REO's as comparables to non-REO

[Metamorphic]

Seller identity or status should not change a property's market value. What's relevant is that the comparables used are a consistent with fair conditions of sale or else adjusted or reconcilled for differences if the market shows it is warranted.

Seller identify or status does not change a properties market value, but it MOST CERTAINLY does change the economic reality of sellers.

Banks, like other owners that are not occupying (or renting out) are not deriving any benefits of ownership. A bank pays holding costs, maintenance costs, utilities, taxes, etc, for these houses that are not keeping the rain off their heads. A "typical" (occupying) seller gets to live there while he's trying to sell, so he's less motivated to settle for a lower price, because while it costs him, he gets shelter. A bank has a CLEAR financial motivation to get rid of this liability which provides no benefit and so selling for less that market value makes sense.

It is incorrect to describe this "non-occupancy expense-benifit differential" as distress. Its most certainly NOT distress. Its a prudent financial calculation. If discard REOs as non market value sales because of "distress" you better throw out every RELO, every probate, and every non-occupied sale, because in each case you have somebody racking up expenses without deriving benefit. If they don't sell low to sell fast, they're not market value because they're not well informed.

Like Dennis I'm not fond of applying the term stigma to REOs. Its pretty obvious that Banks have a well earned bad rap for their handling of REO and Short Sales. They have proven sufficiently difficult work with that most agents will steer their clients to non-REO/Short properties when ever they can, particularly when they have a client that has a time line for making a move. So I think its fair to say that the segment of buyers interested in REOs is limited to buyers that can or will tolerate the banks bad behavior as a seller. Any time you reduce the pool of potential buyers (demand), you reduce the market value of the commodity.

Also, have you ever noticed that in the MLS you only get a few pictures of REOs, but 8-10 or more of Resale properties? Its pretty clear to me that REOs are not marketed as effectively as Resales.

Bottom line there are several good reasons why the market value of REOs is lower than Resales.


Normally, it would be a big challenge to quantify the magnitude of the collective effect of these price reducing effects. Fortunately we've got a whole rear-load of data to analyze and its pretty easy to home in on an adjustment. If you can effectively understand the difference between where REOs typical settle and where Resales typically settle (with full knowledge that not EVERY deal will settle at this difference), how is that any different that effectively understanding the difference between where a house with a pool will settle compared to a house without a pool (with full knowledge that not EVERY pool will have exactly that same impact on a sale)?

 

[J Grant]

Not knowing more about the comps, at this point I'd answer number 3.

In the real world it is not so perfect that the 3 REO comps all sell lower than the three non REO comps, though often that may be so.

I know we do it for convenience, but as to labeling the subject "an REO". In reality there is no such thing as "an REO". There is a house or condo or duplex that is lender owned. It has not been sold yet, so there is no "REO sale stigma" . In fact, when we look the subject up in MLS, we often find the subject is is not listed yet, so there is no "listing stigma".

And , reardless of our own personal view that once the subject hits the market, that it might be affected by a listing status/ stigma, on the day we are appraising it, we sign our name that we are appraising the subject accoding to the definition of MV (which overides the fact that it is lender owned). For report purposes, we are appraising the subject as the theoretical sale per the definition of MV, in order to arrive at the most probable price.

What happens in acuuality to the subject the day after we appraise it is not our concern, just as with any other subject.

If we are apparising a lender owned property, the subject is appraised per the defintion of MV. If, the next day, the lender puts it on MLS and every realtor in town shuns it for a stigma, that is not our concern. Our assignment on X date was to appraise the subject according to the definition of MV.

The same as with any property. We can appraise an private owned home, and the next day it burns to the ground. What happens the next day is not our concern. On X date, we aprpaised the subject that was in good conditon that date, for MV.

To sum up, the subject is a home owned by a lender. You agree to appraise this lender owned home for MV. It states that at the top of report.

But if, when developing the report, you let your own personal beliefs about "REO's", make you use different methodlogy than you would for any other subject you are appraising for MV...such as picking lcomps as if appraising for the lowest price, rather than the most probable price...then how can you sign your name stating that you appraised the subject according to the definition of MV?

 

[AngelEyes359]

Seller identify or status does not change a properties market value, but it MOST CERTAINLY does change the economic reality of sellers.

