Justification for Declining Market

[moh malekpour]

The existance of so many foreclosures and REOs in your market is an indicaction of declining market by itself.

 

[Riick]

Many of the houses, aside from the stigma attached of being bank owned, are not upgraded "warmly" - they do not feel "homey". Too much tile, too much white, too many echoes. Not to bring her up again, but walking into one of these places my wife quipped "It is like walking into a mausoleum. It was a $1,000,000 mausoleum, but she was right. It lacked all the special touches - outlets in the right place, colors that blended together, soft lighting, etc. - you'd find in a house meant for owner occupancy when built.

Sounds a lot like what friends and I call "empty house syndrome"
Actually there have been studies made on this, and empty houses do sell for less.
Question I hold out is - How much to make it "warm & welcoming"?
Probably a lot less than the $$ spread to the occupied non-REO house.

 

[Deleted member 80407]

Anyone buying the other guys statement:

"The box is for “arms length transactions” not REO or bank sales. You do not compare distressed sales with “arms length transactions.” Distressed sales are part of the real estate “submarket”. They are evaluated separately.

I sugguest you ask an appraiser who is completing REO assignments. Not all REO properties are in need of much work. Just completed one today which had which had minimal deferred maintenance. The condition of this property was superior to most of the comparables I presented.

In a newer development market with many REO properties (sales/listings), I believe you must consider them with the arms-length transactions because they are bringing the values down within the particular market segment. How much deferred maintenance can there be with a house that is 3-5 years old? If I were a buyer looking in this development, I probably would consider the REO properties rather than the lived-in properties because the asking price is usually much less than the lived in properties.

I also recommend interviewing with some of the realtors selling the REO properties. A whole lot of knolledge can be obtained from sales people who work a market on a daily basis. Some times the value ranges found within a development can be misleading. I know because most of the work I am currently doing is of REO properties.

 

[Mztk1]

Anyone buying the other guys statement:

"The box is for “arms length transactions” not REO or bank sales. You do not compare distressed sales with “arms length transactions.” Distressed sales are part of the real estate “submarket”. They are evaluated separately.

I sugguest you ask an appraiser who is completing REO assignments. Not all REO properties are in need of much work. Just completed one today which had which had minimal deferred maintenance. The condition of this property was superior to most of the comparables I presented.

In a newer development market with many REO properties (sales/listings), I believe you must consider them with the arms-length transactions because they are bringing the values down within the particular market segment. How much deferred maintenance can there be with a house that is 3-5 years old? If I were a buyer looking in this development, I probably would consider the REO properties rather than the lived-in properties because the asking price is usually much less than the lived in properties.

I also recommend interviewing with some of the realtors selling the REO properties. A whole lot of knolledge can be obtained from sales people who work a market on a daily basis. Some times the value ranges found within a development can be misleading. I know because most of the work I am currently doing is of REO properties.

Am I buying what he says? Yes...to a point....

My job is to analyze the subject market and report on whether it is stable or declining. If I have 10 REO sales of similar properties that average $170K in the past month and 10 regular sales that average $210K during the same time period, I do have to believe there is a submarket in REOs. In the example we are given in the original post, we simply do not have enough data. We were not told what the breakdown averages and sales dates were in the example. The other appraiser may very well be right.

Now if I am in a neighborhood where my latest sales are all REO and they average $170K and my last sales that were not REO were from 5 months ago and sold for $210K, except for 2 which both sold in the past week or two at around 170K, I am going to definately include the REO sales in the analysis and call that a declining market.

You have to figure out whether the REOs are having an impact or not on the primary market. If they are not, the other appraiser could well be right. the argument he poses is valid. The only puzzle piece missing is the date of sales for the REO properties as opposed to the regular sales.

 

[Dominic]

About two weeks ago I completed an appraisal on a SFR for a mortgage broker. I indicated to her before the appraisal that the subject's neighborhood had declined -12.8% over the past 12 months (-1.06% per month). When I did the appraisal I indicated the market trend on page 1 of the URAR as "declining." The neighborhood has not stablized and continues to decline. The subject is in a newer sub-division where it appears that every other sale is this neighborhood was either a foreclosure or REO property. The local newspaper has indicated that this particular sub-division leads the community in the highest percentage of decline in median home sale prices. My local MLS statistical data backs this up and supports the numbers that I used in my appraisal report for percentage of decline.

Here's the kicker- The mortgage broker called me up yesterday and told me that FNMA just changed their guidelines and she can't go 100% L.T.V. with her borrower unless I change my appraisal report to indicate that the market is "stable," not declining I told her that I can't do that because my research indicated otherwise and changing my appraisal report would be fraud.

She hired another appraiser in my area to do another appraisal on the property and he indicated in his final report that in his opinion, this particular sub-division and subject's neighborhood was "stable" He obviously supplied her with the report she needed to get her loan approved! I sent the other appraiser an e-mail with my research before he completed the appraisal. This other appraiser sent me his reply with his justification for checking the box "stable" on the URAR. His explanation is as follows:

"The box is for “arms length transactions” not REO or bank sales. You do not compare distressed sales with “arms length transactions.” Distressed sales are part of the real estate “submarket”. They are evaluated separately.

Per Dataquick: Some might point to the October-to-November increase as evidence sales have bottomed out, he continued, but we’ll need to see a sustained trend. We also saw November sales rise a bit back in the troubled market of 1994, well before it hit bottom. It’s worth noting, though, that sales financed with conforming loans have increased each month since September, and last month we saw signs that the jumbo loan problem, while unresolved, wasn't worsening."

My question is this- Does this guys logic make sense, or is he just blowing hot air? Am I missing something here? I feel that my research was thorough. When comparing median home prices which is an indicator of market trend in a particular area, you include all sales after filtering for similar physical characteristics as the subject property. I didn't realize that the market trend box on page 1 of the URAR was only for "straight" sales!? All comments would be welcomed.

