Short Sale Appraisal Question

[SutnNC]

When I perform an appraisal on a property which is currently listed on MLS as a short sale, and the appraisal requested by the client will be used to evaluate a short sale transaction (ie that is the intended use provided by the client), what should I be looking to use for comps (Other Short Sales, REOs or Arms Length)?

From the end user standpoint, I assume that short sales and maybe REO sales should be used primarily as comps. Using arms length transactions would ultimately not help the end user determine an effective list price for the short sale property in question (assuming short sales & REOs typically sell below fair market in the subject neighborhood).

It is probably perceived as a dumb question, though I don't have much Short Sale experience. Please don't bag me too harshly. I just want to make sure that I am doing my job correctly. Any advise on selecting the best comps would be sincerely appreciated.

If we knew the 1004/1073 was being used or that MV (period) was being sought, that would make sense given the hail storm of pre printed garbage. I think that more feedback from the BP and/or BT to the client may be needed to map out the objective. For instance, on some portfolio properties I have agreements where the "be all and end all of residential report writing- the dreaded 1004" is not being used.

THIS is not to say that it is MORE THAN LIKELY that there are multiple uses for this report. 1- to evaluate it for possible disposal and 2- for a mortgage finance transaction ending up in the hands of the US tax payer; the 1004 will rear it's ugly head.

There are a few details missing in how it was communicated (which can play out a couple/few different ways) but we don't immediately know if the 1004 is being used or required. We do however, know that the 1004 is not the final, be all and end all, only solution to every problem.

I suppose we all could have shorted up the "help" on this one by asking BP, "are you bound by THE FORM." (lol)

 

[J Grant]

If we knew the 1004/1073 was being used or that MV (period) was being sought, that would make sense given the hail storm of pre printed garbage. I think that more feedback from the BP and/or BT to the client may be needed to map out the objective. For instance, on some portfolio properties I have agreements where the "be all and end all of residential report writing- the dreaded 1004" is not being used.

THIS is not to say that it is MORE THAN LIKELY that there are multiple uses for this report. 1- to evaluate it for possible disposal and 2- for a mortgage finance transaction ending up in the hands of the US tax payer; the 1004 will rear it's ugly head.

There are a few details missing in how it was communicated (which can play out a couple/few different ways) but we don't immediately know if the 1004 is being used or required. We do however, know that the 1004 is not the final, be all and end all, only solution to every problem.

I suppose we all could have shorted up the "help" on this one by asking BP, "are you bound by THE FORM." (lol)

We are not bound by THE FORM, we are bound by the statement on the form, "The purpose of the appraisal is to dervie an opinion of market value". We sign a certifcation that that is what we did.

Now, if the users of the form want to do something else with the report, whatever that may be, such as crumple it up and use it to shoot hoops with, or decide that the MV is too high given current conditions and that they will therefore discount the property when listed, or accept lower offers, that is up to the users of the appraisal.

But if we sign our name to a certification that we developed an opinion of MV, then that is what we have to do.

If you feel market conditions favor short sales or REO sales etc, or that MV priced listings won't sell in competition with them or other issues, you can talk about that in the addendum, but you still have to develop an opinion of MV, if that is what the purpose of the apprasial states.

 

[J Grant]

For instance, on some portfolio properties I have agreements where the "be all and end all of residential report writing- the dreaded 1004" is not being used.

That is fine. It is not the form, it is the statement of the purpose of the appraisal on the form (or blank pages, if you are not using a form). If a lender or other clients says they are looking for a diff value then MV, and you state it on the page as purpose of appraisal, (purpose of appraisal is to derive an opinion of quick sale value), then all is disclosed and no problem at all.

The problem is when appraisers are working with the pre printed MV statement on a form, but then believe that the lender/client is somehow looking for a "different type of value" than what the purpose of the report states. Whether or not the client is looking for a "different type of value", we are stuck with the stated purpose (MV). The problem is solved with an REO addendum, or you can add your own addendum if you like, that offers an ADDITIONAL, value, such as a quick sale value, sold within 30 days or the like.

 

[Don Clark]

Appraise the property for what it is worth, it is up the lender to decide what they will take in a short payoff. Part of the current market problem is that some lenders are accepting short sales for less then what the market value is (often based on BPO's). I have seen investors buy short sales, and then turn around and sell them at market value. People often confuse what a short sale is (lender accepting a payoff less then what the borrower owes). What the borrower owes has nothing to do with what the current value is. You will hear many different opinions, but this is mine based on my experiences. Your market will determine the type of sales used, but I would not just look for a certain type of sale. Good luck!

That's how I see it. Unless a different value is requested I have to assume the lender wants market value. The decision to take less than market value is theirs, not mine.