Banks, like other owners that are not occupying (or renting out) are not deriving any benefits of ownership. A bank pays holding costs, maintenance costs, utilities, taxes, etc, for these houses that are not keeping the rain off their heads. A "typical" (occupying) seller gets to live there while he's trying to sell, so he's less motivated to settle for a lower price, because while it costs him, he gets shelter. A bank has a CLEAR financial motivation to get rid of this liability which provides no benefit and so selling for less that market value makes sense.

It is incorrect to describe this "non-occupancy expense-benifit differential" as distress. Its most certainly NOT distress. Its a prudent financial calculation. If discard REOs as non market value sales because of "distress" you better throw out every RELO, every probate, and every non-occupied sale, because in each case you have somebody racking up expenses without deriving benefit. If they don't sell low to sell fast, they're not market value because they're not well informed.

Like Dennis I'm not fond of applying the term stigma to REOs. Its pretty obvious that Banks have a well earned bad rap for their handling of REO and Short Sales. They have proven sufficiently difficult work with that most agents will steer their clients to non-REO/Short properties when ever they can, particularly when they have a client that has a time line for making a move. So I think its fair to say that the segment of buyers interested in REOs is limited to buyers that can or will tolerate the banks bad behavior as a seller. Any time you reduce the pool of potential buyers (demand), you reduce the market value of the commodity.

Also, have you ever noticed that in the MLS you only get a few pictures of REOs, but 8-10 or more of Resale properties? Its pretty clear to me that REOs are not marketed as effectively as Resales.

Bottom line there are several good reasons why the market value of REOs is lower than Resales.


Normally, it would be a big challenge to quantify the magnitude of the collective effect of these price reducing effects. Fortunately we've got a whole rear-load of data to analyze and its pretty easy to home in on an adjustment. If you can effectively understand the difference between where REOs typical settle and where Resales typically settle (with full knowledge that not EVERY deal will settle at this difference), how is that any different that effectively understanding the difference between where a house with a pool will settle compared to a house without a pool (with full knowledge that not EVERY pool will have exactly that same impact on a sale)?

"I am not under distress," said the homeowner who sold his home under MV because his business had failed and was being chased by the IRS, "I am making a prudent financial calculation."


Aside from your prudent financial calculation argument I am in complete agreement with what you wrote. I don't assume all REO are under distress. Sometimes the market shows no evidence of price differential and even if it did the cause wouldn't necessarily have to be distress. I always consider REO sales and use them as comparables frequently when they are the best comparables available but I feel compelled to listen to the market when it tells me there is an adjustment or particular weighting in the reconcillation that is warranted.

 

[J Grant]

Seller identify or status does not change a properties market value, but it MOST CERTAINLY does change the economic reality of sellers.

That may be true, but it is to be put aside, if we are signing a report stating we are appraising a lender owned home for MV. When we agree to appraise for MV, we have to put aside the "economic reality of the seller" (the bank), in order to appraise the subjet for MV.

If after we hand the report in, the realitise of listing on MLS or whatever is affected by the enocmonic reality of the seller, that is not our concern, our concern is to aprpaise the lender owned subject for MV (if that is what we sign our name that we did)

It is just like any other property. We might appraise a private owned house, for example, owned by an ego narcisist owner. The owner asks us to provide MV for the subjec, saying they are thinking of selling. We appraise subject for MV of 250k and give the aprpaisal to the seller. The next day, the seller ignores our MV opinion and lists if for sale in the newspaper for 500K. The ego driven, delusional pricing of the subject by the seller after we finish the appriaisal is no more our concern than any possiible stigma or market status reaction that may occur after we finish an appraisal of a lender owne home.

The purpose of the two reports was the same, to appraise for MV. That is the standard for devleoping the most probable price of the subject, regardless of who in reality owns a subject.

 

[AngelEyes359]

(my underscore)




Which of the following best describes your reconciliation:

1. These homes are effectively the same except for the REO status. My subject is an REO, so I'm going to give most consideration to those similar same-type sales and arrive at a point-value near the lower end of the value range.
2. These homes are effectively the same except for the REO status. However, I do not consider the subject's REO status to be relevant, so I am going to arrive at a point-value near the upper end of the value range.
3. At this stage, I don't consider the status-type to be relevant; since they are all similar, I'm going to reconcile at the mid-point of the value range.
4. Flawed poll! I'd make an adjustment to the REO sales since they sale below the non-REOs, and I'd tighten my range to $300k to $305k.
5. Your whacked. None of the above is how I think!

(1) Can't do that one. As much as I would like to give it to them they did not ask for disposition value. They asked for market value.
(3) Can't do that either. Not all comps are created equal. Reconcilling in the middle sounds like euphemism for averaging. We are supposed to reconcile not average. When in doubt just average. That sounds like what Zillow does.

