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REO or short sale as comparable

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V. Nightshade

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Certified Residential Appraiser
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California
I'd like to use a foreclosed or short sale property as a comp in an appraisal of a regular refi. I try to avoid this, but in my current case, it makes the most sense. I've been reading Brad Ellis's and others' comments about not using sales that don't meet definition of market value. But what about the problem that occurs when the most similar, proximate properties that are perfect comps are short sales or REOs. In particular, this is a neighborhood with 30% of listings and closed sales on MLS either REOs or shorts. It seems to me to go to go out of the neighborhood or use a dissimilar property presents other problems, and that a well chosen short sale or REO support and the market value of the subject. In this particular neighborhood, my market analysis doesn't even show a decline of median value comparing each quarter of last year. It doesn't entirely make sense, but that's what I found. (It dropped in Q3 and rebounded in Q4). Most of the discussions about this are over a year old. What are people doing now?
 

Kevin A. Spellman

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Aug 30, 2003
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Certified Residential Appraiser
State
Massachusetts
Did the REO comparable sale sell for less than its prior sale? Did the REO property sold with defects or deficiencies. Most REO are sold “As Is”. Would there be additional capital outlay to bring this REO comparable up to compatible condition/standard as your subject. Can you replicate this REO comparable at the same price level within your market segment? Are the buyers of REO investors or users of the property? I would write in depth the reasoning for using an REO and if it is or is not a reliable indicator of value. Are the REOs in your market area attributed to bad loans or the absence of income?
 

Randolph Kinney

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Retired Appraiser
State
North Carolina
I'd like to use a foreclosed or short sale property as a comp in an appraisal of a regular refi.

<snip>

What are people doing now?
You should complete the analysis by segregating REOs from market sales and looking at the difference in the price for the REO stigma between the two groups. If there is a real difference in price (all other variables are equal), then you could apply that adjustment to the REO to represent what a market sale would be.
 

hastalavista

Elite Member
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May 16, 2005
Professional Status
Certified General Appraiser
State
California
I'd like to use a foreclosed or short sale property as a comp in an appraisal of a regular refi. I try to avoid this, but in my current case, it makes the most sense. I've been reading Brad Ellis's and others' comments about not using sales that don't meet definition of market value. But what about the problem that occurs when the most similar, proximate properties that are perfect comps are short sales or REOs. In particular, this is a neighborhood with 30% of listings and closed sales on MLS either REOs or shorts. It seems to me to go to go out of the neighborhood or use a dissimilar property presents other problems, and that a well chosen short sale or REO support and the market value of the subject.
(my bold)

The bolded parts answer your own question.
I'm assuming when you say "foreclosures", you are not talking about when the bank forecloses on the property but when that property is re-listed to sell on the open market.

If the REOs and short-sales are competitive in a market and present a likely substitute for the subject such that the typical buyer, all other things being the same, would pick the REO/short-sale over the subject if the REO/short-sale were offered at a lower price, then it is a comparable (IMO) and should be considered when valuing the subject.

Others have posted that they disagree. I disagree with them if the situation is as I describe. :new_smile-l:

Prudence would dictate a comment or two in the neighborhood market description and the comparable sales comments section discussing the dynamic.

Good luck!
 

Pat Butler

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Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Illinois
It's important to not assume that an REO property is necessarily in bad condition. I see them generally go to both extremes- either the homeowner trashed the place out or they took care of it.

During the S&L crisis I specialized in marketing REO properties. Part of our job was to not make it obvious that the listing was even an REO property to begin with.

In our market there is no longer a stigma attached to a short sale. It's pretty obvious by now that many lenders are allowing short sales, so the Realtors list that as a 'benefit' in the MLS. So at least the short sales have no stigma attached to them, and the REO properties that were maintained are also part of the competitive properties that a typical buyer would at least look at. I'm seeing more REO properties that have been slightly rehabbed by the lenders too. They'll repaint and recarpet prior to marketing, so a lot of our REO inventory is quite competitive with the non-REO properties.
 

CURT VAN HOOSER

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Joined
Nov 3, 2003
Professional Status
Licensed Appraiser
State
California
It's taking longer each day to analyze data in the areas I cover. I was researching an assignment this morning and found that 18 of 21 active listings are either REO or short sale. The other three are priced similarly. Sales for the last year are down from previous years and approximately 40% of those (the most recent, actually) were REO or short sale. Builder's in this area (yes...they are still building out here) have lowered prices from $50 to $60K on all there homes to make them competitive. So, I would say, yes...you certainly can use REO's and, I believe, short sale properties in the same market range.
 

V. Nightshade

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Joined
Nov 17, 2003
Professional Status
Certified Residential Appraiser
State
California
I'm in synch with Dennis' reasoning and wording and Pat's observsations. It applies precisely to what I'm seeing in thie particular situation now.
 

jakeboeger

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Joined
May 12, 2005
Professional Status
Licensed Appraiser
State
California
REO & short sales are acceptable substitutes for traditional sales in probably 98% of the markets I work in.

I just finished one in Pittsburg where all 5 of my comparables were bank owned.
 

V. Nightshade

Thread Starter
Junior Member
Joined
Nov 17, 2003
Professional Status
Certified Residential Appraiser
State
California
Thanks, I did find something not-REO, but yikes...when I look at the mortgage history I see that even my non REO comps, particularly listing comps, look like REO's in waiting -- owners trying to get rid of their property before their equity drops below the value. In other cases I see people who bought refinanced for what appears to be 100% value a couple of years ago.....Perhaps the term "typically motivated" in this market implies the motivation of a short seller even if you aren't one.
 

Richard Carlsen

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Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan
The FNMA requirements for a sale to be considered relevant are locationally, functionally and physically similar to the subject. As long as the bank-owned property or the short sale property is considered an arms-length transaction, it would normally meet the requirements of a sale under market value although it could be well argued that the seller in a short sale may be disqualified by the undue stimulus clause.

What you need to do is to look at the marketing area of the subject (that area within which a buyer would normally consider if considering the subject as one of the options). If a significant number of houses offered for sale within that marketing area are bank-owned or short sales are offered, then the use of bank-owned and short sale comps is justified on the basis of the principle of substitution. If however, as of the effective date of the report, there were no bank-owned properties or short-sale offers, then I don't think you would be nor could you justify using such prior sales as comparables.

This is one case were you, as the appraiser, really have to have a handle on what is going on in the market.
 
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