 

[J Grant]

Don Clark, yes. Lenders want MV if they ask for MV. Then they have meetings where they decide how far off from MV an offer is and whether to accept it. They may have a threshold of accepting offers up to 10% off MV, or they may decide to market a house for 30 days before accepting a less than MV offer. They may tell the realtor to keep it listed for however long it takes to get a MV offer.

Whatever the choice, it is theirs to make, and by trying to anticpate that the client is "really" looking for a "different" value, don't be surprised if said client comes back and sues your $ss later for not providing what they asked for.

 

[SutnNC]

BP, "are you bound by THE FORM?" Are you being asked to use the 1004/1073 or other GSE form?

 

[Alpine]

It is not located in a SS/REO driven market. Most are traditional and the demand is good in the subject's neighborhood. Based on what you guys are advising, I should use the best comparable arms length transactions I can find.

Honestly, it frustrates me because I will likely end up with a value equal to or higher than what the property has been listed for (350K) for 6 months in a neighborhood where these traditionally listed properties are typically selling in less than 90 days. Subject has been listed for 180 days. The very few Short Sales/REOs over the past 12 months are clearly selling well below market value.

I say use both the arms-length sales from the neighborhood, indicating the so-called market value if it were not a Short Sale, and REOs and Short Sales indicating the market penalty for properties with those statuses. Everyone here wants to tell you to "appraise it for what it's worth", but if there is any characteristic to today's market in most areas, it is a lack of consistency, because highly similar properties sell for a much wider than typical range. In this case, due to status.

An REO or Short Sale status is a condition which impacts marketability, thus market value, much as a bad roof would when marketing a property in "As-Is" condition. There is clearly a market penalty for such conditions. This is proven by the long, unsuccessful market exposure of your subject in comparison to the shorter neighborhood DOM trend. The reality is that most buyers and realtors don't want to undergo the hassles and unknowns of a Short Sale. My own agent has told me that the majority of the offers his clients had on Short Sales did not close, because either the bank rejected the offer, or went incommunicado for months, or the client found another property which they could purchase in a more timely and less complicated manner. Mind you, pre-approved Short Sales wherein the lender has commited to actually selling at the list price are different, but the list prices for those sales are typically already discounted.

So give them both segments of comps, try to reconcile the data the best you can, and explain in narrative that there is clearly a market penalty for Short Sales in your (and most) market, therefore they can expect a wider range of offers and market value for a property of that status. Of course, they know this, but they need all the market data so they can make an informed decision on how much to liquidate in the deal.

 

[J Grant]

Alpine, good post and of course it always brings us back to what MV is...the most probable price, not the highest price. In one subdivision the higher end of value is most probable, and in another a mile away with different supply/cemand/appeal/ , the most probable price can be on the lower end of value. There is no fomula and each area and appraisal and range of prices of short and REO and regular sales presents a diff set of what is most probable.

It is a little bit hard to speak of short sales or even REO sales selling at a "discount", because that implies that they are selling at a discount from MV...when it is unclear yet where MV is. In some cases, this is true, MV is higher, and the short and/or REO sales are discounted down from it. In other areas, where short sales or REO sales predominate, the lower range might be MV and the regular sales are selling above it. One has to be careful in these changing markets to always assume that the highest prices paid are MV....in the OP's example, where he states traditional sales predominate, short sales sell at a clearly lower price and at clearly much longer marketing times, it may indeed be the case that the prices of traditional sales are the MV prices. But one can't assume that about every area.

(lots of posts on this on other threads, am sure the OP has read them...if not he can entertain himself lol)

 

[residentialguy]

Alpine, good post and of course it always brings us back to what MV is...the most probable price, not the highest price.

Most probable price of what type of sale? Your statement is misleading in that it leads to "whatever is predominant" and ignoring the market reaction to a different type of sale. MV on the form is a sale without undue stimulus, so that is the value you are looking for, regardless of whether or not that type of sale is predominant.

BP, you need to talk to your lender and explain the difference to them. Yes, if you are finding MV per form, it is probably going to be higher then the what the listing price has been if it has been listed as a short sale. There is a huge risk with 3rd and 4th party approval needed short sales and the market demands compensation if they're going to take that risk. Ask them if they want the most probable price of a short sale or the most probable price of a sale where seller is typically motivated and without undue stimulus to sell.

 

[SutnNC]

That is fine. It is not the form

The problem is when appraisers are working with the pre printed MV statement on a form

Split hairs much? If anyone is using the 1004, they are using THE FORM with a partial goal of reaching an opinion of market value, that's it within the confines of THE FORM at the bottom following the line asking for an opinion of market value; backed by the built in, preprinted cTa nonsense.

Sheesh............

It'd be easier if we knew what has been communicated to the OP (if any real details have been) or as usual, we've created a new "problem" having nothing to do with the OP. Which as I see it so far, is pretty much arguing the same point from different angles.....

THE FORM (defined): my slang for THE 1004.