Bank owned forclosures

[STEVE COOPER]

What's the opinion out there about comps that are bank owned forclosures. I know the agents and LO's make excuses about them, but when they are in decent condition and receive full market exposure and it still takes a normal average marketing time to sell.....do they fairly represent current market value?

 

[Lobo Fan]

Like most answers... ir depends. Usually, REO sales are below the market levels. If there are enough REO sales in a neighborhood, then they become the market. Usually REO sales have nasty carpet, banged-up walls. Often the appliances and light fixtures and even the smoke detectors have been removed. I have seen toilets and built in cabinets removed. So the lower prices are often to allow for the less than pristine condition.

If they are in decent condition and fully exposed, I would think that they would be good market level comps, especially if they would be perceived as competition for your subject.

 

[Randolph Kinney]

Yes, short sales and foreclosures that are exposed to the market and become sold are market sales. They may not be representative of your subject in condition or quality factors. However, they are part of the market statistics for price, DOM, trends, etc.

When enough distressed sales enter the market, they become the market.

 

[Laura Harper]

What's the opinion out there about comps that are bank owned forclosures. I know the agents and LO's make excuses about them, but when they are in decent condition and receive full market exposure and it still takes a normal average marketing time to sell.....do they fairly represent current market value?

It depends upon the market and what it is telling you when you research. I am north of Detroit. A full 75% of sales, in some areas, are bank/corporate owned. That is the market. It drove the market down to where foreclosures and armslength transactions are of the same value.

 

[Walter Kirk]

They may and in some cases they influence the general market however the sellers are not "typically motivated" and in many cases the properties are in less than marketable condition and should not be given the same weight as a non REO property.

 

[Colorado Guy]

I'm fighting a complaint filed against me for this very issue. A rural area consisted of predominantly foreclosures and short sales - I did a review of an appraisal that went beyond the marketing area because of the foreclosures - I cut the appraisal $100k by using comps within 8 miles of the subject (original comps where 30+miles)

I believe if forecloses make up the majority of the market - then you MUST use them. If they do not, I would stay away from them. I think it comes down the theory of substitution.

 

[Terry Caldwell]

In south Fla. there are plenty of new, almost new, and never lived in foreclosures so condition isn't a factor here when deciding whether or not to use them as comparables. It seems the prevalence of foreclosures would be the primary factor, with increasing numbers of foreclosures creating the market, but I couldn't say at what point that happens.

Currently there are enough conventional sales in this market to avoid using foreclosures for comparables, but the day may be coming if sales slow down more, and then the bottom will be hit, and hard.

 

[Lloyd Bonafide]

I believe if forecloses make up the majority of the market - then you MUST use them. If they do not, I would stay away from them. I think it comes down the theory of substitution.

I agree 100% with Bob. I can recall in the early to mid 1990's, where I did some appraisals with all of my comparables being REOs, because that's all that was selling in some areas.

If you are in a housing tract, and the only model match is an REO, then you have no choice but to use it.

The REO sales I'm seeing now are typically, but not always, selling at least a little below market, but that's understandable, since at least in California, the bank is not required to fill out a normal transfer disclosure, since they never occupied the house.

If I was buying an REO now, I would expect to purchase it at least a little below market value due to the risk of limited disclosure.

When I do an appraisal now with an REO comp, if my subject is rated in good condition, I might rate the REO comp as Average (REO), and make a condition adjustment, even if its' listing and its' pictures generally show a good condition.

 

[Mr Rex]

The problem with using REOs as "the market" includes the items listed above, trashed floor coverings, holes in walls, missing fixtures etc. How many lenders do you come across that will lend on a property in this condition? (unless some type of re-hab loan) Also, these REOs are sold with quick sale pricing based on a shortened marketing/exposure time etc. I would be very careful when declaring that "the market" in comparison with arms lengths sales with typical marketing and exposure times and no needed repairs etc.

As someone else mentioned, its the principle of substitution, but you can't substitute a REO that you can't get a typical SFR mortgage on for a house that doesn't need repairs, even relatively minor things. Lenders in many areas simply will not make any repairs to REOs. HUD/FHA comes to mind.

 

[John LaBelle]

Like most answers... ir depends. Usually, REO sales are below the market levels. If there are enough REO sales in a neighborhood, then they become the market. Usually REO sales have nasty carpet, banged-up walls. Often the appliances and light fixtures and even the smoke detectors have been removed. I have seen toilets and built in cabinets removed. So the lower prices are often to allow for the less than pristine condition.

If they are in decent condition and fully exposed, I would think that they would be good market level comps, especially if they would be perceived as competition for your subject.

I agree with what Chuck wrote for the most part. I'll also add this:
I'm also a realtor, and recently started dealing with some REO properties from that side of the business. From what I can tell, they are looking to maximize the sale price. I recently listed one, which is in need of major renovations due to the pipes freezing over the winter, and they were very optomistic with the asking price.

I'd suggest calling both the listing agent and the buyers agent and get both versions of the condition of the property.