REO's as comparables to non-REO

[AngelEyes359]

I content there is no set number nor is there a set reaction.

I have seen neighborhood with 95%+ REO & short sales yet the traditional sales were selling for about the same they were 12+ months ago, the REOs were selling for what they were selling at 12+ months ago, yet at the 12+ month mark the AVERGE and MEDIAN sales prices for the area inclusive of all sales declined. It was due to the relative ratios of sales (REO to traditional) altering the mix.

On the other hand I have seen neighborhoods with only 50% REO sales show a general decline in traditional sales prices, despite the fact that rehabbing and flipping was still occurring (purchasing REOs to flip as non-REO sales at an increase; rehabbing REOs that were in less than average condition and selling at a profit).

What was the difference between the two neighborhoods? The one with 95%+ non-traditional sales was already a neighborhood dominated by rental properties BEFORE the crash whereas the other was not. The crash and subsequent REO sales led to investors dominating the market (as buyers) and since many were purchasing to rent out properties until the market recovers the ratio of owner occupancy to rental in the latter neighborhood changed, changing the tenor of the neighborhood. Therefore although REO sales were not directly driving either market they did have a negative net affect on the later (previously much more robust) neighborhood.

That is why I do not lend any credence to claims that some target number triggers a change, but rather that each market needs to be analyzed every time to determine what exactly is going on. If REOs are 100% of a local market this may be a bit more difficult, but so to would it be if there were not sales in the neighborhood whatsoever. It still does not make them the market nor mean that are driving the market (although they may well be influencing it, as indicated in my second example).

Bottom line:
There is no set break point so do the work yourself and don't rely on some "rule of thumb" to determine what affect REO sales are having on your local markets.

DMZwerg,

I have already stated that the term "suspect" was intended as a starting point. There may or may not be a tipping point in some markets. Why would anyone be married to a fixed number? Aren't markets going to vary? Why would you suggest I would always use a 90% rule? Do you mean I would actually need to check and do my own work?! Well, Duh. No kidding. :icon_mrgreen:

 

[J Grant]

In reality, there is no such thing as a "market value sale", ( though some of us have gotten in the habit of saying that). Just because we say it, does not make it a recognized sale type, or even a concept of sale, under USPAP.

There are sales that sold for prices that we think represent market value.
There are sales that sold with fair market terms.
There are sales that represent predominant value in an area.
There are sales that represent an average price of "tradtional" sales (non REO sales).
But per Fannie, FHA, USPAP guidelines there is no such thing as a "market value sale"

 

[J Grant]

The real question is: Does REO status represent an element of comparison? If the appraiser is struggling over the answer then the answer is probably yes. If the answer is "yes" then a transactional adjustment must be developed and applied to any sale used for purposes of comparison.

I agree to this part. Well said!

The best strategy is to avoid using these sales but that's not always possible. The goal is to use sales that need the least adjusting (not for the purpose of meeting "guidelines" but because it makes sense that the fewest adjustments means the most comparability.) But if the property characteristics and/or factors in the market result in a better fit between an REO that only needs a small transaction adjustment as opposed to a less comparable property that needs a lot of adjustments then the REO sale is the most appropriate sale to present.

I semi agree with above. Please banish the "best strategy is to avoid using these sales" into a cave... we are supposed to find MV for the subject, and if an area has a lot of REO's, or even fewer REO's but the REO sales are the best competition to the subject, we can't have a "stratgey" to avoid them, because they cause us a headache or we might have to adjust for a condition of sale.

I approach finding MV for an oceanfront 8000 sf luxury home the same way I approach finding MV for a an 800 sf cottage in an area where there is a lot of REO activity. For both types of homes, I do exactly the same thing. I start by trying to find the best comps that meet the principle of substitution, ( comps witih similar physical characteristics, location, etc to the subject, as long as the comp sales are verifiable and arms length transactions.) The sale type, whether REO or short sale or regular owner sale, at this point is not a factor yet. I will eliminate what Fannie and FHA consider "distress sales", re homes sold at auction or sheriff sales ( both FHA and Fannie make distinction between distress sales sold at auction and REO sales marketed in conventional ways such as on MLS).

Then I pick the best comps for similatiy to subject, aka, which homes would the buyer purchase that most closeley resemble the subject. At that point Then I look at sale type, re if an of the comps are REO or short sales, I then decide whether they warrant a condition of sale adjustment.

And in Florida now, even for high end luxury homes or oceanfront property, there are REO sales present in some areas.

When picking comps, we have to start thinkinf more like buyers, (a great instructor I had used to say, pretend a buyer made an offer to purchase the subject and then the subject was taken off the market, what subsitute house would that buyer then choose?)

 

[CANative]

Please banish the "best strategy is to avoid using these sales" into a cave...

Okay. "Under ideal circumstances we would just avoid including these sales as representing the competitive market."

 

[CANative]

Okay. So if we determine that marketing status as REOs and/or short sales is an element of comparison and the subject property is an REO or the intended use is for making a determination in a short sale negotiation between the lender/borrower how should we deal with the comps?

Do we need to modify the definition of value? Or perhaps provide two opinions of value?

 

[Mr Rex]

Okay. So if we determine that marketing status as REOs and/or short sales is an element of comparison and the subject property is an REO or the intended use is for making a determination in a short sale negotiation between the lender/borrower how should we deal with the comps?

Do we need to modify the definition of value? Or perhaps provide two opinions of value?

The answer is a range of values, from a low of competing REOs or shorts to a high of what Res and DMZ deem "typical" (or whatever the latest modifier they are using). I would think it prudent appraisal practice to mention a range in the current market. Of course it may make your Reconciliation and final point value determination for the form take a few minutes further consideration, which can never be a bad thing.

 

[J Grant]

Mr Rex, I agree, good appraisal practice to discuss range of value in area sales.

 

[J Grant]

CanNative, Dennis addressed this a few pages back ( more or less, hard to keep track) where he answers this query from a USPAP course he just took.

I also addressed it in a number of my threads here ( wordy, sorry!), but in a nutshell, you don't "modify" the definition of value, if the subject is an REO, and the purpose of the report is to provide MV, then you treat the subject like any other property you are providing MV for. The REO ownership of the home is not under appraisal, the home itself is.

If the lender asks for an as repaired value on an REO addendum page ( if there is repairs), or an estimated value within 60-90 days marketing time, those additional estimations are based on the initial MF you developed for the subject with the sales comparison approach.

 

[CANative]

So say your client is a bank that has a foreclosed house on it's hands. They ask you to provide an opinion of value so they'll know about what they should be trying to sell it for. Your MV opinion without regard to it's REO status is $250,000. So they put it on the market at $250,000. A month later they get offers of $215,000. What should they do? Accept the offer because, after all, REO's sell for less or should they hold out for an offer that reflects the MV opinion of the appraiser?

 

[AngelEyes359]

So say your client is a bank that has a foreclosed house on it's hands. They ask you to provide an opinion of value so they'll know about what they should be trying to sell it for. Your MV opinion without regard to it's REO status is $250,000. So they put it on the market at $250,000. A month later they get offers of $215,000. What should they do? Accept the offer because, after all, REO's sell for less or should they hold out for an offer that reflects the MV opinion of the appraiser?

What should they do? Well, in the ideal world the bank would have a knowledgeable employee on staff versed in collateral valuation issues who would either (A) ask you to provide disposition value or (B) have an internal pricing mechanism based on historical market data to discount the opinion of MV provided so a realistic listing price could be provided. (IMO they would be better off doing this than obtaining their listing price strategy from a $50 BPO.)