REO Comp Question

[hastalavista]

They are basically the same property condition wise. I called the agent to confirm (pre flip). Her reasoning of why I shouldn’t use it was that it sold afterwards. That was the only reason. But I felt that if I made appropriate commentary that shouldn’t matter.

This is a basic H&BU issue. Basic and fundamental.
Who is the likely buyer of your property? An owner-user or an investor? Is the buyer of you property going to buy it, renovate it, and then live in it (an owner-user)? In my markets, probably not. In my markets, the typical owner-user is not buying a major renovation project.
Is the buyer of your property an investor, who is going to purchase, renovate, and then sell for a profit? In my markets, probably yes.

If the buyer is an investor, then you should find similar fixers that were purchased by investors. The REO sale you describe would be an ideal candidate. You should check with the parties to see if the REO status had any impact on the price; my guess is it did not.
Your assignment (I'm presuming) is for market value. In order to select the best comparables, you need to match the subject's H&BU with similar properties in the market. If the subject is an investor-flip H&BU, then those properties that sold to investors who flipped them are the best comparables.

You should summarize your H&BU conclusion in your appraisal (just don't "check" the box). The summary explains why you are using fixers and why you are using an REO fixer.

In this situation, and in my opinion, your former mentor's advice is not good.

Good luck!

 

[norapp]

I think your instincts are good and you can use this. I would. Just explain the later sale.

 

[J Grant]

What condition is your subject in? Is it in similar condition to the "REO comp" when that home was sold for 60k?

Also, what do you mean by it was an "REO comp' - was it sold on MLS and exposed to open market but REO owned ( bank owned), or was it a cert title or other kind of sale sold not exposed to MLS?

 

[residentialguy]

Two questions: Are you appraising the market value of the subject or some other type of value (e.g. liquidation value)? Is there a bifurcated market where REO and other properties compose two unique segments?

For many, they default to "well, if the subject is REO then the comps should be REO" and that is NOT a good guideline.

Worth repeating.

Are you looking for market value or liquidation value? If you are looking for liquidation, then use the REO sale as a comp when it sold as a REO. If you are looking for market value, you can still use it as a comp, but you will probably have to adjust it for the atypical motivation that it had. I really try to avoid using REOs for market value because there is really no good way to find out the undue stimulus to sell it...as you can see, it originally sold for $60k as a REO (basically a liquidation sale) and then resold at Market value for $225 6 months later. That's $165k more...and I highly doubt they put more than $100k into that to fix it up. That tells me there was a LOT of undue stimulus for that bank to dump that property. The market value may be closer to the last updated sale.

If you're looking for market value, I suggest you stay clear of REOs and Shorts. Find yourself similar condition sales that aren't Bank owned.

 

[hastalavista]

If you're looking for market value, I suggest you stay clear of REOs and Shorts. Find yourself similar condition sales that aren't Bank owned.

Not everyone would necessarily agree with the above.
But I won't rehash the differences in opinions that were hashed in depth and detail (and maybe ad nauseum) in 2010-2012 on that topic.

 

[residentialguy]

Not everyone would necessarily agree with the above.
But I won't rehash the differences in opinions that were hashed in depth and detail (and maybe ad nauseum) in 2010-2012 on that topic.

I don't speak Mongolian, Denis

 

[Terrel L. Shields]

atypical motivation

The key is this. Banks are not arm's length sellers. We had a lot of properties here flipped for huge profits and the buyers were sometimes bankers or Realtors with an inside line on the bargains. So if sold as stigmatized, when does the stigma go away? About the same time the ink dries on the paper.

The REO certainly needs exposed and explained but when properties that have profits multiples of the cost of renovations then I'd mark it as below market sale depressed by its ownership conditions...And if flipped, you can bet it will sell far in excess of the buyers investment. Is that really market?

 

[hastalavista]

I don't speak Mongolian, Denis

No problem; I'll bring my translator.

 

[J Grant]

It's not a matter of whether the comp was bank owned, it is a matter was it exposed to MLS/open market. If it was, it competed with other homes for buyers . The mentor's reason for not using it because it sold later is idiotic. If first sale was in needing repair condition, then subsequently repaired/upgraded and had a second, higher $ sale, the question wold be, is the subject in similar needing repair condition as that comp was when first sale occurred?.If so, it is a possible good comp, and disclose and comment that it was later re sold for more $ after repair/upgrades.

If subject is in dated/needing repair condition, then it is likely the typical buyer for it is an investor or property flipper. Such a buyer looks for homes they can make a profit on, whether a home is bank owned or not, and these buyers tend to re sell the homes for higher $ after repairing/upgrading it. If an appraiser does not understand that market dynamic, they may not be competent for this type of assignment. .

Like any other appraisal, an appraisal of a property in dated/needing repair condition requires identifying the typical buyers, their motivation, and thus can find competing comps. If the competing comps happen to be REO owned, then that becomes part of analysis.

 

[Joyce Potts]

What definition of Market Value are you using and/or is the client requesting liquidation or some other kind of value?