REO Comps or non-REO comps

[Lee Lansford]

Let's play around with this a bit.

Say I finish this REO and the value opinion is at the bottom of the range because it's an REO. $210,000.

The next morning the client calls back and says they've made a mistake in their order form and this property is just a refinance.

Do I have to change the comps and my value opinion?

Greg,

What you ask is what I was addressing in my recent posts.

When appraising for "Market Value" of a property, the opinion of value is not dependent upon who (bank? or "Mr. & Mrs. Jones"? or ??) owns the property.

Here lies the confusion: Not defining the value that is being sought. The lack of correct definition begins with not recognizing the problem to be solved.

Different definitions of "value" may (probably) yield different assignment results.

Lee

 

[Lee Lansford]

REO sales are distressed sales, have a stigma, repairs, a lot of trouble to get the loans closed, and buyers expect at least sweat equity if not entrepreneurial profit.


Market Value is defined as:
The most probable price which a property should bring in a competitive and open market under all conditions requisite to fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

• Buyer and seller are typically motivated;
• Both parties are well informed or well advised, and each acting in what they consider their best interests;
• A reasonable time is allowed for exposure in the open market;
• Payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and
• The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.


Soooo... which value did your client ask be appraised?

Aaaaahhh!

Recognition that defining the problem to be solved comes before identifying the definition of "value" to be employed.

Mountain Man, you get a Gold Star!

 

[Lee Lansford]

I think as long as the REO's are similar in condition to your subject and are the most recent sales, you have no choice but to choose them. If I were looking to buy and there was two homes side by side in the same condition, only one being an REO and the REO was much less expensive, your darn right I'd choose the REO, who wouldn't...

While your observation may be true in many areas across the USofA, the statement is not universally correct.

 

[Atlanta CG]

With the number of good people losing their jobs and then their homes, many are left in good overall condition. The main difference between them and a "fair market sale" property is the lack of any warranties or repairs that may be found by a home inspector. There really is no stigma attached to the property. So what is that discount? Hard to measure. But if they are the majority of the alternative choices, that is your market in reality. Don't get tied down to our definition verbiage - explain why it does not apply and reflect the way the current buyers are reacting.

 

[Lee Lansford]

...

Don't get tied down to our definition verbiage - explain why it does not apply and reflect the way the current buyers are reacting.

So...an opinion of MV (which has a definition) is now dependent upon who owns the property?

Thus, we can't appraise a particular property and a specific real property interest for MV (which, again, has a specific definition) without first determining who owns the property?

 

[Lee Lansford]

...

Don't get tied down to our definition verbiage - explain why it does not apply...

The manner in which I understand your words is this:

"Forget about the definition of value that is found in this report. The definition does not apply to this appraisal...but I'm including it anyway."

Do you see the folly in this?

 

[The Bob]

Lee,

If the market for different syles of houses can vary within an area, can a market also vary by the likely buyers and sellers within the same area? If so, would that affect the "market value"?

In some areas I cover, the most likely buyer for an REO (in fact, the inevitable buyer) is an investor/rehabber. They won't even look at other listings of owner-occupied houses. The flip side is that many OO's won't consider an REO. So you really have two distinct markets as defined by the most likely buyer.

This is a passage from "Appraising the Tough Ones" by Frank E Harrison, MAI, SRA. Its from page 10 and discusses something similar.

An appraiser using a non traditional approach might also conclude that there are two values for the property. However, instead of calling one "market value" and the other "value in use", the nontraditional appraiser might conclude that there are two different market values for this complex residential property. The distinction would be in how the appraiser defines the market. One market value would relate to the nondisabled purchaser, who would see the property as penalized for its special design features, while the other market value would apply to the disabled purchaser, who would not see the property as penalized. If handled this way, the appraiser could report two different values in the appraisal report and identify both as market value. The values would be different because the appraiser would be defining different markets for the property

Could the above logic apply to certain markets with REO sales?

 

[CANative]

In my opinion the price difference is primarily based on availablility of financing and abilities of a buyer. REOs/short sales/pre-foreclosure properties can be very difficult to close unless there is an all cash offer or the buyer has pre-arranged private financing. Quick, easy and essentially risk free for the seller who must sell quickly because they are not getting any benefit of occupancy. Sitting for months (up to six months) in escrow is probably an intolerable risk to a bank or holding company.

 

[Mike Garrett RAA]

Greg...I beg to disagree. FHA and VA financing is readily available for REOs and short sales, AT LEAST IN MY MARKET. The ability to get the transaction to the closing table really depends on the agent. My fishing partner, a long time real estate broker, does an amazing job handling REOs and short sales. He says it only took him two years to learn how the game is played.

I would guess maybe 25% of my VA appraisals involve REOs or short sales. Nearly all end up closing.

 

[Mile High Trout]

NOW, if you are appraising for a definition of value that is different than MV, the resulting opinions of "value" might be different. Or, does "undue stimulus" have no meaning?

That's a very good point. But what about the fact that the prices seen in the marketplace not reflective of liquidation value may have been unduly affected by previous periods of excessive financing availability?

Don't forget the bubble did pop, and new benchmarks to value are being set. I'm still a subscriber that until the unusual volume of distressed sellers either sell, or quit being distressed, both sides of the market are important to consider for most assignments. ( With what I would coin a conservative approach in utilizing weak sales. You know a market is finding consistency when the question to utilize short sales is really more of a side option. )

Highest and best is still appropriate in many cases, but I think that one should still consider overall buyer opportunity. The high volumes of liquidation values are reflective of previous periods of undue stimulus in the other direction, where valuation was inflated.

Buyers and sellers are the market, not a definition written on paper. Sounds like this argument is highly relevent to the individual market an appraiser may be analyzing.