REO Comp Question

[Wally Ballou]

Hi everyone!

Quick question - I am doing an REO appraisal in a rural market and have a comp that is perfect that I feel should be utilized that sold REO for 60k. It was flipped and resold 6 months later for $225k. My question is - is it still appropriate for me to use the REO comp within my report with verbiage that it was flipped and transferred after? I asked the mentor I used to work with and she told me absolutely not to use the comp at all, but I am not sure why I can't if I disclose the other sale after the fact in detail. Does anyone have any guidance or advice on this? Thanks!

We usually ask the client if an REO is OK.
If it is, give as much detail as you can.
And to go from $60K to $225K might mean renovations were performed

 

[jay trotta]

Funny how "History" cannot be deleted, but can be repeated.

 

[hastalavista]

It all comes down to defining the "market". It's funny we don't ever discuss the definition of "market". I've looked in all my appraisal texts and there is no definition of "market". So I came up with my own:

MARKET: Where two or more people with complementary interests (you want to buy/sell, I want to sell/buy) come together to transact business; each acting in what they perceive to be their own best interest".

in some area's REO's are a distinct market. People will argue they are distressed or the seller isn't typically motivated, but those differences are part of what makes them a niche market.
Take motivation. A bank has more considerations than just price. They have carrying costs, insurance, risk of loss due to vandalism, fire, etc... They don't like owning RE. They want to make loans, not have bad debts sit on the books. It would be hard to argue they don't think they are acting in their own best interest simply because REO's sell "below market" whatever the hell that means. Again, in some areas they are the "market".

Jim: there are definitions (the one you post is the same as presented in Appraising Residential Properties, 4th ed., AI).
The problem is (and you may agree or disagree with me) the term "market" as typically referenced/referred to in residential mortgage lending isn't adequately defined for what we are really doing.
What we really are doing is analyzing a particular geographic area and then, based on a number of dynamics, identify parts of that area as the competitive market where our subject would compete within and against. Add to the mix the use of "neighborhood" and it can get confusing (even for us appraisers! ).

So, like you, in my residential reports, I include my own definitions (which are not my own, but based on the recognized text) so that the client is not confused:

The Dictionary of Real Estate Appraisal (4th ed.) defines the term "neighborhood" as:
A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises.
The neighborhood boundaries are: XXXXX

The competitive market is where similar properties compete against one another for the same buyer pool. "Competitive Market" is defined as:
The geographic or locational delineation of the market for a specific category of real estate, i.e., the area in which alternative, similar properties effectively compete with the subject property in the minds of probable, potential purchasers and users.
The competitive market boundaries are: XXXXX

See addendum exhibit "Subject Competitive Market/Transaction Summary Table" for a map of the competitive market area and a summary of the sales transactions per MLS.​

My neighborhood may be the same as my competitive market, but I've yet to conclude my neighborhood is bigger than my competitive market.

 

[The Bob]

Jim: there are definitions (the one you post is the same as presented in Appraising Residential Properties, 4th ed., AI).
The problem is (and you may agree or disagree with me) the term "market" as typically referenced/referred to in residential mortgage lending isn't adequately defined for what we are really doing.
What we really are doing is analyzing a particular geographic area and then, based on a number of dynamics, identify parts of that area as the competitive market where our subject would compete within and against. Add to the mix the use of "neighborhood" and it can get confusing (even for us appraisers! ).

So, like you, in my residential reports, I include my own definitions (which are not my own, but based on the recognized text) so that the client is not confused:

The Dictionary of Real Estate Appraisal (4th ed.) defines the term "neighborhood" as:
A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises.
The neighborhood boundaries are: XXXXX

The competitive market is where similar properties compete against one another for the same buyer pool. "Competitive Market" is defined as:
The geographic or locational delineation of the market for a specific category of real estate, i.e., the area in which alternative, similar properties effectively compete with the subject property in the minds of probable, potential purchasers and users.
The competitive market boundaries are: XXXXX

See addendum exhibit "Subject Competitive Market/Transaction Summary Table" for a map of the competitive market area and a summary of the sales transactions per MLS.​

My neighborhood may be the same as my competitive market, but I've yet to conclude my neighborhood is bigger than my competitive market.

