Fannie definition of market value

[Overimprovement]

Lots of discussion in this hot market lately regarding adjustments, contract price over list price, no comps supporting contract price, etc. The bottom line number we are producing,
if we are reporting on a 1004 form, is market value, which is clearly defined by Fannie as follows (and stated on the form itself):

"Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

• buyer and seller are typically motivated;
• both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
• a reasonable time is allowed for exposure in the open market;
• payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
• the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale."

So the question for discussion (and I am keeping my opinion out of it for now) is this--what element of the definition above is being violated by an opined market value that is more reflective of the crazy bidding wars, than one that seems easily supportable by recently sold comparables? The only phrases that seem to be open for discussion might be undue stimulus (you have to be clear on this if you use it) or perhaps well informed/advised.

Perhaps another way to phrase it might be this--if you were to list your personal residence for sale tomorrow, do you think it would sell closer to what a real estate agent might list it, or what you personally would appraise it for just based upon a typical sales comparison grid of comparables? If the values are different, which is really its market value as defined by Fannie?

I find the current real estate market to be similar in some respects to the lumber market. Do I think a 2x4 can stay priced near $10 per 8' board for much longer? Of course not. But if I need to buy some boards next week or tomorrow for a project that HAS to get finished (I actually do), what is the most probable price I can expect to pay? I actually find this topic increasingly fascinating, and I do see valid points from each side of what appears to be a great divide.

Thoughts?

 

[Terrel L. Shields]

buyer and seller are typically motivated;

What part of this market is "typical". No one has seen a boom like this and this creates an auction mentality where people bid far above MV thinking that prices will catch up (will it? how do we know? or is it wishful thinking?)

payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto;

Credit is not cash. Credit is a hedge. You pay a small amount down and have a straddle. You are paying for an option to buy it (pay for it) in the future (call) or selling in the future (put). The problem is it is a short term option. If you don't flip it for a profit soon, then long term your continual monthly payment for the option is all loss if prices don't rise or worse, fall.

 

[Meandering]

Lots of discussion in this hot market lately regarding adjustments, contract price over list price, no comps supporting contract price, etc. The bottom line number we are producing,
if we are reporting on a 1004 form, is market value, which is clearly defined by Fannie as follows (and stated on the form itself):

"Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller,

each acting prudently,

knowledgeably and assuming the price is not affected by undue stimulus.

Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

• buyer and seller are typically motivated;
• both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
• a reasonable time is allowed for exposure in the open market;
• payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
• the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

 

[Overimprovement]

What part of this market is "typical". No one has seen a boom like this and this creates an auction mentality where people bid far above MV thinking that prices will catch up (will it? how do we know? or is it wishful thinking?)

Credit is not cash. Credit is a hedge. You pay a small amount down and have a straddle. You are paying for an option to buy it (pay for it) in the future (call) or selling in the future (put). The problem is it is a short term option. If you don't flip it for a profit soon, then long term your continual monthly payment for the option is all loss if prices don't rise or worse, fall.

So to go counter-point for a moment:

We are talking about Fannie Mae here. They ONLY get involved in mortgages which they purchase, so implicit in their definition is that a loan is involved. In fact, technically, if there is no loan, but an appraisal is completed anyway, an appraisal report is not even supposed to be on a 1004 form.

And while I agree that the market is not typical, the definition uses the phrase typically motivated. For 'most' of the buyers, they do not absolutely have to buy.

 

[RCA]

Nonsense. Based on my talking to recent buyers, many with college degress from top univerisities, the people buying homes now are people who need them and figure interest rates are going up, prices are more or less going to stay high and if they drop because interest rates increase, it will be, at worst, a wash in terms of monthly payments. Part of the calculation is that the economy must get better for a couple of years because we are coming out of a pandemic.

It's really just cold calculation in most cases, despite appearances.

 

[Overimprovement]

Again, to take the counter-point, what is:

The undue stimulus?
The atypical motivation?
How is any individual buyer not acting prudently?
Can a short time period before going under contract be considered an unreasonable time?

Again, at this point, I would not say that I disagree in general with you or Terrell, but how would you support this position?