Dave

Hey! you're practically a neighbor Dave... welcome aboard!

Lemme guess... your subject is in "Jess Ranch" ?

There are almost no neighborhoods around here that aren't declining... the MB is full of it, and that other appraiser's logic is the reason some of us had to go back to corporate America and now only appraise part-time...

was that other appraiser from AV also?

 

[Michigan CG]

Mr. Kloss, with all due respect, people are payment buyers in most aspects. Assuming a no money down scenario on a $170,000 home the P & I payment is about $1,020/month for the REO property.

The payment for a non REO property at $210,000 is $1,260/month. You have to look at the market and say to yourself, why haven't there been any regular sales? Because the market is REO properties. $10,000 in flooring and minor repairs is still only $180,000 in real money vs. $210,000 in the regular market where new owners will still spend on average $5,000 to make it what they want.

If you are advocating a submarket, saying there are two different markets, it is my opinion that you are very wrong, and I have vast experience in the REO world in my situation.

To say that REO properties do not affect value is a serious misjudgment, otherwise home prices would not ever decline.

 

[Tim The Enchanter]

The other appraiser is full of hot air.
Must be a wannabe politician.

 

[mwbode]

Don't sweat over it. Most likely the loan is approved and the package has not been reviewed. Odds are the loan will not close!

 

[c w d]

I think the other appraiser may just be right.

If including the REO sales with the arms length transactions brings the median values down, assuming the traditional sales in the mix are recent, than it is obvious the REO sales are in a submarket. If they were it the same market as the standard market sales, they would not affect your median values much one way or the other bringing them in or taking them out.

As for who would buy an arm's length sale over an REO, that's easy: Most regular, i.e., non-investor buyers. First lie of economics 101: "People act in their economic best interest". No they do not. People choose emotionally and come up with reasons later. My wife, a typical buyer, gets the willies at the mere mention of looking at bank owned houses for sale. Something about Karma or some such crud. Her reasons though don't matter, she makes them up after she decides she wouldn't want one.

In the market 2006 and earlier most REO homes were disasters. It was easy to say it would not appeal to the typical buyer. These days, however, more average condition homes are entering into REO status. You have to apply the principle of substitution. Buyers may make decisions based on their emotional attachment to a property, but, when faced with a multitude of homes on the REO market in similar condition to those that are being sold by the typical seller, well, what are they going to buy? The cheaper REO.

 

[Mztk1]

Mr. Kloss, with all due respect, people are payment buyers in most aspects. Assuming a no money down scenario on a $170,000 home the P & I payment is about $1,020/month for the REO property.

The payment for a non REO property at $210,000 is $1,260/month. You have to look at the market and say to yourself, why haven't there been any regular sales? Because the market is REO properties. $10,000 in flooring and minor repairs is still only $180,000 in real money vs. $210,000 in the regular market where new owners will still spend on average $5,000 to make it what they want.

If you are advocating a submarket, saying there are two different markets, it is my opinion that you are very wrong, and I have vast experience in the REO world in my situation.

To say that REO properties do not affect value is a serious misjudgment, otherwise home prices would not ever decline.

Those are broad brush strokes you are making, and you are also taking what I said out of context.

This part is your straw man argument that takes what I have said out of context:

"You have to look at the market and say to yourself, why haven't there been any regular sales?"

I went to pains to qualify that the case could be such that there ARE concurrent regular sales and that they could well be selling higher than the REO properties. This could very well indicate an REO submarket. Second, I went at length to explain that if you have only REO sales and now a few resales at the same level as the REO sales, than the REOs may very well be setting your market. You have to analyze each market separately. For instance, I find short sales and pre-foreclosures to have a greater affect in most residential markets on value than foreclosures, but not all. Dynamics are very different from neighborhood to neighborhood.

Your idea that people mostly shop based on monthly payment is, I believe, wrong. I for one only see people shopping by monthly payment when making bad car buying decisions or buying a house from an investor in a "gentrifying urban area". Most buyers, in my experience as both an appraiser and an agent, have a price range they look at. Yes, they are qualified based on what they can afford monthly, but once they go out and shop they usually look within the range of price they are qualified for and not the payment. There are simply too many unknown factors in "payment". What interest rate they'll get, what RE taxes will jump up to with a new owner (in Florida at least), what home owners insurance will cost, etc. Payment is not a fixed number! Otherwise, and if you were right, listings would be priced by monthly payment in the MLS and not asking price. Further, it has been my experience, that some buyers will come to me asking about foreclosures and wanting foreclosures. They are often investor buyers who want you to remember their name when a "deal" comes up; while other buyers, typically what we consider the regular buyers, come in looking for the right house to call home - they don't even want to see a foreclosure and if they did they'd more than likely go to the foreclosure listing specialist in the office like all the investors do, not the guy or gal who has private listings. I have extensive experience with REOs as well. I can name the REO specialists by first and last name and recite their phone numbers by heart in each one of my market areas. A lot of these guys have 'pocket buyers' lined up. It is rare that a Mr & Mrs Smith looking for a family home will run to them. It is also rare for an agent who does not specialize in foreclosures to start showing those houses to prospective buyers. A top agent's goal is sell their own listings first and foremost. The better agents have a formula for showing properties that puts the odds in their favor to accomplish that goal. The formula, if it involves foreclosures at all, only uses them to show the house "they'll never buy" just before showing them the "dream house" which happens to be the agent's own listing they are hoping to contract.

Another broad stroke you have made is that without foreclosures we'd never have declining values. I've been to plenty of neighborhoods without a single foreclosure that still have downward pressure and falling values. What you are saying is just plainly incorrect.