BPO and Appraisal

[DMZwerg]

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.

So if you want to find MARKET VALUE (as defined) then you would use Market Value type sales ... QED :icon_mrgreen:

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.

Actually, when discussing 2-families investment buyers are NOW the only buyers when dealing with certain strata of the market (rebabbers & landlords) with owner-occupiers only coming in at the "good" quality level. Different sets of typical buyers for different strata = different buyer motivations (change in typical).

Same is often true with SFR REOs. Since most require cash (especially at lower end) rehabbers are grabbing lowest hanging fruit, then investors, then finally owner-occupiers (purchasing few if any REOs in this area). After a while you start recognizing the names (those that actually sound like names, many investors utilize LLCs).

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.

Like many REOs ... regulators saying "you have to get your reserves back up to X% in 30 days, thus properties being sold off fast.

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

WHO are the typical buyers for the properties that meet the definition?
WHAT would they typically "not pay more" for?

If there exists a set of buyers willing to pay "premiums" for properties that are not REOs then there is your answer, price is definitely NOT REO prices. If REOs are typically selling for cash and non-REOs typically have other financing then by what criteria are you determining that they are the exact same typical buyers?

THINK!!!!
ANALYZE!!!
COMMENT!!!
SUPPORT!!!

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.

You want a shocker ... my mentor acknowledges that I TYPICALLY opine lower than he does for the same exact property. :laugh: Yeah, I am about as middle of the road as they come except for one thing ... I actually research my market and identify different strata with different typical buyers, etc. I noticed the trend back when the average and medians for the city was dropping like a rock off a cliff (and had been) yet the local SFR neighborhood markets were still dead stable. I am not saying this is true with every market (military housing appears a definite exception) but in general applying the FIRREA definitions seems to separate the market that meets its definition from the markets that don't (REO, short, estate (often), etc.).

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

When I can detect and measure it, then it exists. Here is a surprise for you ... while doing a 2-family in Milwaukee I ran across as non-REO sale that was an obvious outlier. When I called the agent I found out the owner's son had died and a tenant made rude comments so the owner just wanted to dump it. Problem solved. In Hawaii one appraiser pointed out high priced outliers due to out of state purchasers, and again eliminating the sale that did not meet the FIRREA definition solved the problem. Same with builder sales (aka, usually do not meet the FIRREA definition).

Call me a pessimist but I just don't usually appraise to the maximum potential price (like the standard definition from 50+ years ago mentioned) :laugh:

 

[J Grant]

wow...where in USPAP or FNMA for that matter, does it state that it is the best appraisal practice to choose our comps by price?

I don't pick comps by price...when I said I use comps with a tight range of value, I should have explained further (this board is exhausting), that the value range usually ends up being tight after other rigorous selection such as physical characteristics are used. I do reports of course where sales prices have a wide variety and then there is a wide range among prices, however, when there are plentiful sales available, well selected comps often have a tighter range of value than poorly selected comps, which need big adjustments.

And there is nothing normal or typical about these times. A sale under forced conditions (ie REO, Short Sale) represents a forced-sale value and not consistent with a “normal” or “typical" sale (typically motivated buyer/seller, no undue stimulus) - a fair sale.

You keep trying to incorporate words and concepts that are not part of USPAP or FIRREA...such as traditional sale, and now the word "normal." The market does not try to be normal or abnormal. The market responds to forces impacting it, economic, interests rates, availiblity of credit, actions of buyers and sellers. Though these times may not be normal compared to other past markets, these times are what we are dealing with, and when our effective dates are asked for.

You keep wanting to apply standards from past markets to today's market...such as what constitutes a fair sale etc. Appraisals are suposed to reflect CURRENT market conditions ( current means recent past sales, today's conditions, and listing trends) , not what the market "should be", or what it was like three years ago.

What you refer to as a "forced sale", is now typical of this market...like it or not...I am aware many of us don't like it.

The are specific conditions to this presumed sale in the definition of MV
Basically 3 categories.​

1. the relationship, knowledge, and motivation of the parties (i.e., seller and buyer);
2. the terms of sale (cash, etc)
3. the conditions of sale (exposure, etc).

Comps need to reflect this as well. When they don't, you have to adjust for market variances of these conditions.

