Liquidation Value Observations

[TJSum]

For REO assignments usually the lender will ask for a Liquidation Value as well as the "typical" Market Value. The past several REO assignments I have done, these two values appear pretty much the same. The markets are in such free fall, that the only way to sell a property is to list it at the current "liquidation" values. The typical Market Value is the Liquidation Value.

Could it be that a listing priced for the typical days on market (lets say within 180 days) ends up actually selling lower that the liquidation list price geared to get a contract within 30 days? In these fast declining markets, the liquidation priced listing might end up selling higher than the other listings that sit on the market for several months?

Are others seeing Liquidation Values equal to the typical Market Value ???

 

[Brad Ellis]

TJ,

My department process these each day.

I have not seen that occur much.

In fact, I have seen the opposite even in markets totally dominated by REOs, like parts of Detroit. Right in the midst of perhaps 75% of all properties in a neighborhood being REOs, we continue to see higher prices for the non-REOs. Now I'll grant that sometimes the differential are not great- but they are different most of the time.

Often it is a matter of condition since normal market sales do not usually have lots of deferred maintenance whereas REOs typically have a lot of it.

Still, I'd love to see your actual data demonstrating that. Of course it is possible- but is it really true for many neighborhoods?

Brad

 

[hastalavista]

Brad-

You have the advantage of viewing many different markets so I will defer to your macro view.

My micro view is this: It depends on the composition in the market.
An example would be certain markets like Tracy, CA, where there has been significant newer development (5-10yrs or less). In those larger master developments, the majority of REO listings I see have little if any deferred maintenance. "Little" deferred maintains means the house needs a good cleaning and walls need to be patched (minor- like where the mirrors/pictures were hung) and painted. In these markets, it is the low price that is selling (REO or not). In fact, sometimes when the REO appears priced high and I call the agent to get some background, they complain that the lender is basing the price on an out-of-date (or inaccurate) BPO or appraisal and the agent tells me it will sit there until the price is reduced. This is not just hot-air being expelled by the agent; again, the low-priced homes are selling.

So, depending on the market, I too am finding little difference between the quick-sale price and the market price (less than 3%).

These are homes that were sold in 2006 for $600k, foreclosed in 2007 for $525k, and listed/sold in the $400-$450k range. (Economic Obsolescence or sudden drop in land values? :laugh: ).

 

[TJSum]

Yes Denis, these are the kinds of markets I am talking about. Many are townhomes built within the past five years. Very little difference among condition. Several of my REO assignments were "short sales" so the borrower was still living in the house. This too makes a difference as many times damage is done when the defaulting borrowers move out taking as much with them as possible.

I'm just thinking in neighborhoods like these, cookie cutter townhomes all 2-3 years old with plenty of inventory and rapidly declining market. A properly priced 30 day liquidation sale might actually end up selling for a higher price than the ones priced higher only to lanquish on the market being exposed to lower and lower neighborhood values with each month.

 

[Marcia Langley]

I don't have an indication of that happening in my market (yet). We were late comming to the declining price state of affairs.

But theoretically, it makes sense that once a market is in such great oversupply and rapidly declining, then the two values (market and liquidation) could converge.

If the market is such that many listings are still over priced and so are not selling at all, and the only closed sales are the ones that were priced so low that they sold within 30 days, then you would expect market value to begin to approach liquidation value.

In a rapidly declining market, the upward pressure on price due to longer exposure time would be offset by the downward pressure of monthly declines of the sold prices of competing properties.

At some point the downward pressure may totally cancel out the upward pressure causing the short DOM value (the liquidation value) to actually be the market value.


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Could it be that a listing priced for the typical days on market (lets say within 180 days) ends up actually selling lower that the liquidation list price geared to get a contract within 30 days?

Yes, but that would not be how it would look in your appraisal.

What I mean is, if we are not restricted to looking at the market as of a particular date (like an appraisal's effective date) but are looking at the market as a dynamic entity, you may see houses that were priced too high to sell in 30 days and 60 days into their 180 strategy time there were competing houses selling for less, then their strategy did not work.

If they start lowering their price, eventually they may hit the sweet spot where the asking price is in line with declining values, maybe on the 180 day mark. But on that 180th day, it would sell for the same as the competing properties that sold on the 180th day but less than the properties that sold on the 60th day.

When analyzing markets for an REO, you still have to limit your analysis to what took place in your subject's hypothetical exposure time leading up to the effective date. If your effective date is on that 60th day, that property described above will not be a closed sale. If your effective date is obn the 180th day, it will have sole in the same price range as the other properties that sold on that same day.

Your analysis is all about the exposure time leading up to your effective date. You do not yet have the future data that will occur after your effective date. The client will read your exposure time market trending and draw his own conclusions as to his best future marketing time strategy for the subject property.

The primary indicator for the client that a longer marketing time may not add to his profits is how close the liquidation value is to the market value.

 

[TJSum]

Yes Marcia, very good explaination, I agree. I guess the point I wish to make, in some markets that are declining rapidly, the quick 30 day value might be the best stradegy for the lenders, because there is no advantage to longer listing periods, in fact if current trends continue it is a disadvantage.

 

[Marcia Langley]

Absoluetely, TJ, I had a particular submarket last year where that was exactly what was happening. (But it was not an REO).

Literally all of my sold comps were within 30 days on market. But there was a large oversupply that was simply not selling at all.

This was at the beginning of our decline and the data was very strange looking.

 

[Brad Ellis]

Denis,

Just saw one in Tracy yesterday. I'll confirm that prices are converging there for new construction. Interestingly, we had recent new home sales as well that were all over the board- 1 below the typical REO price and two higher and then one REO split them- i.e it sold fro more than one of the new ones.

Centex development if memory serves. That one might depend on ugrades.

Not seeing that at all though in the new developments north of Sacramento- there the REOs are selling for less and there are both new home sales and resales.

Brad

 

[Richard Carlsen]

It is hard to imagine Market Value, without a defined DOM but with non-REO sales averaging 250 DOM, being equal to Liquidation Value with a mandated not to exceed 30 DOM.

I would not anticipate Market Value equaling Liquidation value until the number of REO properties on the market exceeded the number of active/serious buyers by at least 20 to 25%. (Not all REO properties will satisfy the needs/wants of all buyers).

I just don't see that as happening.

 

[TJSum]

In some (not all) Maryland and Northern Virginia markets, if you combine the short sales with the REO properties, there is enough of them to be driving the prices in those markets.

Most of these are in at least average condition, many less than five years old. It is not your grandfathers REO properties were are talking about with mega repair issues. The only advantage typical sales have, is that they do not have to jump through the third party approval hoops.

Market studies are different for each area, but drops as much as 20% in the past six months are being seen. What advantage would it be for pricing a home at a higher price knowing you can allow it to sit on the market for the typical six months when prices are dropping this rapidly? Wouldn't the 30 day quick sale price end up selling higher than a home lanquishing on the market with monthly drops averaging 3.4% if current trends continue (and based on the inventory available there is no bottom in sight).

Especially with condos and townhomes when you have plenty of competing listings, like I said, this in not your Grandfathers REO properties. :Eyecrazy: