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Appraised value in declining markets

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V. Nightshade

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Certified Residential Appraiser
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California
Something I've been thinking about: When we state the appraised value as of a certain date, using the definition of market value which assumes exposure to the market, we assume that the "marketing time" precedes the date of the appraisal. In a stable or increasing market, this might not matter to a lender who is trying to determine whether there are assets to cover the loan. However, in a declining market, with a surplus of inventory, this number seems sort of bogus, because the value as of the date of appraisal could be significantly less in 30 or 60 or 120 days. So as of "today", in order for me to have a property sell, I would probably need to price it below the price of similar properties on the market. I realize that's not the "market value" as of a certain date. I guess what I'm wondering is, are appraisals in a declining market an exercise in futulity? What do they mean? And what are the best methods for reconciling values? (e.g., give most weight to pending sales, if available). Or is this something that is factored in by the lender in making the loan? (i.e, recognizing that given the declining market, today's value might not be tomorrow's value.) I'm thinking about this in the context of REO appraisals, and I also see that there are some other very salient discussions on this matter.
 

CANative

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Exposure time precedes the date of value. So the question is: What would this property have sold for on the effective date had it been put on the market zzz days ago? Your value opinion is not a forecast. That's why GSE's and lenders are reducing LTV's by 5% or more in markets they have identified as declining or "soft."
 

Terrel L. Shields

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That's why GSE's and lenders are reducing LTV's by 5% or more in markets they have identified as declining or "soft."
That is correct. And exposure time, not marketing time is the key. It is to estimate the market value as if it closed that day and therefore was exposed "adequately" which more or less should be the typical DOM of comparable property. A sudden event, say a plant closing in a small community, might complicate the problem - Marketing time might suddenly increase dramatically, but this market in most regions is showing slow changes in DOM and pricing, very little up or down generally.
 

Riick

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Delaware
Issue has come up inside the lending community.
Up until the 5% haircut move...
the consensus was that even in declining market, the value is as of a point in time.
Everyone's Crystal Ball seems to have gone on the Fritz
 

V. Nightshade

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My head is spinning. The philosophical and theoretical foundations of appraisal science are on the line. But as long as we have the 5% solution everything will be fine. Actually, I never really thought about "when" the components of the definition of market value kick in till now. But then again, I'm relatively new at this (and am probably looking to escape).
 

Pat Butler

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Certified Residential Appraiser
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You bring up an excellent point and one that is more appropriate in today's market. When I do an appraisal for a private client I'll include a section in my comments talking about how the appraisal assumes that the subject property was on the market prior to the effective date.

When marketing times were only a month or two then this subtlety didn't matter. Now, if the marketing time is one year, that makes a two year difference between the assumption that the subject was on the market PRIOR to the effective date versus the date that the subject would likely sell on going one year forward.

This is something that I discuss with my divorce clients. Just had a case where the attorney looked pretty foolish. The effective date of my appraisal coincided with the filing date of the divorce per the attorney's instructions. The opposing attorney totally missed this point and kept pointing to active listing data of houses that were presently listed for less than my market value. Of course, my subject was presumed to have been on the market for 1.5 years prior to the eff date base upon market data, while he was forward looking.

On the other hand, when I do an appraisal for a client needing a value to put their house on the market then I'll either include competitive listing data that shows the upcoming trends, or do it more like a relo appraisal.

This also shows how foolish it is when lenders require listing data as part of the appraisal. That listing data can't be reconciled to the sales data because of this date problem unless you do forecasting adjustments like a relo appraisal.
 
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Richard Carlsen

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Michigan
I think what Pat described is more prevalent among users of appraisals than one would think.

It is very common for a person with little knowledge of the appraisal process not to understand that the opinion of value as of an effective date means that the value is based on the definition of Market Value which assumes a sale of the subject as of the effective date which therefore also requires an estimate of market time necessary to generate the sale.

Therefore, in a declining market, putting the house on the market at the opinion of value price may not generate a sale at that opinion of value price while in a rapidly rising market offering at the opinion of value price may result in the property being priced below the established market levels at the time of a sale in the future.
 

Marcia Langley

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Missouri
V,

I wouldn't too much about the REO client's ability to properly interpret the report. They are generally sophisticated enough to know the difference between exposure time and marketing time and understand that the appraiser is working from an exposure time perspective. They can then make their own decisions about the future marketing time.

Non-REO lender clients should also be able to make that distinction. For less sphisticated users of appraisals, some additional clarification is appropriate.

In any case, the clarification should be in comments, not by thinking you need to change standard appraisal practice.
 

casurf2020

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Mar 29, 2007
Professional Status
Licensed Appraiser
State
Arizona
This may be a little off the subject, but how do you all figure out a "90 day" value on a REO appraisal? They want a "as is" value, "as repaired" value and then a "90 day value". Is there any web site that one can go to, to learn how to calulate a 90 day value?
 

Richard Carlsen

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Michigan
This may be a little off the subject, but how do you all figure out a "90 day" value on a REO appraisal?


Despite what many will tell you, a 30 or 90 or 120 day value is nothing more than a SWAG at best.

For me, I base my estimate on the market trends, anticipated changes in market activity (seasonality), inventory condition (over-supply?), current list to sell ratios and a little gut level intuition based on nearly 33 years in the real estate business.
 
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