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REO repair incentives

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Bobby Bucks

Elite Member
Joined
Jan 27, 2002
Professional Status
Real Estate Agent or Broker
State
North Dakota
I’m curious if I’m the only one in the world who comments on repair incentives for REO condition adjustments and as an item on supplemental REO addendums...I’m getting stumped over how to arrive at a percentage that is supported unless all my sales are REO properties......naturally, some underwriters get upset with bank owned comps even when they are a significant part of the market.....hopefully, one of our resident AMC gurus will weigh on on this one. Brad how about it?????? Are you working today? I’ll bet Uncle Joe’s working.....if not, I'll bet he’s reading this post......Uncle Joe I’ll let you in on a little secret....a college buddy of mine is a counterpart of yours at
another AMC in your locale.....I’ve forgiven him for going over to the dark side, but that’s another story. He has assured me that you are one swell guy. In fact, I’ll be in greater Pittsburgh next summer and we intend to take you to lunch........in fact.....it will be my treat.. .....I'm looking forward to it immensely. :)
 

Farm Gal

Elite Member
Joined
Jan 14, 2002
Professional Status
Licensed Appraiser
State
Nebraska
Bobby:
Please clarify your intent :
comments on repair incentives for REO condition adjustments

I am not quite following this...
 

Bobby Bucks

Elite Member
Joined
Jan 27, 2002
Professional Status
Real Estate Agent or Broker
State
North Dakota
Lee Ann ...... an addundum to a post? ...Do you need a 4th comp as well? :)
A formula for arriving at an adjustment.....example with round numbers....
$100,000 dwelling...needs a new roof costing $2,000, new floor covering
$1,500, painting $1500.....total repairs needed $5,000.......repair incentive
or entrepreneurial profit.......is the total of 5,000 x .5 ....= $2,500 +
$5,000 making total of $7,500....my question relates to arriving at 50%....the figure I use comes from office data on REO sales I inspected which were in similar condition to the subject ....of course it varies with the
condition.....minor cosmetics might be 10%..... a major rehab might be 60%.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
I don't treat this as an "incentive", but rather a market resistance that is reflected in the potential purchaser. The potential purchaser of a home that needs very extensive work would be an investor. As such, the investor has a typical profit margin that he works with, usually 15-20% of return. This is because the normal homeowner would not be able to finance the differential for repairs along with the home. Hope this helps.

Roger
 

Oregon Doug

Senior Member
Joined
Jan 15, 2002
Professional Status
General Public
State
Oregon
Bobby, all my REO appraisals are based on "as is"/"where is" so that any repair incentives are recognized and included in the value estimate. If I have indicated a declining market or over supply situation (often both), then I suggest "sales incentives" that are usually about half of my guesstimate of the costs required to bring the joint into inhabitable condition. No one has argued with me over that - so far.

It's getting more common for me to be able to complete an REO appraisal using all REO comps - pretty scarey!

I always comment on sales incentives - even if it's to say that none are indicated.

Oregon Doug
 

Farm Gal

Elite Member
Joined
Jan 14, 2002
Professional Status
Licensed Appraiser
State
Nebraska
OH!

Sorry Bobby, I have never considered that to be incentives, but rather 'entreprenural profit' in cost approach or 'market reaction to condition' in the sales approach, so I didn't know what you meant!

Many/most of our REOS go to the investor able to pay cash and make required repairs: lenders won't take on a property without either escrow $$ or repaired to 'lendable' condition. The few buyers capable of putting down the required monies tend not to want to get involved in repair issues unless they are rehab specialists.

I am finding more an more beaters to compare apples and apples. it's going to be a wild ride for this market segement.

Most homes in our market do not sell with any other than the typical incentives (portion of closing costs) and these sales are generally precluded from the fixer market segment, again the real dumps are 'lender rejects' because of condition!

We see some few 'carpet or roof' participation, but those are generally on a house otherwise well maintained, mostly to permit the buyer to chose their colors. :roll:
 

Dave Doering

Sophomore Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Missouri
Bobby,

Are you possibly referring to a consideration for "investor incentive" or "entreprenuership"? If so, this is reflected in the measurable discounting of properties with extensive repairs or distressed property sales such as REOs.

In our market we are seeing two layers of profit or incentive that require compensation and are reflected as a discount to the sales price on REO and properties with extensive repairs. The first is a compensation to the purchaser for coordination, supervision and allowance for contingencies on the actual repairs. When there is a significant number or types of repairs, often involving numerous trades (electrical, plumbing, mechanical, carpentry, etc.), this is the equivalent to the general contractors direct and indirect overhead rate as well as a fair profit on the repairs (typically 15% to 20% overall on the direct cost of the repairs). In addition, a typical investor is not going to put their capital at risk and forego other avenues of return on their investment without compensation. Therefore, it is appropriate to also consider an anticipated profit or rate of return on the investment that must be built into the acquisition price of the REO property. In my market this will typically measure in the range of an additional 10% to 15% built into the anticipated sales price of the repaired property.

While some lender's object to reflecting "entreprenuership" or "investor incentive" in doing REO appraisals, it is in fact a reality of the market and a part of the anticipated cost structure of an "informed buyer acting in their own best interest" as defined in the definition of market value. On the other hand, other lenders are more realistic in valuing their REO properties and require that this be addressed as "investor incentive" and taken as an additional discount in the itemization of repairs. I will consider these as indirect costs in arriving at my cost of repair to arrive at the "as is" value in an REO appraisal.
 

Bobby Bucks

Elite Member
Joined
Jan 27, 2002
Professional Status
Real Estate Agent or Broker
State
North Dakota
thanks for the feedback folks, I'm getting where I'm using an addendum which addresses all areas of incentives, discounts and entrepreneurial profit, sort of a one paragraph covers all. With the number of litigation REO's and short sales on the increase, we'll only see more requests for addressing repair items. I still receive some REO assignments with no request for the REO addendum.....if it's REO I use that form anyway because it's much simpler.
 
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