Comparable or not comparable?

[J Grant]

ysome of you don't understand what arms length transactions are?? If foreclosures are sold throught MLS and exposed to market and the buyer and seller did not know each other or have a special relationship, it is an arms length transaction.

Re the subject....the client is a divorcing couple, what does that have to do with has nothing to do with an arms length transaction? they happen to own the property, that's all, that should not affect the value of the subject.

 

[Pamela Crowley (Florida)]

About the only sales happening here are the REOs for MUCH LOWER prices. Sales of REO are the market here, so they are the comps.

 

[The Warrior Monk]

ysome of you don't understand what arms length transactions are?? If foreclosures are sold throught MLS and exposed to market and the buyer and seller did not know each other or have a special relationship, it is an arms length transaction.

The scenario above is an arm's length transaction, but it is possible that the sales price of the property doesn't represent its market value. It has to be taken in the context of the rest of the market.

Example: If I sell a property for $1 after listing it through MLS to someone I don't know, it is an arm's length transaction. It doesn't mean that it sold at its market value, if the next lowest similar sale sold for $100,000.

The long and short of it is that changing markets are difficult to analyze, so review those sales carefully, especially given the intended use.

 

[J Grant]

David...agreed, one sale does not make a market. But the presence of many types of sales, in this case, foreclosures, does make a market, or rather, shapes market prices, because then other owners must compete with them when selling.

For example, let's say you are eccentric, and decide to sell your house for 1 dollar. If all other homes were selling at much more, it would stand out as an odd sale and an appraiser should not use it.

But if the majority of people in your subdivision all started selling their homes for a dollar, and the trend is to be continuing, with many homes listed at a dollar and ten cents, for example, then that becomes the new market in your area. If a market changes, let's say lots of foreclosures, or majority of homeowners selling for a dollar, there should be a reason the appraiser can find out. For example, if lots of people sell for a dollar, maybe toxic waste is discovered in area water. If lots of foreclosures in a duplex market, maybe rents can't cover sales prices, maybe there is lots of unemployment and people are leaving the area, properties are vacant and can't be rented, or homes were overpriced in past few years and bought by investors who are dumping them, etc. the appaiser has to look at listings too and see where the market is going. Are the foreclosures/short sales a temporary market glitch, or are a lot of listings having prices slashed, represented as bank owned etc.

 

[Wayne Tomlinson]

There are a lot of well considered posts here.
I agree with the thought that, if it like you say, all the sales are what have been distressed sales, then that is the market. It is not your fault that your client is choosing to divorce during a down time in the market. (It might even that the market and the whole down economy may even be a part of the reason for the divorce.)


One thing that you can be sure of is that no matter which you come down on, the other side in the divorce will be sure that you should have gone however far it took to find sales of houses that prove the value higher.

I have seen the phrase "fair" market used above. I would like to know just how that fits into the equation. Of course it is not "fair" that the current market sucks, just as it was nor really "fair" that the market and sale prices were as high as they were one year ago.

Which ever way you go, be secure and have a lot of back up for your position, and have a lot of ammunition that you do not put into the report but you have in your file to support your position. I have found that you can put too much into the report for court cases. It gives the opposition too much to pick on.

You need to confer with the attorney. Spend time bringing him up to speed on the overall market and what you have for back-up.

If you have a good relation with the attorney, you are half way there especially if the other side does not.

Judges are great math experts. They mostly like to use the formula simply

A + B/2 = the final value.

It is one of the basic courses in law school, I think.

Wayne Tomlinson

 

[The Warrior Monk]

Judges are great math experts. They mostly like to use the formula simply

A + B/2 = the final value.

It is one of the basic courses in law school, I think.

Not always...that assumes that both appraisal reports are equally good, or equally bad. If the other appraiser's appraisal is discredited, the value will likely be that of the credible appraisal.

 

[J Grant]

I think the appraiser has to do the best job they can, not try to pick sides and a hgih or low value, whatever the outcome via the judge etc, that is their client's problem, not their problem, imo. Personally, if I knew a case was going to court I'd probably decline it, who needs the headaches. Let them get a BPO!

 

[Richard Carlsen]

Short sales and REO's can be arms-length transactions but they normally do not meet the criteria for a market value sale to be used as a comparable as defined by the definition of Market Value due to the sellers extreme motivation. Arms-length transaction is not the only criteria that one has to consider. While a short sale or an REO may be dominant or a highly influencing sale in the market, it does not constitute a sale that would apply to the definition of Market Value and therefore, should not be used as a comparable in forming an opinion of value based on the sales data approach. You may use the presence of short sales or REO's as mitigating factors in the reconciliation but you should not use them in the sales grid except for information purposes.

In short, you cannot form an opinion of Market Value by using anything else in the grid except sales that conform to the definition of Market Value to which you are appraising.

 

[Mike Garrett RAA]

Simple way to answer the question....

Forget, for a moment, you are an appraiser. You are now a buyer. There are several properties on the market that meet your needs. All are identical in features, amenities, and terms.

Offering #1 List price $100,000
Offering #2 List price $105,000
Offering #3 List price $110,000

As a buyer, if all things were equal...which one would you buy?

Offering #1 is an REO
Offering #2 is a short sale
Offering #3 is owner offering

Now, can you see how and why both REOs and short sales should be considered? They are the market! A buyer typically doesn't care who the seller is...they want the best buy. Sellers need to recognize the competition for their listing and price accordingly.

Language of Real Estate Appraisal, Fisher,Martin,Mossberg 1991 defines Arm's-length transaction...

"A transaction occurring in a competitive market with reasonable exposure under conditions requisite to a fair sale, with a willing buyer and seller each acting prudently, knowledgeably, and for self interest, and assuming that neither is under undue duress."

While one might argue a seller selling as a short sale might be under duress, we could argue that the short sale eliminates the cause of the duress and solves a problem for the seller.

I certainly believe both REOs and short sales presently define the market...IN MY MARKET at this time.

 

[J Grant]

Richard...Value due to the sellers extreme motivation

You are wrong!! The def of motivation is TYPICAl seller motivation. When most sellers have what you "Extreme motiavation", that becomes the typical seller in the area, just as a typical buyer would be aware there are many foreclosures in the area and use that knoweldge when negotiating prices, even with an owner and not a foreclosure sale. How can you appraise in this market, and think foreclosures are extreme motivation? that is a market from a couple of years ago, when foreclosures were rare and usually due to something awful happening now large numbers of owners are simply walking away from their homes voluntarily because they know they can't sell it for what they paid.