REO's as comparables to non-REO

[JSmith43]

Holy cow! I'm glad my automatic post notification is turned off!!

Mr Moderator: Do I detect a pattern of you reminding the readers that some of the posters expanded the sales study parameters when faced with a dearth of recent nearby data?

Good thing that never is the case on the commercial side of the tracks:laugh:

Now that I got that out of my system, let me say that I am convinced that ResGuy and Zwerg & other contributers are putting forth arguments that are not put aside by ridicule. I'd like to be harder on you than that, but I am one sarcastic SOB myself, at times.

 

[DMZwerg]

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.

I consider them, analyze them, and don't use RELOs, some estate sales, and so forth if I have better comps available. I determine, to the best of my ability, via analysis and verification, whether or not the buyer or seller had motivations that were not typical. When I do use them I try to adjust or at least comment on why I am giving them less weight ...

Which is, oddly enough, exactly how I treat REOs. :icon_wink:

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.

Actually I would go further. The culture of some banks is to accept cash offers even over higher bid offers that have typical financial arrangements comparable to cash. Since some institutions have this culture and others do not, and its implementation can be seemingly erratic (aka, as in "more likely just before the regulators are due), REO sales transactions may well not be typically motivated at all. Further, those that foster this culture skew the pool of potential buyers much more to primarily investors rather than primarily owner-occupiers (traditional for SFR) and thus may well be pulling from an almost entirely separate buyer pool than traditional SFRs.

I have actually seen that happen in Kenosha with ALL duplexes, not just REOs, and the prices in that market fell twice as hard and far as both the SFR market and the 3-4 family market as the owner-occupancy buyers were no longer supporting (and were barely participation in) the market. In other words a fundamental shift occurred. In one neighborhood market there was exactly ONE non-REO sale in last 12 months (actually a "flip") and expanding led to only more REO sales. Owner occupiers are not selling because the values have dropped so much (unless forced to via short sale or foreclosure) and are not buying. Investors are snapping them up now that the cost compared to income and taxes have finally dropped to where they are more equivalent to 3-4 families, thus the return on net investment is not longer skewed by competing with potential owner occupiers.

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.

Also correct locally.
And much harder for appraisers to verify condition without information. :icon_mrgreen:

 

[DMZwerg]

Now that I got that out of my system, let me say that I am convinced that ResGuy and Zwerg & other contributers are putting forth arguments that are not put aside by ridicule. I'd like to be harder on you than that, but I am one sarcastic SOB myself, at times.

I used to work in the publishing industry and had the joy of being the forum person when we had to axe a number of popular programs. I loose my cool sometimes but would not worry a Mod based on anything stated on this thread so far

 

[hastalavista]

J Grant:

I see you modified your post. Too bad, I was going to say "why don't you tell me what you really think?" :laugh:

I'm a big boy and I can take it. I know I'm taking a very controversial position.
But I do promise to do my best not to let any "bias" creep into my analysis.

As fate would have it, I just came back from a CE class on....(drum roll) appraising REO properties!

I raised my same questions with the instructor (a very experienced appraiser who is a USPAP instructor and has taught appraisal classes for 25+ years, and operates in the Sacramento area, so has significant experience with REO properties).

Here's a summary:
Q: Are REOs, by definition, non-market transactions?
A: Yes. The seller is a lender who is under duress to sell the property as quickly as possible.

Q: Would you consider REOs as appropriate comparables if they are similar to the subject and compete with the subject in the market?
A: It depends. If there are few REOs, probably not. If there are many, I would. If they are 100% of the market, I must.

Q: If, when comparing REOs to traditional sales, you see REOs sell at a discount, and if you conclude that the discount is due to their REO condition, would you adjust the REOs for that condition?
A: Yes, without hesitation.

Q: If your subject was an REO, and the predominant sales that competed with the subject were REOs (but there are still some traditional sales), would you use the REOs as comps.
A: Yes.
Q: Would you adjust the REOs if you could discern a market adjustment for them?
A: Yes (upward), if they are selling below the traditional sales and that discount is due to their REO status.
Q: When forming your opinion of market value for the subject and it is an REO, do you consider it would sell for less because of that status, and value it in-line with the REOs rather than the traditional sales?
A: No. The REO status (duress) is not part of the definition of market value.

Q: In a situation where there are only REO sales (a situation where he says he's seen), and all of your comparables are REO sales, would you make an upward adjustment to those REO sales because of their status.
A. No. In the case where the market (or sub-market) are all REO sales, that becomes the market value for the subject.

(at this point I had to stop because I was starting to take up too much of his time; which is too bad because I see an inconsistency in the last Q&A, but maybe I'm mistaken)

So, this is additional confirmation of the conventional wisdom expressed by others that REO status should not impact the valuation of a subject if the subject is REO and those REO sales sell at a discount in the market (and I was able to make my "element of comparison" argument and he did agree that in some markets, buyers reacted negatively to the REO and bid less just because of that; regardless, that dynamic should not be considered).

I obviously agree that REOs can be adjusted (if the data supports an adjustment).
He strongly disagreed that REOs could be considered market transactions (due to the lender being under duress); although he did say they could sell at market value.
He was fairly emphatic that the REO status should not be a consideration when the subject is an REO, regardless if the market discounts properties strictly on the REO status (all other things being equal).
He said when there are nothing but REOs to consider, they do represent the market value (no upward adjustment when its 100% REOs).

