A few questions on REO Appraisal Procedure

[Six Flags]

Since this is my 1st REO appraisal I have a few stupid questions. Most of my research is done and the report is well on it's way to completion.

Based upon the available listings I've decided to use 5 Sold Comps (3 Arms-L, 2 REO) and 3 Active (1 REO, 2 Arms-L).

The subject property is in poor condition. But, for the purpose of the sales comparison approach I'm going to assume the property is in average condition. Meaning I won't adjust comparables in average condition (down) and in fact I may adjust inferior comps (up). I intend to value the property subject to completion in the sales comparison and reconciliation sections. Is this the correct approach in dealing with REO's in the 1004 form? (FYI, the home is owner occupied)

I've itemized the needed repairs and cross-referenced the cost with Marshall and Swift's most recent Repair Cost Guide. The end result is a pretty hefty amount of over $40,000.

I intend to deduct the cost-to-cure from the appraised value (subject to completion) to arrive at my "as-is" value. Is this the correct approach?

Since the client has not stated what their desired quick sale timeframe is (or market exposure time), I'm unsure of how to determine it for myself. Any tips or advice in this area is appreciated.

Lastly, the client specifically states that the "REO addendum must include all 4 of the required estimates of market value". Looking at the addendum I can only see where 2 values can be entered... These are the 2 values which are "as-is and "as-repaired" under specific time restraints. What/Where do the 2 other values get entered?

Bless anyone who takes the time to read all this and helps me.

 

[Tim Hicks (Texas)]

I don't know your scope of work, but most companies want the "as is" value on the URAR, with your other REO sales supporting the "as is" value and the other sales supporting your "as repaired" value. Keep in mind that most buyers are not going to buy a house that needs $40,000 in repairs for just $40,000 less than a house that needs no repairs. Around here that would mean an $80,000+ adjustment in most cases, but typically the REO sales in poor condition will reflect that. Also, REO sales can be in varying degrees of condition.

Your URAR should reflect your "as is" 0-90 value with adjustments for market time and condition. Then you simply do the math on your REO addendum for without condition adjustments and time adjustments for 0-typical market time value, 0-90 as repaired value and 0-typical market time as repaired value.

It sounds like you are well on your way to doing your last REO appraisal simply because you did not disclose competency issues to your client and did not associate yourself with an appraiser to obtain competence. It is always best that you work with a pro on complicated assignment like this so you will learn the proper way to do what is really an easy assignment.

 

[Tim Hicks (Texas)]

See your other thread where you asked the same question. It appears you are well on your way to doing your last REO assignment.

 

[Tim Hicks (Texas)]

My REO addendum has a place for four values. As repaired for 0-scope days, as repaired for typical market time, as is for 0-scope days, as is for typical market time.

 

[Tim Hicks (Texas)]

Most appraisers that do REO appraisals shoot themselves in the foot because they try to apply mortgage lending guidelines (and their stupid tricks to avoid underwriting issues) to their REO appraisals. If the property is in poor or fair condition, you better put "poor" and "fair" on your report and grid. You should do this on any appraisal assignment, but appraisers try to cheat by using average - or average --. Tell the truth in any assignment. If it is below average, what is that? Fair or poor?

Also, REO appraisal are not about lender guidelines for adjustments. Neither should regular appraisals, but especially for REO assignments. If you have to exceed guidelines for condition adjustments, you better do it. The assignment is for asset management and they need to know what price they can sell the house and don't care if you have to adjust 40% for condition.

REO assignments are easy if you know what your client wants and know how to really appraise a property. Too many appraisers want to do REO assignments like broker appraisals with underwriting conditions that do not fit REO appraisal assignments.

 

[Ray Miller]

I would use arm lenght sales of normal properties in my grid

In the REO adm I would use normal listings in the grid.

I would then take my cost to cure in the REO adm. (sometime MS is way off on these figures)

I would then do my 90 or 120 day value or in some case now 60 day value. With repairs and with out repairs.

I would suggest you find a mentor for the first few of these to get you over the hump.

I will try and find your other post.

 

[DWiley]

I intend to deduct the cost-to-cure from the appraised value (subject to completion) to arrive at my "as-is" value. Is this the correct approach?