 

[Terrel L. Shields]

And while I agree that the market is not typical, the definition uses the phrase typically motivated. For 'most' of the buyers, they do not absolutely have to buy

If cash was required for a mere 30% down....??? Would the buyer have that? Not very many would. So cash equivalence is almost certainly an oxymoron as defined by FNMA.

at worst, a wash in terms of monthly payments.

Exactly. as @George Hatch has said, They are buying the payment... what happens when they have to refi 5 years down the road at higher interest rates? And 5 years is about the average time between refi's if I understand right. Even though I've lived in the same house for 30 years, I've had 4 mortgages - stepping down each time to capture lower interest rates and I ended up paying it off in 15 years - about 4 years per loan. In fact, after 9/11 I could have refi'd again for less, but I had such a short time left to pay off the whole thing, the closing costs might have ate most of the savings. Had I needed to sell and buy anew, or had I just needed to cash out some money then timing might have proven me to be burdened with a much higher interest rate hence payment. The only person I ever knew that paid off a 30 year loan was my ex- Father in law, who bought a house with FHA loan and was over 65 when he finally made the last payment.

short time period before going under contract be considered an unreasonable time?

certainly. It's eyeballs not minutes that count. And there is a plethora of buyers. This leads to the auction mentality where in the excitement people become determined to bid ever higher until everyone else cannot go further. Then they are shocked that the appraiser uses historic data (yesterday was history) and not rely (or shouldn't) upon the speculative nature of the bid. Why do you think many appraisers view an auction as suspect in terms of market? If not true, then we should consider auctions as the ideal comparable in this market. When I auctioned an estate, we were exposed to the market for over 30 days- papers, radio, etc. We had six bidders present, and 4 actually bid. It brought perhaps a little less than it would with an agent but at the time, likely would have languished on the market up to six months, meanwhile costing us several hundred per month in insurance, utilities, lawn mowing, risk of vandalism, etc.

 

[Overimprovement]

My hunch is that the phrase cash or cash equivalent (like cashier's check or wire transfer) is meant to be from the seller's perspective, not the buyer's.

 

[J Grant]

Appraisal opinion of MV it states " as defined " (defined in the MV definition). Which means, regardless of the actual buyers /sellers behavior, the OMV is based on the transaction assumed appraisal "sale" at MV definition terms. And MV definition states a price unaffected by undue stimulus (it does not say a market unaffected by undue stimulus ) the MV definition applies in all markets, not just some.

When there is a conflict between value developed by the sold comps, after making time /market condition adjustments, and a SC price, even if listings /pending's are higher, the appraisal is designed to put most weight on the sold comps. That is what makes it an appraisal, and why it produces a market value opinion, ( rather than a price opinion.) Price appreciation is baked into the prices of our comps, we make market condition adjustments and consider actives as a trend to reconcile higher or lower side of value

RE agents recognize prices are rising so rapidly that more appraisals will come in "low". That is why, in my area , I see about 40% of contracts now with a clause that buyer will waive the appraisal, or buyer agrees to pay 10k (or whatever ) over the appraisal value.

Our appraisal value is what the lender uses for their LTV%, so even if a buyer waives appraisal and puts in cash to close the gap for a higher price, the lender lends on the appraisal value LTV, which puts the lender in a better equity position

 

[ucbruin]

Every silly cycle has a reason to be different the the previous silly cycle....

In the early/mid 70's in SoCal real estate was in this silly cycle but I was still in college so I didn't pay attention to the reason (I worked with a older guy who kept track of the 2%/month appreciation)....

In the early 90's same thing, I seem to remember hearing in the news that folks who bought in the a developments 1st phase made stupid profits by the start of the next phase (people were lining up to buy, lotteries were happening, people and/or investors purchased multiple properties as investments)....

Late 90's budget surplus and after September 11, the Feds continual push to keep sales of new construction going in order to keep the economy going (sub-prime and shady mortgage brokers)....

Of course 2020, is different because rates are low, credit scores are higher, buyers are professionals, etc. (pandemic panic buying)....
Most of the contracts I'm getting are much higher than list price with a range of 3%-10% down payment and seller S concession back to the buyer (really is this cycle really different)

I hope I'm wrong because I'd like to see my condo value remain above my purchase price....
But I don't expect this upward trend to continue much longer....