Arms Length Transaction

[BR549]

I am working on a HUD foreclosure sale.(The sale not the REO), I have three very good comparables that are also HUD forclosure sales, the market is very limited, will these be considered arms length transactions?? Are am I going to be lunch meat for the underwriter???
Thanks

 

[hal380]

Hi Stacy:

What is Arm's Length? Buyers and sellers dont know each other, not related, come from the market place, right.

If you have 3 sales, and they have been exposed to the market for a time period which is typical of your market area, and they were purchased by 3 different individuals, then I would say you have an arms length transaction.

When I do this type of appraisal, I do not limit myself to FHA forclosure sales only. We should look for the most similar and proximate sales, regardless of the seller or the motivation of the seller.

A home in forclosure is usually somewhat neglected. Can be only cosmetic neglect or can be long term deferred maintenence (sp?), or can be the object of vandalisim. In any case they tend to sell at somewhat of a discount due to the fact that they are vacant, and in some disrepair. That having been said, I would not ignore a house that sold, not in forclosure, which was more similar to the subject, and closer than one of your forclosures. You would have to make adjustments for condition, but after some good scrubbing, and lawn mowing, your forclosure may shine like a non forclosure.

Sorry wandered off the Arms Length part of your question. I dont think you have a problem. What I am saying is dont ignore non-forclosure sales.

Regards

Hal

 

[Patrick Egger]

You're appraising a HUD sale property and using other HUD sale properties as comps .... willing seller & buyers, properties exposed to the market, etc., subject is similar, etc ... all look like reasonable comps to me.

The question arises on how comparable are the HUD sales, e.g just because they were sold by HUD and previous foreclosed properties only covers one item. Are they also comparable in terms of condition, size, etc. ... from your post I'd assume yes.

If so, I'd use them but as Hal posted, don't let being a HUD sale limited your comps. Check out the other sales in the market. A lot will depend on the condition of the subject. Some of the HUD sales I've seen have been trashed, while others were in no worse condition than a typical resale. Did the HUD comps sell low because they had been trashed?

I'd use the HUD comps but I'd also spread several non-HUD sales to better understand the potential of the property after the buyer takes posession. After all, this is the situation your client is faced with.

Did the subject or any of the comparables sell low/high considering the market? In your market, does being a HUD sale limit the potential buyers to investors or those willing to take on a fixer-upper? Have there been other non-HUD fixer - upper properties sold and how do those compare to the subject?

Lots more questions than answers. The key is not to limit your research to just HUD sales ... understand the market and use the most representative sales, which may or may be the HUD comps.

 

[Ghost Rider]

I can look at it from both sides, and give you reasons to use them, and not to use them.....

By the technical definition of "market value" would require utilizing sales from typically motivated buyers AND sellers......a foreclosure sale typically has a VERY motivated seller, more so than most participants within the market place. Therefore, they would be considered non-arms length transactions, and would not be the type of properties to use when determining the market value for the subject property. The argument for using them is simple. They are the MOST similar types of properties in terms of condition you can find for the subject property. As you are dealing with a foreclosed property, it's a messy appraisal no matter what - Are you appraising it "as-is" or are you going to require the repairs to bring it into a "marketable" condition??

Since you are doing it for the sale of the property, I would avoid the HUD sales, unless they are typical of the market, and are the leading indicators of the marketplace (I.E. the entire market is being comprised of foreclosure sales) If I were doing an REO appraisal, I would DEFINITELY be using the HUD sales as my indicators, but also see what the "typical" market was to give an "as-repaired" value to the lender/client.....

 

[Restrain]

Just a thought: I've often seen HUD foreclosures go for ABOVE market prices due to the bid processes used by HUD, especially when you consider the needed repairs and lack of waranties, etc.

Roger

 

[BR549]

Thanks for all your helpful replies, I was in fact concerned that the seller was VERY motivated, you have all given me additional insight in which to analyse the very limited sales I have to work with.
THanks again

 

[Mike Garrett RAA]

Impress your client...use 6 comps, 3 REOs and 3 regular market sales. You might be suprised with the results.

 

[BR549]

Than ks Mike, That is a great idea.
Stacy

 

[Jo Ann Meyer Stratton]

Mixed up in those six comparables, have some that are the same condition as the subject, some that are average condition and some that have been renovated extensively. Right in your report will be the illustrations of "as is" and "as repaired". For REO reports that are prepared for Fannie Mae--that is the mix they prefer.