I would have to pick #2 or #4 if the market showed a price differential between the two groups with a strong preference for #2 if only to avoid the uncomfortable hot seat position choosing #4 would put me in. They have asked me for market value which assumes conditions of fair sale not disposition value. But I would rather provide an accurate opinion of market value and move on quickly than buy myself a guaranteed headache.

 

[residentialguy]

You guys are making me distressed :new_silly:

 

[residentialguy]

Seller identify or status does not change a properties market value, but it MOST CERTAINLY does change the economic reality of sellers.

Banks, like other owners that are not occupying (or renting out) are not deriving any benefits of ownership. A bank pays holding costs, maintenance costs, utilities, taxes, etc, for these houses that are not keeping the rain off their heads. A "typical" (occupying) seller gets to live there while he's trying to sell, so he's less motivated to settle for a lower price, because while it costs him, he gets shelter. A bank has a CLEAR financial motivation to get rid of this liability which provides no benefit and so selling for less that market value makes sense.

It is incorrect to describe this "non-occupancy expense-benifit differential" as distress. Its most certainly NOT distress. Its a prudent financial calculation. If discard REOs as non market value sales because of "distress" you better throw out every RELO, every probate, and every non-occupied sale, because in each case you have somebody racking up expenses without deriving benefit. If they don't sell low to sell fast, they're not market value because they're not well informed.

Like Dennis I'm not fond of applying the term stigma to REOs. Its pretty obvious that Banks have a well earned bad rap for their handling of REO and Short Sales. They have proven sufficiently difficult work with that most agents will steer their clients to non-REO/Short properties when ever they can, particularly when they have a client that has a time line for making a move. So I think its fair to say that the segment of buyers interested in REOs is limited to buyers that can or will tolerate the banks bad behavior as a seller. Any time you reduce the pool of potential buyers (demand), you reduce the market value of the commodity.

Also, have you ever noticed that in the MLS you only get a few pictures of REOs, but 8-10 or more of Resale properties? Its pretty clear to me that REOs are not marketed as effectively as Resales.

Bottom line there are several good reasons why the market value of REOs is lower than Resales.


Normally, it would be a big challenge to quantify the magnitude of the collective effect of these price reducing effects. Fortunately we've got a whole rear-load of data to analyze and its pretty easy to home in on an adjustment. If you can effectively understand the difference between where REOs typical settle and where Resales typically settle (with full knowledge that not EVERY deal will settle at this difference), how is that any different that effectively understanding the difference between where a house with a pool will settle compared to a house without a pool (with full knowledge that not EVERY pool will have exactly that same impact on a sale)?

Good post, met! REOs are a mess to figure out. I would argue that the sales you mentioned could be considered "distressed", but that would not mean you can't use them. I use REO, but cringe a bit when I do. So many variables and unknowns....they are not as reliable indicators because of this.

I just finished up an appraisal today. There were 11 comps in the last 3 months...only 1 was a traditional type fair sale. I ended up going out 5 months and using 3 traditional sales and 2 REOs. (and for those of you that are thinking I went out 30 miles, you're wrong...the farthest comp was 1/2 mile away, well within the subject's neighborhood.) Sale price of the traditional sales were 155k-169k...the REOs were 141k-144k. I ended up with a MV of 148k. I didn't adjust for condition of sale {{gasp}}...but I placed most weight on the 3 traditional sales in reconciliation, (EMV was bracketed by the adjusted sale price). The REOs were lower - about 15k. I could have adjusted for the REOs, but I just included them because they were prominent in the neighborhood and driving the market down. I noted that their sale price was not a good indication of the most probable price that this property would bring in an open market with adequate exposure by a typically motivated buyer and seller, as defined by Fannie Mae.

When I spoke with all the agents, I asked if the market, given the identical house in identical condition, would pay more for the traditional sale, they all said yes. This came from both the agents of the traditional sales as well as the agents of the REOs. This is in an area where 1 out of 11 sales are REOs.

 

[Metamorphic]

Good post, met! REOs are a mess to figure out. I would argue that the sales you mentioned could be considered "distressed", but that would not mean you can't use them. I use REO, but cringe a bit when I do. So many variables and unknowns....they are not as reliable indicators because of this.

