A couple HUD REO questions

[Doug in NC]

I know HUD expects appraisers to check all mechanical systems during the appraisal inspection, but what if it is a foreclosure and the power is off. What is the procedure to follow for this?

Another question:
You have 3 comps, one is an REO and the other two sales are normal market sales. It has been my experience that foreclosures typically sell significantly below normal market sales, even when they are in pretty good condition (due to the distressed nature of foreclosures). All other things being equal, does it make sense to place the most emphasis on the REO sale over the other 2 sales - particularly when the REO sale adjusts out substantially lower than the other 2 sales?

 

[Mr Rex]

Doug, here is the revised Appendix A that covers HUD REOs.

http://www.hudclips.org/sub_nonhud/cgi/pdfforms/06-9MLAPPENDIX%20A.doc

 

[Doug in NC]

Thanks Mike. Here's what I gleaned from it:

"M&M contractors are required to complete a PCR prior to ordering an appraisal of a REO property. The PCR contains information specific to the condition and functionality of the property. Prior to performing a site visit of a REO property, the appraiser must be provided a copy of the PCR by the M&M contractor.

The appraiser must coordinate a specific time for a full site inspection of the property with the property manager. Generally, a REO property is secured with the utilities de-activated. The appraiser should request that the M&M contractor make sure the utilities, including the mechanical systems, are activated at the time the appraiser makes the property inspection. If an appraisal is completed without the utilities turned on and/or the mechanical systems functioning, the appraiser must note this in the appraisal report and must rely upon the information provided by the M&M contractor in its Property Condition Report (PCR); reference the PCR in the applicable sections of the appraisal report (condition of property or physical deficiencies) as well as append a copy of the PCR to the appraisal report. "

 

[Mr Rex]

Doug, typical in my experience for REOs to not have utilities on, so you refer and rely on the PCR supplied. Section A-2 covers use of other REOs as comparables.

 

[Damon Pedersen]

HUD recently announced they did not want other REO properties used as comps unless they are the most similar in terms of condition. That makes no sense since most HUD REOs in this market are all usually trashed.

I do not require the utilities be on, but rely on the PCR to note that they are winterized, but were (or were not) in working order when the PCR was done.

 

[Lobo Fan]

For me it depends upon how many REO's are in the market. If there are a significant number, then they represent the market. I will use REO's for comps if they represent the true competition for the subject when it goes on the market.

 

[Greg Bell]

here is a sample addendum we use in the mid west

Additional Comment Addendum


REPAIRS , ALTERATIONS , REQUIRED INSPECTIONS


The Mechanical Systems were not checked for functionality by the appraiser.However ,visual inspection indicated that all of the systems appeared operable and a complete property inspection was performed on the property /2007 and was supplied to the
appraiser . According to the property condition report , all mechanical systems were off at the time of inspection and were checked for functionality by the inspector . Utilities were functional at the time of inspection per PCR Report.

An extraordinary assumption is made on functionality of utilities . An assumption is made directly related to a specific assignment , which , if found to be false , could alter the appraiser's opinion or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about Physical , Legal or economic characteristics of the property or about conditions external to the property such as market conditions or trends , or about the integrity of data used in analysis.


The subject property can be sold with FHA mortgage insurance , which meets FHA's Minimum Property Requirements in it's 'As is" condition without repairs being necessary.

Insurable with Repair Escrow . The subject property can be sold as insured with repair escrow , because the cost of repairs is estimated to be $5,000 or less.

The subject property in it's "As-Is" condition is uninsurable and does not meet Minimum Property Requirements due to the cost of repairs necessary to meet Minimum Property Requirements are in excess $5,000.

 

[NC Appraising]

Doug
I have always been taught that the clients want to know the market value, not the liquidation or investment value. Think about this, if you give them the market value say 85,000, it may sell for that amount, or it may sell for less due to the stigma of this property being a foreclosure. I have seen REO's sell for market value in certain markets, it depends were the subject is located, and the supply and demand. We give them market value for a good starting point for them to properly list the subject, and who knows, it may just sell for market value. Another way to think about it is if you gave the lower value (stigmatized value) to the client say 80,000, and market value is 85,000, do you think that investor is going to pay the 80,000 it is listed for?
No, they are going to want to pay less than the listed amount.

I only do Fannie's, they want to know the market value for the subject. They do not ask for the liquidation/investor value, but I give it to them anyway on my additional comments page.

 

[Doug in NC]

Doug
I have always been taught that the clients want to know the market value, not the liquidation or investment value. Think about this, if you give them the market value say 85,000, it may sell for that amount, or it may sell for less due to the stigma of this property being a foreclosure. I have seen REO's sell for market value in certain markets, it depends were the subject is located, and the supply and demand. We give them market value for a good starting point for them to properly list the subject, and who knows, it may just sell for market value. Another way to think about it is if you gave the lower value (stigmatized value) to the client say 80,000, and market value is 85,000, do you think that investor is going to pay the 80,000 it is listed for?
No, they are going to want to pay less than the listed amount.

I only do Fannie's, they want to know the market value for the subject. They do not ask for the liquidation/investor value, but I give it to them anyway on my additional comments page.

Steven,

I believe the market value and investor value are often one and the same for foreclosures. Considering the poor condition of most foreclosures (in my experience), no one except an investor is going to be willing to go to the trouble of making so many repairs/updates (holes in walls, carpet trashed, holes in floors, sagging structure, missing exterior siding, broken out windows, missing hvac units, mold, etc). It may be different in your market, but foreclosures in near average market condition are rare in my market. If an investor doesn't buy these properties, there is no other market for them.

PS: I used to do FNMA work until the $250 mandate came down the pike. IMO Fannie is getting a 2 for one deal out of appraisers. What I used to charge for one appraisal, FNMA is now getting the pre-foreclosure and a post-foreclosure appraisal. Great deal ..... for fannie.