Comparable or not comparable?

[ZZGAMAZZ]

H.O.W.L.

To paraphrase Ginsburg, "I hear the best minds of my generation . . . " debate ad nauseum the inherent discrepancy between the defintion of "Market Value" and the "Principle of Substitution" and wonder why this critical condondrum isn't addressed definitively in appraisal policy.

 

[J Grant]

No matter how one spins it, a bank or lender owning a single family residential dwelling is not a "typical" owner or seller and is not selling the property for the same reason as a "typical" owner-occupied house is sold. Whatever is said, the bank is selling the property because it got ownership by default and not choice. The bank does not want to own the property and therefore when the bank gets rid of the property, it has a non-typical motivation for selling

I respect your experience etc, but in this case think your reasoning is not following the market...it is not a matter of "spinning it" The problem is twofold. First, from a buyer point of view, and one of the defining parameters for choosing comps, imo, THE gold standard for choosing comps, is the principle of subsitution. So, let's say your subject is a 1500 sf house with pool and lake view. There are fiour listings in the subdivision, all ( to make it simple) 1500 sf houses with pools and lake views. They are all on MLS- two described as owned by private owners, one advertised by realtor as a short sale, and one advertised as owned by a bank and a foreclosure sale. From a buyer point of view, all the houses are desireable and subsitutions for each other, and the foreclosure/ short sales might be bought first, assuming they were lower priced. Now, let's say there were six sales in the last six months of 1500 sf homes with pools and lake views. All were listed on MLS. Two were sold by owner, two as short sales, and two as foreclosures. Obviously, short sales and foreclosures make up a good part of this market and should be used...they meet the principle of subsitution and are ongoing in listings.

Now, the second part of the problem is what defines typical seller motivation. Truly, both a bank and a private owner's motivatins are the same...they both want to sell the property and are competing for today's buyer. So what if the bank got the property by default and didn't want it, and the house across the street is owned by a sweet couple who raised their kids in it and now are selling because they want to retire...both just want to sell at this point. Now, the bank may want to sell sooner, or not, then the retired couple. But how soon THEY want to sell is not the issue...the issue is, what is typical marketing time. If the pressure coming from short/sales foreclosures is, 90 days, because those homes slash their prices to sell in 90 days, then 90 days is typical marketing time, even though sweet retired couple can wait a year to sell. In this market, the sweet retired couple who can wait a year is the atypical seller, with atypical motivation...most of the market is desperate to sell their homes, and when they get realistic and serious, they slash the price enough to sell within 90 days. The sweet retired couple are now ATYPCIAL sellers, with a motivation atypical for this market ( even if their motivation was typical in the prior market)

For comparison,...let's say you have a rolex watch you owned and loved for years, and need to sell it, so you take it to a pawn shop. On the other side of town, a bankruptcy proceedign i under way too dispose of an estate's contents and among which is the same make/model rolex. The judge orders the contents to be sold and the watch is sent to the same pawn shop. The buyer who enters the shop doesn't care that you owned your rolex for 10 years, and that the other watch came from an bankruptcy proceeding. All he cares about is the condition of the watch and the price. Now both watches are competing for the same buyer and are equivalent subistitutes for each other.

 

[Richard Carlsen]

I respect your experience etc, but in this case think your reasoning is not following the market...it is not a matter of "spinning it"

I appreciate your position and respectfully disagree with it. The market does not define value; the definition of value to be used in forming an opinion of value comes with the assignment from the client in order to solve the problem. While the Market is the source of the data, the definition of Market Value must be applied to that data. I call your attention to the definition of Market Value contained in USPAP:


MARKET VALUE: a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal.

Comment: Forming an opinion of market value is the purpose of many real property appraisal assignments, particularly when the client’s intended use includes more than one intended user. The conditions included in market value definitions establish market perspectives for development of the opinion. These conditions may vary from definition to definition but generally fall into three categories:
1. the relationship, knowledge, and motivation of the parties (i.e., seller and buyer);
2. the terms of sale (e.g., cash, cash equivalent, or other terms); and
3.the conditions of sale (e.g., exposure in a competitive market for a reasonable time prior to sale).

Appraisers are cautioned to identify the exact definition of market value, and its authority, applicable in each appraisal completed for the purpose of market value.

Please note the bold sentence at the end. In my copy of USPAP, this sentence is in bold letters. USPAP tells us that the exact definition of MV must be identified. This comes with the assignment. It is not enough to just say, "Well, this is what the market is doing and therefore this must be the definition of Market Value."

Sorry, but in my mind, that dog just won't hunt.

 

[J Grant]

Richard..But the whole point is, the market does define value!! If we ignore what is happening in the real market, what real buyers and sellers are doing, and insist on following an academic interpreation of USPAP terminology...your interpretation of it is different than mine...if an appraiser does not apply the terminology to the market, what are they doing? Thier appraisals are misleading, imo, if they are not based on true market conditions.

I don't see anything in your above post, in fact, that would exclude foreclosures/short sales from meeting the USPAP definition of market value that you posted...terms of sale, market exposure, relationship of parties, motivation, etc. Foreclosures and short sales that are sold on MLS, often with as much time on the market as non bank sales, and sold with either regular financing or cash just like any other house...The relationship between buyer and seller is still arms length, with typcial buyer/seller motivation. Typical buyer and seller motivation for the PRESENT MARKET.