I just finished up an appraisal today. There were 11 comps in the last 3 months...only 1 was a traditional type fair sale. I ended up going out 5 months and using 3 traditional sales and 2 REOs. (and for those of you that are thinking I went out 30 miles, you're wrong...the farthest comp was 1/2 mile away, well within the subject's neighborhood.) Sale price of the traditional sales were 155k-169k...the REOs were 141k-144k. I ended up with a MV of 148k. I didn't adjust for condition of sale {{gasp}}...but I placed most weight on the 3 traditional sales in reconciliation, (EMV was bracketed by the adjusted sale price). The REOs were lower - about 15k. I could have adjusted for the REOs, but I just included them because they were prominent in the neighborhood and driving the market down. I noted that their sale price was not a good indication of the most probable price that this property would bring in an open market with adequate exposure by a typically motivated buyer and seller, as defined by Fannie Mae.

When I spoke with all the agents, I asked if the market, given the identical house in identical condition, would pay more for the traditional sale, they all said yes. This came from both the agents of the traditional sales as well as the agents of the REOs. This is in an area where 1 out of 11 sales are REOs.

Yeah, well "distressed" is melodramatic way of saying that the seller is somewhat more motivated by marketing time that ultimate price. Distressed makes it sound like there's a gun to their head, but the fact of the matter is the bank is just trying to save another months interest and HOA dues by setting an attractive price, and the Negotiator at the bank, I'm sure, sees the REO inventory as job security, not a jacketed hollow point.

The whole question is can you hang a price tag on the motivation of a group of sellers (or buyers for that matter). What's funny about the whole thing is that nobody cringes when they use the sale from the seller than was not at all motivated by a quick marketing time and that was willing to sit on the market till the found the buyer that was willing to pay top dollar for their particular property. That guy is just the opposite side of the coin of the REO but nobody freaks...or would even think to investigate that.

We're also not even considering the variability in buyers. The guy that's getting transferred and has a week to get under contract and a month to take possession, is probably not going to get the same deal as the guy with 2 months to shop and 6 months to wait for a short sale negotiation. The contingent-conventional buyer is probably not going to be able to buy as cheaply as the cash-no contingencies buyer. We do appraisals all the time mixing these things and usually dont even think of adjusting. Any one of these could produce a sales price variance equivalent to the typical REO vs. Resale. With REOs we've got loads of data to support an adjustment so why not. Obviously fewer adjustments is better, so if I'm choosing between the REsale model match and the REO model match I'll take the Resale every time, but that REO is far from unusable.

 

[residentialguy]

What's funny about the whole thing is that nobody cringes when they use the sale from the seller than was not at all motivated by a quick marketing time and that was willing to sit on the market till the found the buyer that was willing to pay top dollar for their particular property. That guy is just the opposite side of the coin of the REO but nobody freaks...or would even think to investigate that.

I do

We're also not even considering the variability in buyers.

I do

 

[DMZwerg]

The definition of MV exists to define the value of the subject, see my above post, at top of page it states purpose of the appraisal, to provide the lender/cleint with the makret value of the subject property.

The definition of market value exists to IDENTIFY exactly what value you are appraising. If the subject is an REO market value is NOT what REOs are selling for, but rather is the market value that meets the definition, generally of the same condition as the subject ("as is" value), thus the existence of the REO addendum.

And then on the addendum, the term MV is defined, and it is meant to apply to finding the value of the subject (puropose of the appraisal)

Almost. It applies to finding the market value of the subject, in this case under conditions of a fair sale and meeting the conditions of the definition. Therefore it applies to the COMPS, which are to be adjusted to meet this definition. Unless the appraisal is done "subject to" the subject is NOT adjusted to meet the definition, only the comps; if done "subject to" then the subject would have portions altered to "as repaired" or "as plans" and the comps adjusted to that hypothetical version.

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

Which would be correct in my opinion.

Let us say you select only "comps" that are in similar condition but are all bank sales (REOs) that were marketed to be and sold within 30 days, and say you use them all without adjustment. Have you then appraised market value as requisite to a fair sale (etc.)?
Actually, no, that value would more likely meet the definition of "AS-IS" estimate of market value based on a client-imposed restricted market exposure time of 30 days.
How about if the subject needed serious work but all the comps were in average or better condition and sold within 30 days?
Again, no, but rather "AS-REPAIRED" estimate ... exposure time of 30 days.

It is the comps selected, used, and how they are adjusted (or not adjusted) that really determine whether or not the definition of market value is being followed and what exact market value (aka, under what definition) is being appraised.

Hope that clears that up for you a bit!



p.s. Thanks for using quotes! woohoo