I agree to this, although the word "have to" is your own...apprasial guidelines state the appraiser should consider adjusting for variances...because, as always, our market determines the variances, (or lack of them)

See above.

 

[residentialguy]

What in the world is unknown about a bank's motivation in selling an REO???? Their motivation is TO SELL IT.

You've got to be kidding me. That's like saying the motivation of a buyer is TO BUY IT.

Fail

Motivation: How bad do they have to sell it. What is driving them to sell. Has the homeowner been sucking on them for 2 years. How heavy are they in the home. Do they have an exorbitant amount of properties in that area that they have to dump. Did they go by a bad BPO? Did they just get a huge check for the Govt or a mandate to dump it? 100's of possibilities. Why did they sell for that price?

 

[J Grant]

DMZ , I agree with much of your well written post!

 

[J Grant]

You've got to be kidding me.

Fail

Motivation: How bad do they have to sell it. What is driving them to sell. Has the homeowner been sucking on them for 2 years. How heavy are they in the home. Do they have an exorbitant amount of properties in that area that they have to dump. Did they go by a bad BPO? Did they just get a huge check for the Govt or a mandate to dump it? 100's of possibilities. Why did they sell for that price?

Go ahead, knock yourself out finding that out. What matters in the end is did seller motivation impact price. If it did, adjust for it, if it did not, don't adjust. We are not expected to find out every nuance of a seller's motivation, be it bank or private owner. IF the seller's motivation was atypical and affected price, it will be apparant ...and every REO sale on MLS has an agent associated with it and they will answer questions.

Bank motivations overall are pretty standard...the banks are stuck with a bunch of REO properties and have to sell them, and would perfer to sell them in a shorter rather than longer marketing time. Ask realtors and lenders and they will confirm this.

If you are going to call and ask about every nuance of a bank's motivation, then why not call and find out every nuance of a private seller's motivation. Were they depressed the day they got the offer? Did they have something to drink, did that affect their decision making? And on and on it can go.

 

[residentialguy]

Go ahead, knock yourself out finding that out.

Exactly....with bank sales, you can't. Other sales the agent or homeowner can say, yeah, they homeowner just won the lottery and didn't care what it went for...or the homeowner died...or the homeowner didn't have to sell - no presure. Knowing the motivation of a bank - not so much.

By saying "Go ahead, knock yourself out finding that out." is hinting that you don't take this step/ And if you aren't finding this information out, I suggest you start. It is a necessary step part of developing a credible opinion.


Bank motivations overall are pretty standard...the banks are stuck with a bunch of REO properties and have to sell them, and would perfer to sell them in a shorter rather than longer marketing time.

Really? That's why similar REO homes prices are spread out like a crazy lady's quilt.


If you are going to call and ask about every nuance of a bank's motivation, then why not call and find out every nuance of a private seller's motivation.

I do! And so should every appraiser - that's what we are supposed to do. Again, motivations play a critical role in whether or not that sale is relevant. Motivations can substantially affect the sale price! This is not just me saying it. Dust off your USPAP book and you'll see it there as well.

 

[J Grant]

Res Guy, motivations are important to the extent that they affect sales price. And that is easy to adjust for. We can talk to owners and agents about both bank and private seller motivations. No matter how much you ask they are not going to tell you everything. And far as I know, it is not critical to know everything, every nuance of a seller's motivation... motivation is first of all, the seller wanted to sell. DOH. I mean that as comic relief, not that you are doh, but I mean, come on...what other motivation do they have?

And banks' motivations are easier to call than a private owner...the bank has to sell, period the end. Private owners can have to, or just want to sell, in the end, what difference does it make? The seller's motivation, and the buyer's motivation, and the negotiation, is reflected in the sale price. Days on market is a key to motivation...homes listed at competitive prices sell in shorter marketing times, thus showing more serious motivation on the part of the seller. Whereas homes with long marketing times with many price reductions shows less serious seller motivation....not exactly rocket science.

Realtors are as avail to talk to about motivation in both bank or non bank sales. But the main impact on motivation is seen in the sales prices. A buyer does not care if the bank has 50 properties to sell or 5000 and rarely asks, and the realtor may not know and the staff assigning the appraisal may not know, so what difference does it make if you the appraiser know? The appraisal is concerned with the market reactions to the TYPCIALLY motivated/ informed buyer... and the typically motivated buyer does not ask a zillion questions about a bank or private seller motivation....they may ask one or two quesitons, then they make the offer...they soon know by whether their offer is accepted, how motivated the seller was.