If an appraiser appraises my house for a theoretical market, and then I go to sell it, and in the REAL market, the price is much different, that was a misleading appraisal. How many times do we see on MLS, "listed for below appraised value" That says it all, right there. For an appraised value to be so off what the property will really bring, it is the appraiser's fault. Again, I just don't see why short sales and foreclousres marketed on MLS to typical buyers and sold for typical terms of financing, don't meet the criteria for USPAP market value sales .

 

[Richard Carlsen]

Richard..But the whole point is, the market does define value!!

Not in my appraisals it doesn't. Even if it is a Market Value appraisal, the definition of Market Value is determined by the client and the clients needs. If there are any additional requirements or a specific definition of Market Value (such as FNMA), then that definition becomes part of the assignment conditions (old Supplemental Standards) to which I must adhere. I cannot just go out and say, that is the market and the client will have to live with it. I either must comply with exactly what the client specifies in the assignment conditions or decline the assignment.

To me, FNMA is very clear in stating that the buyer and the seller must be typically motivated. As I see it, it means that since the house is primarily a SFD and normally owner-occupied, a bank or lender owning the property (and not occupying it) is not a typical seller one would find in the neighborhood. This also means that the banks motivation to sell is different than if the house were owner-occupied. I just do not see a bank-owned property sale as a "typically motivated" sale. These kinds of sales may be common and even constitute the majority of the sales in a neighborhood but a bank cannot be seen as being a "typical" seller. For that reason, REO and short-sale properties, where banks must also agree to the sale along with the seller, can be classified as Market Value sales in accordance with FNMA's definition of Market Value.

 

[Mztk1]

Jo Anne, you and I are both in the one of the world's foreclosure capitals. Are you saying that in your area of Florida there is no reaction to bank ownership? I.e., buyers do not expect some type of a deal with a foreclosure?

I know with FHA doing a lot of the foreclosure loans and 6% shaved off for closing and pre-paids plus 3% for a gift program, it is hard to follow without making the phone calls, but in ~95% of my markets foreclosures still sell below the rest of the market.

 

[Randolph Kinney]

What are the typical seller motivations to sell?

What are the typical buyer motivations to buy?

If we exclude any seller who is not an individual owner occupied SFR as a valid seller for market value considerations, then any rental SFR, any second home, any new home, etc. cannot be considered.

If we exclude any buyer who is not going to occupy the SFR property, then investors, second home owners, relatives buying for relatives to live in, etc. cannot be considered.

That is quite an exclusion of sales. If the market price is dominated by distressed sales, or non owner occupied sellers including builders, how is it that an owner occupied seller is not affected? If he wants to sell, he has to compete with all other sellers in the market. As the market price moves down, he has to follow with his price or not sell at all. Eventually, he must catch up or get in front of the market price to unload, if he is a motivated seller. And you typically see this in a declining market with multiple listing price adjustments, relistings, etc.

Here in San Diego county, for every home that sold, 2 more enter into default. For every home that is sold, one home is sold either as REO or a short sale. The lenders know that the problem is getting worse. They are begining to accept a substantial discount at trustee auctions. They are regularly reducing the price on listed REOs. They are agreeing with short sales at substantial discounts. Lenders are offering cash back at closing.

Now, how do you identify a motivated seller in this market? The one that keeps his list price higher than all other properties that are non owner occupied?

 

[J Grant]

FHA has the gift program and prepaids for any loan, not just a loan for a home going into foreclosure, so adjustments for that is the same, if reflected in a lower price.

In my market area, most homes are not financed thru FHA, in some cases, I see foreclousures going below market, in which case I might or might not make an adjustment, depending on terms, condition of property, etc. I might just leave it alone and say it represents lower end of value, due to being sold as a foreclosure.

Other cases, foreclousres or short sales are selling around market rate...what i see is that as a number of foreclosures sell lower than rest of market, the rest of the market lowers their price to keep in competition with the foreclosures. I think every market is different, even with in a few miles, the quantity and quailty of homes in foreclosure /sold as short sales will have a different impact on the market and has to be analysised. Again, look at listings and pendings, both bank sales and non bank sales, to see where your market is presently and is heading.

 

[Mztk1]

What I meant by the foreclosures with FHA is that, in my markets, a lot of the foreclosure houses are selling with 9% back so their values in the MLS and public record are overstated. In fact, a higher percentage of foreclosures are selling with concessions than in the past, even on the conventional. I am finding a consistent $5,000 to $15,000 reaction by the market due to bank ownership.

It's been my experience as an appraiser - and in a previous life in a different state as a sales agent - that the average "mom and dad" buyer choose out of emotion and a lot of them are not into the idea of buying a house that has been foreclosed on. Most people do not have an investor mindset. So I've been very sensitive to the idea that a foreclosure is not necessariliy a substitute property in the open market. In fact, in my experience, it rarely is, and an economic depreciation adjustment is typically necessary.

Short sales are something entirely different. Most short sales have to get an offer accepted by at least one bank and sometimes two. The process can take weeks. Certainly only the buyer not typically motivated is going to be able to wait 4 to 6 weeks, sometimes longer, for the banks response. Short sales, like foreclosure, are almost always below market in my area as well.

The ony exceptions I've noted are when you have no other sales except foreclosures - then I can't measure it and can only assume the rest of the market has bailed. I have several projects near me where there have been nothing but short sale and REO sales since the start of 2008.