A good example of what you are talking about regarding the limitations of "market' would be the market for historic houses. Normally, our focus will be a relatively compact area. I've found that with historic houses, buyers will cover a really wide area. I recall one I did years ago my search covered 6-7 counties. The kicker was one of the comps I found in the furthest county, the owner was home and in our conversation found out he had actually looked at some of my other comps that were over 60 miles away.
BTW, I have that book. One of the best.

 

[hastalavista]

A good example of what you are talking about regarding the limitations of "market' would be the market for historic houses. Normally, our focus will be a relatively compact area. I've found that with historic houses, buyers will cover a really wide area.

Yeah. Another example (IMO) is a smaller, pocket development in an older-established neighborhood. I see a lot of these in San Jose, CA. 15-45 homes with an age-range of 20-30 years surrounded by homes with an age range of 50-60 years. The competitive properties for these homes (per my analysis) are similar pocket developments, not the older homes. As a consequence, the competitive market area is larger to capture these homes than it would be for the 50+ homes.

There is a reason Market Analysis and H&BU share the same step (#4) in the 8-step Valuation Process.

BTW, I have that book. One of the best.

For us who specialize in residential work, I recommend it over The Appraisal of Real Estate.

 

[Lee Lansford]

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.

Some appraisers never give thought to this. Some appraisers seem to believe that if the subject of the appraisal is an REO, the comps should also be sales of REO properties...no matter what. They give no consideration to the definition of value that they are opining to. But, of course, you understand, I know.

 

[Carnivore]

Some appraisers never give thought to this. Some appraisers seem to believe that if the subject of the appraisal is an REO, the comps should also be sales of REO properties...no matter what. They give no consideration to the definition of value that they are opining to. But, of course, you understand, I know.

Probably the same appraisers only use short sales when their subject is a short sale.... LOL Sorry I had to say it.

 

[DWiley]

Some appraisers never give thought to this. Some appraisers seem to believe that if the subject of the appraisal is an REO, the comps should also be sales of REO properties...no matter what. They give no consideration to the definition of value that they are opining to. But, of course, you understand, I know.

The AI course on REO appraisal that was developed by Mark Smeltzer has some of the best information on the topic that I have seen. Really good stuff for anyone doing any REO work at all.

 

[residentialguy]

Mumbly speak doesn't magically change reality.

There was no "mumbly speak".

If someone is buying a property and the order is for financing, the lender wants market value, as defined on the 1004. It doesn't matter if it is Joe the Plumber selling it or the Bank. The seller doesn't matter. The seller could be a total wacko and wants to sell his house for $50. That doesn't mean we have to use other sales to find out what other wack jobs are selling their house for.

***Now, if the bank orders an appraisal on one of their properties that they own and wants to know the market value for the most probable price that they (the bank) could sell it for (under their situation as a REO sale where there is additional stimulus to sell), then that changes the value conditions and you wouldn't use Market Value, as defined on the 1004. They don't want market value, they want more of a disposition value or liquidation value where you would compare similar REOs that are in the same position. This is where the bank often screws up the order thinking that Market value on the form represents what their sale would reflect and FNMA's definition of Market Value wouldn't give them what they need.
as you correctly stated here

they (REOs) are by definition not market value sales because the seller does not meet the pre printed definition of a typically motivated seller

I assumed, maybe incorrectly, that OP is just doing a finance deal where someone is buying a REO property, as described in my first paragraph. If I assumed incorrectly and it is the second scenario, than I totally agree with you. OP should use REOs. Those sales represent the value that are looking for. The use of typical motivations of a non-distressed private owner sale would be misleading...unless they were adjusted to reflect the stimuli found in similar REO comps.

 

[residentialguy]

Let's clear that question up so we're on the same page.
@ennazec08
Are you doing an appraisal for lending purposes for someone buying REO property? Or are you doing an appraisal for a bank for one of their REO properties? The intended use might be so they know what price they should list the house at, for example. This type of order typically requires the use of a REO addendum.