Comparable or not comparable?

[Richard Carlsen]

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.

Sorry to disagree with you Mike but while these sale are certainly part of the "Market", they are not the part that we are appraising. 2, 3 and 4 units houses are also part of the market but if the assignment is to form an opinion of Market Value on a SFR, you would not include multi-unit houses in the mix for consideration. If the the assignment calls for Liquidation Value, then you would consider short sales and repo's. However, reading the FNMA definition of Market Value, you will note that condition #1 is that the buyer and seller are typically motivated. I doubt that the seller/lender in a short sale or an REO property meets the definition of being "typically" motived.

The definition also says that the "price is not effected by undue stimulus." I would consider that a short-sale whereby foreclosure is looming on the property for the owner and the lender must make the decision to take less than is owed, certainly constitutes "undue stimulus" to the parties involved on the selling side. In addition, a lender with a growing portfolio of foreclosed properties that it needs to get off of the books in order to get cash flowing in rather than out and willing to consider offers at Liquidation Value, would certainly be considered to be under significant "undue stimulus."

 

[Mike Garrett RAA]

Then I would suggest you are mis-leading your client.

 

[Richard Carlsen]

Then I would suggest you are mis-leading your client.

Not so Mike.

I did not say that no mention was made in the report of the REO's or short-sales nor did I say that they were not considered in the reconciliation of the sales data. They would certainly be described to the client as part of the current market trends and what is happening in the market along with their potential influence on value that the client must consider in making a lending determination.

However, it is the client who defined the value to which the appraisal is made. If the client wants me to include as part of Market Value, properties that do not meet the definition of a Market Value sale, then the client can included that in the assignment conditions. I will be happy to comply.

However, as I read the FMNA definition of Market Value, REO and short-sales are not in any way, shape or form "typical" sales as described and therefore should not to be used in arriving at a value based on Market Value except as part of the consideration of market trends in the reconciliation.

 

[Pamela Crowley (Florida)]

Here, if you don't use any sales of REO or Short Sales, you wouldn't have ANY sales to use as comps.

 

[Richard Carlsen]

Here, if you don't use any sales of REO or Short Sales, you wouldn't have ANY sales to use as comps.

And that is one of the prime reasons why this is such a difficult time to appraise.

 

[Pamela Crowley (Florida)]

If the few buyers are only buying the lowest priced REOs, then that is the market. Any owner/occupants wanting to sell have to compete with the foreclosures and will have to offer at similar prices or not sell.

It is what it is and the REOs are the market. Not difficult at all when those are basically the only sales happening.

 

[Richard Carlsen]

Pam

Assuming you are using the FNMA definition of Market Value, which spells out in fairly explicit details what constitutes a Market Value sale, how do you justify using a sale that is sold under the definition of Liquidation Value to estimate the Market value?

The Market does not define the value used in appraising value in an appraisal. That value is defined in the assignment conditions by the client based on the Intended Use of the appraisal. The Market defines the geographic and time frame when the specified transaction took place.

I would be more than happy to include REO and short-sales in my estimate of Market Value. The client only has to tell me in the assignment conditions to do so. However, when using the FNMA definition of Market Value, I do not see that sales that were not arms-length or which were sold as liquidation sales meet the criteria for use as Market Value sales as defined.

 

[J Grant]

Richard...imno you still don't get it, that market conditions have changed so drastically, that in most cases, if an appraiser does not include short sales/foreclosures, they are misleading the client and are at that point "cherry picking", using only owner sales ...it is not the same as mixing single family and duplexes in a report, not at all. How can you decide that foreclosures/short sales are "not the market we are appraising", when they make up a significant part of market sales? These days, foreclosures are not a sign of "undue stimulas", they are a financial decision by many borrowers not to hold on to a losing value property, or one they can't sell for what they bought it for etc. And, if a large number of sellers are subject to what you term "unde stimulas", urgent reasons to sell, then that is part of the market, not a separate submarket to be explained but not included in a report. imo, by doing that, you are overappraising value in many cases. when an owner, as others noted, goes to sell, they will compete with short sales/foreclosures. And foreclosures are not like the old days, worn out fixer uppers, many are in similar condition to other homes in the area, with upgrades etc. and they are not sold at liquidation value, they are placed on MLS on the open market, the banks want to get as much money as they can for them, in most cases .

Also, the meaning of "undue stimulas" has to be considered in the market context of an area. We don't appraise in a vacuum, relying on theoretical definitions of a word like undue stimulas, it has to be measured around what is happening in the real world for an appraisal to reflect what is happening in the real world, with real sales, real buyers and sellers, not exlcuding sales that don't meet a theoretical, outdated definition of a word...in a healthy market, the few people going into foreclusre/short sale may be selling for a reason of "undue stimulas", in this market, if you see a large, consistant, or even a small, but consistnat, or growing number of foreclosures/short sales, then those people selling for reasons defined as "undue stimulas" become typical sellers, because the market forces affecting them are shared by many in that area...re low demand, dropping prices, perhaps job layoffs, or stalled ecnomy, high vacany rates, whatever the reasons, when they affect large numbers of sellers in the area who in conistant numbers are walking away from their property, they become the "typical" sellers, and what used to be termed "undue stiumulas" is now so commonplace, that it is now a typical seller motivation.

 

[Richard Carlsen]

they are misleading the client and are at that point "cherry picking", using only owner sales

But I do get it. That is the point. Cherry picking means that you are picking the best or cream of sales that are applicable to the assignment. And I am saying that not all sales in the Market are applicable to the assignment.

Let's take an example: You go to a farm and the farmer hires you to count all of his Holstein cattle in the south 40 acres. You do that and find that there are 52 of the critters. You make your report to the farmer and collect your $325. 1 year later, you get a call from the farmer to come count the Holstein cattle in the south 40 acre field again. However there has been a big storm and part of the fence has blown down connecting the north 40 and the south 40 acres where the farmer keeps his Black Angus feeder cattle. Now a bunch of Black Angus cattle are in the south 40 acres. You go to the south 40 acres and you count all of the cattle in the that field. You find that there are still 52 Holsteins but in addition there are also 30 Black Angus cattle grazing away. Now the assignment that the farmer gave you specifically said to count the Holsteins. But now there are 30 Black Angus that do not meet the criteria of the assignment. Are you going to include all of the cattle in your count and tell the farmer that there are 82 Holsteins in the field even though 30 of the animals are Black Angus and do not meet the definition for the cattle to be counted that the farmer gave to you? I think not.

In that same way you would not count the Black Angus as Holsteins even though they were in the same field, you would not use a Liquidation Value sales to estimate the value of a property when the assignment called for a appraisal value based on Market Value even though the Liquidation Value sale was located in the same Market.

 

[J Grant]

Richard, foreclosures are not sold for liquidation value in most markets!! they areplaced in on MLS, usually after a BPO is done for market value, and priced either at market prices or a touch lower. Unless your market is very strange, in which case you are right. But for most markets, that is how it works. So the foreclosure sale is not the hostein that strayed into the main pasture, the pasture is now filled with black angus and hosteins, and though in the past, people might have paid more for the black angus, now they are not ( or perhaps a bit more, but not huge amounts more, like in the past) Because, the market for cattle has changed, when they go on sale to the end buyers, for meat or breeding or whatever, the holsteins are now, for whaterver market forces affect cattle, as desireable to the end buyer as the black angus. (because in current market cattle buyers are very price conscious, and won't pay any more for the black angus) that , imo, is the kind of market we are in in many areas we are appraising, so we have to see it for what it is, and not cling to the idea that black angus command superior prices, when they don't anymore...