He also said, and I agree, that as the ratio of REOs to traditional sales increase, the "gap" between REOs and traditional sales in terms of price (if a gap exists) typically narrows and the market does not have to be 100% REOs for the gap to disappear. We discussed where that "tipping point" exists? I thought maybe around 70% in certain markets. He thought more like 90% in the markets he was familiar with.


So, without having anything further to reference or cite, I think I have to say, at this point, my argument is wrong (REO stigma, as I have described and defined it, if it does exist, should be an element of comparison to consider in opining a market value opinion if the subject is affected by the stigma).
Naturally, I'll keep on the look out for information that supports it, but to make a persuasive argument, the information would have to be persuasive and definitive. If I find it, I'll let you know. :new_smile-l:

 

[J Grant]

Hi Dennis, thanks for sharing the info from the instructor!! A lot of what he said is what I have been applying in my reports...a few points of difference but a good portion of his responses to your questions are what I have been using as guidelines...

The very thing I edited from my post was more about the application of a stigma adjustment, which you changed your view on, good on you for saying that that takes guts !
I believe the exchange of ideas we are having benfits us all!

 

[J Grant]

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.)?

I have never seen REO comps with the caveat that they had to be sold within 30 days. They are put on MLS and sold in whatever marketing time they sell in. But, if per your example , the best comps (most similar physical characteristics location etc ) to my subject were all REO comps and every MLS and verification said these comps HAD to be sold within 30 days, in that case, I might make a condition of sale up to my subject ( my subject representing the standard of a MV sale, sold with typical market exposure 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.

The above sentence makes no sense to me so I can't address it.

How about if the subject needed serious work but all the comps were in average or
better condition and sold within 30 days?

If my subject needed serious work, I would not be picking all comps in average or better condition, I'd find comps in similar poor condition.

But to answer your example, if my subject was in poor condition, and the comps were in better condition, I'd make a line item adjustment for the superior conditon of the comps to the inferior conditon of my subject. If all these comps that I selected also had to be sold in 30 days and I felt that impacted their price, then I would make a condition of sale adjustment ( top of grid) to the theoretical MV sale of the subject.

Ar factor to consider, if the REO comps "had" to be sold in 30 days, and 30 days was typical marketing time in the area, there might not be much of an adjustment, if any. But if typ marketing time in area was 90 days, the adjustment would be appropriate and easier to extract.

Again, no, but rather "AS-REPAIRED" estimate ... exposure time of 30 days.

The above makes no sense. A subject would be appraised "as repaired", if the subject value was subject to a repair issue of the subject being addressed, for example, leaky plumbing being fixed in the subject kitchen. An "as repired value for the subject property would read "$130,000, subject to leaky kitchen pipes repaired."
Usually, that means the lender wants the pipes fixed before they close on the house.

I don't get see how an "as repaired" value for the subject is being lumped with a market exposure of 30 days for the comps?

Apologies for not using qoute button, sometimes it causes problems with my computer!

 

[residentialguy]

He said when there are nothing but REOs to consider, they do represent the market value (no upward adjustment when its 100% REOs).


And he emphatically knows the market see no value variance if it is 100% REO, how????

If he's going to apply this "No sales, no value" philosophy to this line adjustment, it should apply to every line adjustment, should it not?

He's already stated that REO are not Market Value here:
Q: Are REOs, by definition, non-market transactions?
A: Yes. The seller is a lender who is under duress to sell the property as quickly as possible.

Now, if 100% are REO, this duress disappears?? Lenders don't have to sell, now? Did he smell like Gin, by any chance? :new_all_coholic:

 

[residentialguy]

So, without having anything further to reference or cite, I think I have to say, at this point, my argument is wrong (REO stigma, as I have described and defined it, if it does exist, should be an element of comparison to consider in opining a market value opinion if the subject is affected by the stigma).

Dennis,

I was in the same thought as you and fought it hard, just as you did and realized that I was off. It is an understandable stance and not a big deal that it was a bit skewed. I commend you for being open to learn. That's what we are here for...that's what makes a good appraiser. You, my friend, are a good one.

 

[AngelEyes359]

Now, if 100% are REO, this duress disappears?? Lenders don't have to sell, now? Did he smell like Gin, by any chance? :new_all_coholic:

Res,

I appreciate your argument but I suspect this guy is spot on in the 90%> greater comment. It's not that the duress has disappeared from the REOs. At this point, the potentially competitive non REO properties have just been overwhelmed and dragged down by the REO onslaught. It is a tough task as a potential seller to command a significant premium when 90% of the competing similar properties are priced significantly cheaper.

 

[residentialguy]

Res,

I appreciate your argument but I suspect this guy is spot on in the 90%> greater comment. It's not that the duress has disappeared from the REOs. At this point, the potentially competitive non REO properties have just been overwhelmed and dragged down by the REO onslaught. It is a tough task as a potential seller to command a significant premium when 90% of the competing similar properties are priced significantly cheaper.

Suspect is not good enough.
I just appraised a property with over 90% REO...there was still a +/-10% variance.

If the REOs and fair sales have no variance in market value and you prove that, then there is no problem. Your researched has shown that the REO market is selling for the same as a fair sale, therefore no adjustments are necessary. But you can't assume it. Period.