disagree, and cite Fannie's statement as evidence that an authority, at least in some cases, recognizes a "stigma" can be created (or, is believed to be created).

I agree with you 100% about spending a lot of time on this topic (which I think is useful). However, I am not finishing the work I need to finish, so now might be a good time for me to focus on that!

 

[J Grant]

Dennis, I agree with your post agreeing with me, lol!

Re, a stigma does not have to linger to be a stigma, I understand that as well. However, I still do not see how being listed for sale as an REO equates with the seriousness of the stigma, whether long or short lasting, of a house known or suspected to having env contanimation, or where a grisly crime took place.

Imo, Fannie's latest udate addressing the issue of "stigma", probably does not relate to a postion held behalf of Fannie itself that an REO may have a stigma.
They are addressing it, because they are being peppered with questions by appraisers about how to appraise if they believe an REO comp has a "stigma".

In the "old days", aka a few years ago, it was more true that an REO sale had a stigma. Back then, the typical REO was the creepy boarded up house that no one wanted. That is no longer the case in most areas, but imo many appraisers still cling to the outdated notion that an REO has a "stigma". But again, if you can prove they do in your market, then adjust for it.

I am curious about how you can prove it, when even if REO's tend to sell lower, that is often attributed to lenders taking lower offers to sell the vacant REO faster, or physical condition etc. How do you measure the amount of a "stigma" to adjust for, when so many other factors can be present which might lower the price of an REO compared to a non REO?

As I said, from point of view of buyers, it is considered savvy these days to buy an REO, and realtors don't give a * about what they sell, they are in it for a commission, and if it is quicker for them to close on a vacant REO than an occupied home where owners don't want to move till the school year is up , the realtor is going to favor showing the REO to buyers.

 

[hastalavista]

I am curious about how you can prove it, when even if REO's tend to sell lower, that is often attributed to lenders taking lower offers to sell the vacant REO faster, or physical condition etc. How do you measure the amount of a "stigma" to adjust for, when so many other factors can be present which might lower the price of an REO compared to a non REO?

A good and fair question; I need to make this quick.

I certainly do a statistical analysis of the market and trend the three different types of listing status (traditional, REOs, and shorts). I can use that data and throw out the outliers (low-sales, long-time on market, etc.) to get some kind of baseline trend. That, in and by itself, is not conclusive.

But what I also do (and I've posted this regularly on the forum, so this is my standard practice) is talk to the agents who participate in my market. I speak (or, more likely, email-correspond) with the agents/brokers on both sides of the trade (buyer & seller). Many times I do this before I've inspected the subject, so I may talk to 8-12+ participants for properties I'm considering (not all get used in the report).
The selling agent has an interesting perspective, especially when REOs or shorts are something that they specialize in. The buyer's agent usually provides a critical ingredient into the analysis; specifically, how did the buyers compare their purchase (let's say it was an REO) to non-REOs, and did the status influence their bid-decision? While the feedback from individual agents can be considered subjective, the collective forms a consensus which is becomes objective.
Some markets show a pattern of buyers discounting simply because of the listing status when everything else about the house is similar to non-REO sales. Sometimes the consensus is that REOs, while having a stigma in the past, have lost their stigma (traditional sale agents state that they consider the REOs their competition and price their homes competitively with the REOs). It varies, but I think you get the idea.

When the pattern is sufficient, sometimes a credible percentage adjustment can be extracted. Sometimes a percentage adjustment may not be possible; in those cases, an implicit adjustment can be made in the reconciliation process.

Combined (statistical analysis and broker/market-participant survey), the data is sufficient to (in my humble opinion) form a credible opinion of stigmatization and formulate a reasonable adjustment based on the market's reaction.

My experience is this: poor quality/condition REOs almost always sell at a significant discount to their counter-parts (non-REO/poor condition properties). However, when the condition is the same, sometimes a reaction in pricing difference can best be explained by the stigma-perception (especially when it is confirmed by the market participants).