Maybe, but probably not. Many appraisers overshoot the "as is" value because they fail to account for the fact that the typical "as is" buyer may be an investor demanding a return.

In looking at the "as is" value, one needs to consider who would/could buy the property in its "as is" condition. If the property needs $40,000 in repairs, who is the "typical buyer?" If the property's "as repaired" value is $200,000, then $40,000 might stop a "regular" buyer dead in their tracks because they would not have the means to do the repairs.

Is the "typical buyer" for the property is "as is" condition actually an investor rather than a "regular" buyer? If so, then the appraisal shoul also reflect the fact that an investor will require a return on investment. That return is required on both the cost to acquire the property and the cost to repair it.

The AI has a 7 hour REO seminar that goes through this in detal. One nugget from that seminar is

(As Is Value + Cost of Repairs) X (1 + Entreprenurial Profit) = As Reparied Value

In our market many investors are requiring 25% to 40% gross return on REOs. Using 25%, and an "as repaired" value of $200,000 as an example, the "as is" value for a home that needed $40,000 in repairs would calculated as follows:

(AIV+$40,000)x 1.25 = $200,000

AIV = $120,000

So an investor could spend $120,000 for the home, spend $40,000 repairing it, and make a 25% gross return by selling it for $200,000.

In this case the $40,000 in repairs resulted in an $80,000 impact on value. Of course, selling costs and other expnses mean that the net return is much lower than the gross return. If investors are requiring a higher return (and they are in many areas with lots of REO homes), the impact would be even greater.

 

[DWiley]

Please see the response I posted in the other thread you created.

I second Ray's recommendation that you affiliate with someone else who has more experience in this area.

Also, do not forget to comply with the disclosure requirements of the COMPETENCY RULE in this assignment.

 

[Six Flags]

My REO addendum has a place for four values. As repaired for 0-scope days, as repaired for typical market time, as is for 0-scope days, as is for typical market time.

Tim, does your addendum allow for adjustments to the active listings?

I have this form as well but it doesn't allow for adjustments of the listings.

I have ACI software and I have 2 options:

Supplemental REO Appraisal Addendum = doesn't all for adjustments but has 4 values
Supplemental REO Appraisal Addendum - 2008 = allows for adjustments but only has 2 values

Since the client has clearly stated they want all 4 values listed on the REO addendum I guess I should be using the regular addendum, but it doesn't seem logical not making adjustments.

 

[CANative]

A fellow forumite asked me about REO's the other day and I dashed off some suggestions in two PM's. I'll post them here to see if they can help you at all. If not just ignore me.

Just break things down into what your client wants and solve the problems. They have a property on their hands that they don't want and it's costing them money every day. The want to know how much they could sell it for if they do nothing but list it, they want to know how much they can sell it for if they fix it up and just list it, they want know how much they can sell it for if they don't fix it and want to sell it in less time than most properties take to sell, and they want to know how much they can sell if for if the fix it up and try to sell it in less time than it takes most properties to sell.

Basically, four appraisals, two of which don't really fit the definition of market value.

When you say "include" certain sale comps what do you really mean? Do you mean sitting at the computer and pickout just enough sales to fill in the report form and appraise as you go? If so, that will probably cause you a lot of problems.

REO's are difficult because you have to sort through so many different sales because you're providing four different opinions of value. You have to plan an REO strategy. Sort sales by similar characteristics, by sale date, by conditions of sale, and by exposure time (especially exposure time because you will need to use that to determine various probable prices based on exposure time (exposure time precedes the date of value) and you also have to make a forecast based on estimated marketing time (marketing time is after the date of value). You also have to keep hitting this moving target based on condition of the property on the date of value as well as after repairs and use the data you've collected from the sales in varying states of condition. 4 values, 4 conditions, 2 exposure time scenarios and 2 marketing time scenarios. The combinations are endless and confusing.

Sometimes you'll get lucky in that normal exposure time is the same or less than what the client wants so you reduce the opinions of value (normal and forced exposure time are the same).

Don't let an AMC get away with paying you chump change for these. Even at full fee you'll lose money on the first few REO's.

I might add that one of the scary things is that the client wants to use your analysis to decide if putting money into the property will result in a return.