BPO and Appraisal

[J Grant]

Time to get out the chalk and write on the blackboard 100 times "REOs are not comps (under FIRREA), they are proxies at best!"

There is no such thing as a "proxy" for a comp. If an appraiser puts a sale on the report and uses it, the appraiser has stated they are relying on it as a comp.

Even if they are the ONLY sales in the market and have been for the last 5 years STILL does not make them comparables under the FIRREA definition.

The FIRREA definition of MV applies to a A THEORETICAL SALE OF THE SUBJECT. It is not stated in FIRREA that it this definition applies to comps, nor to comp selection.

Further, Fannie stating they can be INCLUDED does not change the definition. If you are able to write your own definition (non-lending) or where different definitions are implied (REO addendum) THEN they could be comparables in those instances just like non-REOs could suddenly become NOT comparable (aka, proxies only).

Once again, you are extrapolating the FIRREA def of MV to apply to comps, when it is stated as applying to a PRESUMED SALE of the subject (see definition)

And the fact that Fannie, Freddie, and FHA, who are well aware of FIRREA and MV , and have input from the best appraisers in making their guidelines, the fact they sent out updates stating that REO's can be included as comps means nothing to you...reread FIRREA addendum on the 1004, the MV definition and what it applies to. ( a PRESUMED SALE OF THE SUBJECT).

 

[J Grant]

Same method Zillow uses :icon_mrgreen:

How are you so familiar with it? you a frequent Zillow subscriber for value?

I looked it up once for value of my house, what a joke!

 

[residentialguy]

Once again, you are extrapolating the FIRREA def of MV to apply to comps, when it is stated as applying to a PRESUMED SALE of the subject (see definition)

If you want the value of a presumed type of sale, it only makes sense to use that type of sale to help determine that value. If I want to find liquidation value, I would use liquidation type sales. If I want to find value of a quick sale, I would use quick sales. If I want to find the most probable price of a famous person's home, I would find sales sold by famous people.

If you want to find out the most probable pay of a top model...don't look at appraisers, even though we might look the same.

 

[DMZwerg]

Once again, you are extrapolating the FIRREA def of MV to apply to comps, when it is stated as applying to a PRESUMED SALE of the subject (see definition)

And a comparable is supposed to be comparable to exactly what again?

Yep, THE SPECIFIC PRESUMED SALE of the subject as per the definition!
:new_snipersmilie:

So I would say QED on that topic, but you go on ...

And the fact that Fannie, Freddie, and FHA, who are well aware of FIRREA and MV , and have input from the best appraisers in making their guidelines, the fact they sent out updates stating that REO's can be included as comps means nothing to you...

How about we look at sel072611.pdf and see if we can find the statement you are referring to. Go ahead, open it up (or indicate the one you are quoting) and find the page that contains it. While you are looking I will add a few I find along the way ...

pp.491-2:
• Misrepresentation of the physical characteristics of the subject property, improvements, or
comparable sales.
• Selection and use of inappropriate comparable sales.
• Failure to use comparable sales that are the most locationally and physically similar to the subject property.
• Use of adjustments to comparable sales that do not reflect market reaction to the differences between the subject property and the comparable sales,
• Failure to make adjustments when they are clearly indicated.
• Failure to address and note adverse factors or conditions that affect value or marketability with respect to the neighborhood, site, or improvements.
​

There I believe I bolded one of them you are hanging your hat on, except it states "comparable" sales. That puts the discussion squarely back to what is or isn't comparable and puts location and physical comparability as a mere subset of comparability (aka, they don't HAVE to be "the most" locationally or physically comparable to be comparable sales, but the appraiser must use the comparable sales that are (the two factors). Searching the document for the term "REO" yields no phrase discussing the use of REOs in 1004 reports in the entire document. Care to suggest another document? :icon_mrgreen:

How about the Fannie DU Guide for FHA?

p.14 (under Real Estate Owned): [note: p.20 of the PDF]
Note on real estate that will be sold: If a listed property will be sold at or before closing, select Pending Sale in the Property Disposition field. DU uses the following formula to estimate the net equity:

(Market value entered x 90%) – outstanding mortgages
​

Net equity is considered a liquid asset. Verify and clearly document sales proceeds in the loan file according to current FHA guidelines.

