Appraising a Forclosure Sale

[TJSum]

Who is your client, the lender who is selling and currently owns the property, or the buyer's lender? You never made this clear and why the responders are all over the map and over thinking...

 

[CANative]

Appraise the property, not the sale or contract. For the sales comparison use the sales which best reflect current market activity.

 

[Russ Kitzberger]

David had a good reply on the topic. I would like to add the following:

The most important item is setting up with the client (mortgage company or lender) what is the scope of work. Ask them if they require an inspection with utilities functioning. You may need to do the appraisal subject to repair or inspection if the owner (bank) refuses to allow the utilities to be turned on. Also determine the collateral condition. They should know what collateral condition the secondary market for this loan is seeking before they order the appraisal.

If the lender is seeking a low risk level then you may need to enhance the scope of work to include personal interviews with the buyers of the comparable properties (especially and REO or distressed sales) to fully describe the conditions of the sale, level of repairs, and risk in the transaction. If the lender is risk adverse, then you may need to receive a copy of a home inspection and contractor quotes for the repairs necessary to the subject to bring it into average or marketable/sound condition.

As you have stated the buyer "is getting a good deal". I have recently appraised several of these bank owned sales for banks loaning on the purchase side. The buyers received "good deals". However, the lack of utilities was an item that the secondary market wanted to be corrected prior to buying the loans. Therefore the appraisal was made subject to and I went back a few weeks later for a completion inspection when utilities were active. There is risk in this and lack of warranty or disclosure in our market area, so there is discounting.

Just be prepared to have a irritated buyer or realtor if normal underwriting will not take your appraisal or the property due to title, valuation, or property condition circumstances. Like David said you may be the first several appraisals. Lenders are generally cautious about previously foreclosed collateral, they know what they have in inventory and do not want more of the same.

The reason these sell for a discount in my market area is that risk inherent in the transaction and the inconvenience of buying one of these properties were anything can go wrong at the last minute without warranty. For instance, FHA has the 90 seasoning of title and many conventional lenders are going this route also. Many times there will be a transfer on the date of the sale, similar to a relocation, which will prohibit most of these types of financing.

There are many reasons in markets that REO properties sell at a discount, the important thing is to determine what the best and most appropriate approaches to value are and the motivations of the purchasers in your market and for that property type. Also, when developing the sales comparison approach I would suggest considering utilizing both REO and conventional sales. Then in your reconciliation weighing the best and most similar. You will likely have a large adjusted value spread in your grid.

There are 3 approaches to value. If the market is moving to investment, you will need to develop the income approach to produce credible results.

With the large amount of rate resets, rising inflation, and overall economic conditions, this will likely be your first of many future appraisals of distressed property.

We have several urban areas in Northeast Ohio were the market is 90% REO, 9% short sales and declining at 45% per 12 month period.

Russell Kitzberger
Pointer Appraisal Services LLC, Northeast Ohio Real Estate Appraisers
www.PointerAppraisal.com

 

[realbiz]

The REO properties I am doing are mainly competing with other REO properties. I am speaking of my market only, as yours may be different. When I inspect the property reporting the current condition, and repairs needed are very important. In some cases the property will only be bought by investors due to the condition, if the bank is not willing to make the repairs. I have had several recently that were fired damaged or gutted (sinks, appliances, light fixtures, pool equipment, air conditioners, etc.). The fire damage property was investor only. With the gutted properties some where cured by the bank and others were not. Call it as you see it. Also, be sure you know what their requirements are. Most I deal with what "as repaired value", and "as is value" based on certain marketing times. But, others have different requirements.

 

[Ted Markow]

To all thanks for all the informative thoughts and views from your perspective markets. I think in this area (southern NH and Northern Massachusetts) we have yet to see the degree of forclosures present in other sections of the country and we are lucky in that respect. We are just starting to get grumblings from the powers to be of mortgage fraud!! "News Flash". Not that it hasn't been there but the bell has now been rung. Yes our market is on the decline but at a much slower rate than a lot of you are talking about. The property that is being considered is a 2 family and it seems like multi family properties are going to take the biggest hits in this market due to so many unqualified buyers getting into them a couple of years ago. I was only able to find 2 qualified market sales and 2 REO sales and 3-4 active or pending sales. The problem in this market is that realtors do not fully disclose that a property is a REO you have to look for "code" words or phrases. I don't understand who they are trying to kid. thank you

 

[David Sawyer]

Key quote words are "corporate owned" or "not a short sale", "or vacant and on combo box (code 2609)" I currently have a duplex assignment received this past Friday in my declining market. Only 6 sales in last 12 months, which only 2 in last 90 days and 256 actives. Needless to say, the investor has fleed the market.

 

[Ted Markow]

How about "no changes to Seller's addendum"--- "allow 72 hours for response on offer"----"preapproval or proof of cash must be sumitted withall offers" they are only limited by their imagination.

 

[Tim Hicks (Texas)]

If you are appraising the sale of an REO property, utilize the most similar sales available, end of story. If other REO sales are the most similar, use them. If the property has been repaired and good working order, use other sales in good working order. You are appraising the property, not the contract, not REO label, not the mortgage brokers hopes and dreams. If the home needs repairs, please note them with a cost to cure and let the lender make a lending decision. DO NOT ignore repair issues just because the buyer is getting a good deal or there are other sales in similar condition. Always be truthful in any appraisal assignment.

I say these things because I have lost broker clients because I am told other appraisers will ignore repair issues including foundation problems because there are plenty of REO sales to support the sales price.

 

[Ruben Ramon]

I don't understand what the hubbub is. Unless the owner of the property is financing, they are not your client, so handle this like any other purchase. If REO's are common and banks are typical sellers, use REO properties, if not, dont use REO properties, you know your market. As for the advise telling you to use REO's because its an REO, ignore it, they are wrong.

The most important thing is your sow, you need to talk to your client.

 

[Kevin Keck]

I don't understand what the hubbub is. Unless the owner of the property is financing, they are not your client, so handle this like any other purchase. If REO's are common and banks are typical sellers, use REO properties, if not, dont use REO properties, you know your market. As for the advise telling you to use REO's because its an REO, ignore it, they are wrong.

The most important thing is your sow, you need to talk to your client.

I agree with this post. I generally don't buy into the if the subject property is an REO property the comparables must be REO properties. There are some on this forum that make the argument that a stigma is attached to REO properties and that you must use REO comparables or adjust for the stigma. It is an interesting point but I'm not buying into this line of thinking just yet.