I spend a significant amount of time analyzing the market beyond the 1004mc analysis in situations where the REO/short-sale dynamic appears to be a market influence on values. Do enough appraisals in the same markets, and the pattern becomes clearer (if it exists).

Not all markets are the same and reactions (perceptions) can change over time- even in the same region such as mine. Homes in some San Francisco neighborhoods have no negative reaction to their REO status assuming like-for-like with non-REOs. Homes in areas of the Central Valley/Stockton market can have a discernible difference.

The mix of the types of properties also affects if a stigma exists. In markets that are heavily saturated with REOs and shorts, those tend to be the competition that others price against.
In areas where there are few REOs (and demand is low), those tend to be the areas where REOs see the greatest discounting.

The clustering of REOs in a particular market does appear to have an effect on the neighboring properties (this should come as no surprise, but some may not believe it or it is simply not true in all cases). This is why it is dangerous to automatically assume that comps in an area where the mix is different (ratio of REOs/Shorts/Traditionals) are better indicators of value than the REOs in the subject's immediate area.

The trickiest markets to determine a reaction (in my experience) is where the REOs and shorts make up about 30-50% of the transactions. Once you get over 50%, they appear to lead the pack. Under 30%, they appear to trail the pack. In that middle-ground, sometimes nothing can be concluded (or, attributed to simply a listing status stigma). Like I say, this is in general and there are exceptions.

By the way, in some markets in the past, my experience and market participants agree that a short-sale would almost always sell at a low price given the uncertainty of the negotiation process. Now, in some markets, that is no longer true (per my analysis and confirmed with market participants). Some lenders are speeding up their negotiation and approval process, and buyer agents are now advising their clients not to automatically assume a short-sale will take an extraordinarily long time.
Also, in some markets, lenders and short-sale sellers are offering credits; especially for FHA purchases, to be more competitive. And, I'm seeing more lenders do cosmetic repairs (paint, flooring, clean-up the landscaping) before marketing the home to the public. In these markets, many times, such homes compete equally with non-REO homes.

In the peer review I mentioned earlier, I said that my peer and I had a disagreement on how REOs and short-sales should be treated and analyzed. One of the reports she reviewed was in a market where there was significant REO and short-sale activity, and I applied an adjustment for this stigma. She told me she would be very uncomfortable trying to conclude a market reaction for buyer/seller motivations that included a stigma for listing status, but she did say that my report had reasonable analysis and made a credible argument for making such an adjustment. I appreciated her candor on the issue; and for sure, if she felt it was unreasonable and non-credible, she would have told me. :new_smile-l:

 

[J Grant]

Dennis, I will try to be brief too have to go out...I agree with much of your thought process. If you can show a proof of stigma fine, (or if your report is strong enough with fuzzy proof that will probably be sufficient too)

But I think you noted a lot of reasons REO's sell lower and in realtiy, they have nothing to do with stigma, or a "listing stigma".

The reality is this, if an REO and non REO are in same condition, and a buyer looks at both, the REO, because vacant, doesn't show as well. The utilities are off, the rooms look dark, the pool is covered with plastic, there is no furniture. So the buyer offers less. That is an appeal problem, not stigma. Also , buyer often look at REO's just figuring they will try to offer less and see what happens. They offer less not because of a stigma, the realtors encourage it, saying the bank wants to sell etc.

Plus, there are a number of cash buyers purchasing them in some areas and lenders will take less for a quick cash closing. There are so many factors of influence, it is really hard to seprate these factors out from stigma to why prices can be lower for REO's (when they are, not always the case)

Because of this, I don't typically adjust for stigma. I do weight some sales, whether REO or non REO, more heavily, depending on my subject, the market, etc. The reason I do this is because it is extremely hard to prove a stigma exists, and even if it does, to extract an exact amount of it, that might be separate from the vacant status of subject and other influences on price.