​

So, other than seeming to indicate that Market Value is somewhere above Disposition Value (which would seem to reject your claim) it does not appear to confirm your claim.


Then there is the document "appraisalguidance.pdf" dated April 2009.

p.18: Sales Comparison Approach to Value
Comparable market data must be verified, analyzed, and adjusted for differences between the comparable properties and the subject property.

The appraisal report must take into consideration all factors that have an effect on value, recognizing that a well-informed or well-advised purchaser will pay no more for a similar property of equal desirability and utility if purchased without undue delay. To accomplish this, the appraiser must analyze the closed or settled sales, the contract sales, and the offerings or listings of properties that are the most comparable to the subject property in order to identify any significant differences (or elements of comparison) that could affect his or her opinion of value for the subject property.

Selection of Comparable Sales

Comparable sale properties that are not truly comparable to the subject property or are in competing neighborhoods are acceptable provided the reason for the use of the comparables is adequately documented and explained. The appraisal must include a discussion of how a competing neighborhood is comparable to the subject neighborhood.

p.19
The subject property can be used as a fourth comparable sale or as supporting data if it was previously sold and closed or settled.
Contract offerings and current listings can be used as supporting data if appropriate.
​

So where is this now mythical reference?

 

[J Grant]

DMZ, you keep intermixing sale condition with sale type. REO is a sale type. Physical condition and location are in a different category, and physical condition and location should be similar or equivalent for comps to subject, or as close to similar as can be found, with any differences that are seen in the market or that impact price adjusted for.

With all the quotes you made, I did not see one quote that said to exclude REO comps, or that REO comps are only good as "proxies " for comps.

 

[residentialguy]

Comparables should be comparable on every line item...not just physical attributes.

REOs go beyond just not being similar in the condition of sale. It is a clouded sale...one where you can't find relative information, starting with (but certainly not limited to) motivation. REOs and Shorts are all over the board with no rhyme or reason. The agents don't know. They are not ever a good comp because of this.

 

[J Grant]

If you want the value of a presumed type of sale, it only makes sense to use that type of sale to help determine that value. If I want to find liquidation value, I would use liquidation type sales. If I want to find value of a quick sale, I would use quick sales. If I want to find the most probable price of a famous person's home, I would find sales sold by famous people.

This is untrue as a guide for comp selection, because per appraisal teachings and methodology and theory, the gold standard for comp selection is principle of subsitution FROM A BUYER'S POINT OF VIEW. And buyers do not always choose homes by "sales" type. Buyers choose homes by location, and a set of criteria that are important to them, living area, or view, or condo vs single family etc. Investor buyers are part of typical buyers now in some market area, and they too choose by location and desireablity of the property, including potential to fix it up and rent etc.

Liquidation value imposes very specific criteria on marketing time in the definition...a severely reduced marketing time, as well as that the seller HAS to sell within that severely reduced marketing time. Thus, if severely reduced marketing times are seen with comps that sold at auctions and at sheriffs sales, then those are your best comps for that particular value definition. Can we get that out of the way, as liquidation value appraisals are a small percent of appraisal assignments?

The majority of res appraisal assignments are for market value. And the words in market value definition are typically motivated buyer WOULD PAY NO MORE FOR...competing properties, which almost indicates in some cases that a traditional sale selling for high end is above market value and not true market value...market value is defined as the most probable price, not highest price. When most probable price and highest price match, then that is when it is credible and supportable to appraise at high end of value.

