Foreclosed Comparables

[Wastewaterman]

My question is this...........Should a comparable that appears to have been bank owned or a possible foreclosed property be used as one of the three primary comparable? Heres an example issue that I have been running across lately. Tract subdivision. I have 3 comps less then six months old that are the same model, same age, gross living area, etc. Two sold for let’s say $200,000 and the third appeared to be a foreclosed property that sold for $170,000. Am I obligated to use the third comparable? Is that an actual arms length transaction being a foreclosure? What is everyone else doing in this situation? My associate and I think one thing one day and another the next. The one unit housing trends usally show some type of decline and an over supply. Any insight would be greatly appreciated. I look forward to hearing your responses.

 

[jakeboeger]

It depends on the market. I use bank owned sales as comparables 1-3 on a regular basis, but my market is pretty much REO & short sale driven.

Would buyers in your market consider REO sales equal substitutes for non-REO sales?

Of your 3 comparable sales, did the bank owned sale occur during the same time? Was its marketing time lower/higher than what is typical?

Is your market stable/declining?

 

[Mike Kennedy]

third appeared to be a foreclosed property that sold for $170,000. Am I obligated to use the third comparable? Is that an actual arms length transaction


unless I missed something......... "appeared to be" .......just doesn't "cut it". It was, or it wasn't.

unconfirmable? Don't use it.

 

[George Hatch]

If you know a reviewer will see it then you should at least mention it even if you don't think it represents the typical sale.

That is assuming of course, that these transactions aren't common enough in your market to be a significant factor. After a certain point, those foreclosures can add up enough to be a factor, even to the point that they can drive the market. That's happening for a number of market segments in my market area right now.

 

[ken351]

To use a foreclosure sale as a comparable 1-3, you are basically using it an an indicator of subject market value. Be sure that REO is inflencing your market area, otherwise I would not use it in the grid, but mention it in the appraisal. Here in my corner of so calif market, REO and short sales are major contributory factors to rapid market value decline, and drive the market as buyers are finding bargain in those deals, so they make up a good portion of sales in the area.

 

[David Dietz]

Do you have any that sold over six months ago? If you are only looking at using the sale cause it sold within six months I would use an older sale first, and as George said mention the foreclosure if you do not use it. Another thing to look at is the inventory of homes in the subject's subdivision.

 

[Lawrence R.]

Do you have any that sold over six months ago? If you are only looking at using the sale cause it sold within six months I would use an older sale first, and as George said mention the foreclosure if you do not use it. Another thing to look at is the inventory of homes in the subject's subdivision.

Must we all incessantly comment over everything we don't use? I have no problem explaining myself to an underwriter, but this idea that we must make mention(in a 1004 summary no less) of everything we didn't use after evaluating the data is a bit ridiculous to me.

Nah, I pass.

 

[ZZGAMAZZ]

Waste: This issue is a dead horse, recently having been debated ad nauseum on the Forum. IMO there is an inherent discrepancy between the Principle of Substitition and the non-duress factor that should be absent per the definition of Market Value.

As others have said, it depends upon your market; and in my opinion an informed buyer would be foolish to ignore a bank-owned REO--condition notwithstanding--at a significant discount to a privately owned property being marketed with a significantly higher list price.

If you choose to ignore comparables that sold at lower than your opinion of value, it would appear wise to discloure your rationale in the (1004) report rather than to explain it later and/or run the risk of being blacklisted for doing what you felt was correct, which might not be defensible, in case your opinion is perceived to be unreasonably high and you're not given an opportunity to defend your position...

 

[Lobo Fan]

The rule of substitution applies here. If the REO was a good closed sale and in similar condition, etc. to your subject, then I would use it. If your subject were listed at $200,000 and the $170,000 REO property were available, whic would a typical buyer purchase?

Especially if there are a large number of REO properties in the neighborhood. But even if not, it is still a comp. To not use it might artificilly inflate the value. Are there more REO's on the market? If so they will someday be closed sales.

 

[PropertyEconomics]

The rule of substitution applies here. If the REO was a good closed sale and in similar condition, etc. to your subject, then I would use it. If your subject were listed at $200,000 and the $170,000 REO property were available, whic would a typical buyer purchase?

Especially if there are a large number of REO properties in the neighborhood. But even if not, it is still a comp. To not use it might artificilly inflate the value. Are there more REO's on the market? If so they will someday be closed sales.

This is just a question .. but lets assume there is only ONE REO and it sold for $30,000 less than the other two sales. Does it still measure market value? Can it be used to lower values in the whole subdivision or is it a one time occurrance that will not be realized a second time?