Apprasial guidelines always refer to the impact on price on any aspect of a transaction, re, with financing its is not dollar for dollar adjustment, the adjustment is supposed to be based on measureable impact on price ( as specified on FIRREA addendum in report).

To sum up, we are reporting market reaction to the motivation, not the motivation itself.

 

[residentialguy]

Res Guy, motivations are important to the extent that they affect sales price. And that is easy to adjust for.

Sure...when you know what the motivations are. Bank motivations vary tremendously.

STATE BOARD:
Why did you adjust for "motivation" for REO comp 5 and not for REO comp 4? What was the difference in motivation between the two?

APPRAISER:
Derr....I dunno. I couldn't talk to them. There was more price difference on comp 5, so I adjusted it for motivation that I didn't confirm.

STATE BOARD:
So you don't know if they even had a difference or have high motivation at all...you just adjusted because there was a price difference. The motivation could be so that it makes it completely irrelevant

APPRAISER:
Well...no matter how much you ask they are not going to tell you everything. And far as I know, it is not critical to know everything...so I don't even ask.

STATE BOARD:
Oh, you don't even take due diligence to try? Ok...we've heard enough. Thank you and enjoy your long vacation. :icon_mrgreen:



From USPAP Q&A


184..... Market value definitions imply a sale of the property wherein the buyer and seller are “typically motivated.”

185..... This condition requires that the level of research in a market value assignment is sufficient to understand the
186..... motivations of the buyers and sellers for the sales used in the approaches to value. The motivations that lead to a​

187..... sale play a critical role in establishing the relevancy or irrelevancy of a sale as a comparable one in an
188..... assignment.

 

[J Grant]

I doubt I'll ever be called before a state board as to why I did or did not adjust for motivations between 2 REO comps...because the standard of adjustment is for impact on prices...and if there was enough impact on price necessary to adjust, I'd adjust...and the amount would be market extracted per paired sales which is accepted methodolgoy...a variance among prices is normal for all transactions, and is not expected to be adjusted for .

You seem to think seller motivation plays a big part in sales price....more often it is the terms of the deal, such as cash, if there are seller prepaids etc, as well as quick or slow closing times that impact price. Your fixation on seller motivation for REO's seems out of line with market evidence on how much it impacts prices.

In any event, I would have information about the motivations of an REO sale by talking to realtor and looking at marketing times, price reductions etc. I usually do not go beyond realtor to reach a bank directly for additional details of motivation beyond what I discuss with realtor, and have not heard of other appraisers doing that as a matter of course.

If you do, good for you...but...it sounds to me like you are using this as an excuse not to use REO's...re the difficulty of reaching someone at a bank who can confirm all kinds of arcane proprietary information, such as how many properties the bank owns...you know almost nobody can tell you that information, so you use it as a reason not to include the REO sale in your report.

It seems odd that you are holding this standard as a reason to exclude REO comps, especially if they have been listed on MLS, with marketing times and price reductions on record, and an agent available for verification.

 

[residentialguy]

I usually do not go beyond realtor to reach a bank directly for additional details of motivation beyond what I discuss with realtor, and have not heard of other appraisers doing that as a matter of course. If you do, good for you...but...it sounds to me like you are using this as an excuse not to use REO's...re the difficulty of reaching someone at a bank who can confirm all kinds of arcane proprietary information, such as how many properties the bank owns...you know almost nobody can tell you that information, so you use it as a reason not to include the REO sale in your report.

First off, the realtor doesn't know jack about the inner workings of the lender on that property. I've asked 100's and not ONE had any idea. The bank does not discuss it with them and they don't care. Most don't have a clue about the house, much less the motivation of the bank. And yes, you're right - the bank won't tell you anything, either. Now we have sales that have a shotgun pattern for unknown motivations and bogus BPOs. You choose to use these unknowns and I choose to look at it, study it's influence on the defined MV type properties and use it if necessary to explain the heavy saturated REO presence or for lack of non-REO sales available...explaining that I'm using this, but I don't have a frickin clue as to just how bad that undue stimulus was to sell that property. If there is a market price variance between a REO and non-REO sales, I adjust accordingly to that market variance.