Some appraisers though, automatically assume market value means "highest" roice, which is not the case anymore (it used to be the case, when MV definition was divergence of our opinions come from. Frankly, I would perfer it if the FIRREA definition had a more precise definition of "undue stimulus". But it doesn't. Therefore, when some appraisers claim that any sale that is not a traditional sale reprsents undue stimulus and does not qualify as a comp, that is their personal view, and not a FIRREA statement. When an appraiser claims that traditional sales contain NO undue stimulus, that is misleading, because a traditonal sale can have lots of unde stimulus...pending job loss, divorce, relocation etc. The mythical perfect seller with unlmited time to sell and under no pressure etc...what is that, 10% of all traditional sales? Realtors protect the motivations and pressure private sellers are under, which is one of the reason sellers hire them. Unless an owner gives permission to a realtor to state in a listing, or tell clients that "owner is desperate to sell due to divorce", the realtor cannot tell people that. Thus, the stimulus, and range of motivations is pretty wide in private owner, aka "traditional" sales.

Many appraisers have come to the conclusion that when banks make up such a large percentage of owners that the REO and short sales have market impact, that the "stimulus" of the banks to sell no longer qualifies for the term "undue stimulus", but becomes a market accepted range of typcially motivated seller . I am of that group, and the conclusion comes from experience in the market and taking account the whole definition of MV, not just picking on a few words such as "undue stimulus"
The main sticking point, and it is a sticking point for all of us, is the term "price unaffected by undue stimulus) , or the term, "without undue stimulus" The problem is, "undue stimulus" is not pecisely defined, nor is any threshold for it given. The powers that be leave it up to the appraisers to determine that, and that is where the problems arise in different interpretations...do REO sales represent undue stimulus and therefore make them candidates for exclusion (some have expressed this view) Do REO sales have undue stimulus that must be adjusted for ? Do REO sales have undue stimulus that may or may not need adjustment, depending on how the sale type has impacted price in relation to other comps? Do REO sales contain undue stimulus that is by now such a dominant trend in the market that it no longer needs adjusting?

 

[J Grant]

REOs go beyond just not being similar in the condition of sale. It is a clouded sale...one where you can't find relative information, starting with (but certainly not limited to) motivation. REOs and Shorts are all over the board with no rhyme or reason. The agents don't know. They are not ever a good comp because of this.
__________________
That is your personal opinion, and not one supported in many markets. Imo, it would be a weak argument with which to defend a report where an appraiser exclused short or REO sales, which were competivie and should have been included, and where excluding them led to a misleading or inflated value. I don't think this argument would hold up well.

 

[residentialguy]

This is untrue as a guide for comp selection, because per appraisal teachings and methodology and theory, the gold standard for comp selection is principle of subsitution FROM A BUYER'S POINT OF VIEW.

Which is based on being "equally desirable". REOs and Shorts are not equally desirable. That is why they typically sell to investors who inturn sell them at MV.

REOs go beyond just not being similar in the condition of sale. It is a clouded sale...one where you can't find relative information, starting with (but certainly not limited to) motivation. REOs and Shorts are all over the board with no rhyme or reason. The agents don't know. They are not ever a good comp because of this.
__________________
That is your personal opinion, and not one supported in many markets.

LOL...really. Call BoA up and ask them about the motivations of that REO sale down the street and how why they decided to sell at $50k below all the other similar sales. A homeowner can't get through to talk about his mortgage much less some appraiser calling to waist their time looking through all the files of a comp.

 

[J Grant]

Comparables should be comparable on every line item...not just physical attributes.

Very few comps are comparable on every line item, but I know what you mean. You are saying that they should be comparable in sale type as well. But that is for the BUYERS to decide of comp sales types are comparable ( as seen in market evidence, ) not for the appraiser do decide. We are supposed to pick comps from the subject presumed sale buyer, and if the presumed sale buyer is also buying or might buy REO or short sale, then to them it is comparable . If we can support that the presumed subject typically motivated buyer would not consider an REO or short sale, then we have support for excluding them.

For example, if the market data indicates that the typcial buyer/typically motivated buyer for my subject would not consider REO's as a substitute, then I exclude them in that report. But that is the market telling me that after research, which is different than me starting the appraisal with the view that REO sales should be excluded because they are not the same sale type as a traditional sale.