REO sales and "Market Value"

[JRice0220]

This has been a topic that has been brought up around our office more frequently and I wanted to see what the appraisal world outside of my office thinks.

The situation (all 1 bedroom units in similar condition): I was asked to appraise a purchase of an REO condo unit within a newer building. There were 2 REO sales (<30DOM) and 2 Private sales within the past 12 months. There are NO active REO listings (beside the subject) and 2 privately owned listings. The REO sales both sold for around $170k while the private sales are $190k-$200k. The active listings are both $190k+.

Now my question is adjusting the comparables for ownership. It makes sense to make an upward adjustment to REO sales when you are appraising a Private sale because REO sales are typically sold at "liquidation value" or less than market value for quick sale. But my confusion arises when I am appraising this REO sale at "market value" with a reasonable exposure time of 3-6 months and am using REO sales that sold at liquidation value and not making an upward adjustment.

What do you guys think? Or how have you been handling this same situation?

A small side-story : A similar situation came up last week when a friend of mine just lost out on a house because the appraisal came in low. I took a look at it and the subject was an REO. 2 REO sales and 1 Private on the report. Private had a $17,000 downward adjustment, the appraisal was $10,000 under sale price. In my opinion the appraiser wasnt appraising market value but appraising liquidation value by using sales sold at liquidation value and adjusting the private sales downward when they sold for market value.

I feel like m2:m2:m2: this Monday morning.

Thanks everyone for the input. I am a definite lingerer around here just dont post much, but that will be changing!

 

[Randolph Kinney]

This has been a topic that has been brought up around our office more frequently and I wanted to see what the appraisal world outside of my office thinks.

The situation (all 1 bedroom units in similar condition): I was asked to appraise a purchase of an REO condo unit within a newer building. There were 2 REO sales (<30DOM) and 2 Private sales within the past 12 months. There are NO active REO listings (beside the subject) and 2 privately owned listings. The REO sales both sold for around $170k while the private sales are $190k-$200k. The active listings are both $190k+.

Now my question is adjusting the comparables for ownership. It makes sense to make an upward adjustment to REO sales when you are appraising a Private sale because REO sales are typically sold at "liquidation value" or less than market value for quick sale. But my confusion arises when I am appraising this REO sale at "market value" with a reasonable exposure time of 3-6 months and am using REO sales that sold at liquidation value and not making an upward adjustment.

What do you guys think? Or how have you been handling this same situation?

A small side-story : A similar situation came up last week when a friend of mine just lost out on a house because the appraisal came in low. I took a look at it and the subject was an REO. 2 REO sales and 1 Private on the report. Private had a $17,000 downward adjustment, the appraisal was $10,000 under sale price. In my opinion the appraiser wasnt appraising market value but appraising liquidation value by using sales sold at liquidation value and adjusting the private sales downward when they sold for market value.

I feel like m2:m2:m2: this Monday morning.

Thanks everyone for the input. I am a definite lingerer around here just dont post much, but that will be changing!

There have been advisory notices on this. The first thing to do is to know who is the most probable buyer of REO properties in similar condition as your subject.

 

[JRice0220]

There have been advisory notices on this. The first thing to do is to know who is the most probable buyer of REO properties in similar condition as your subject.

This is a 5 year old building. The condition of my unit is comparable to any private sale within the building. Beside being vacant and knowing its an REO there is no other evidence.

It confuses me to think I could come in at $170k and then go back a week after they move in and come in at $190k. Was I not suppose to be appraising "market value" in both instances?

Any link to the advisory notices? Maybe they will provide me some better insight.

 

[Randolph Kinney]

This is a 5 year old building. The condition of my unit is comparable to any private sale within the building. Beside being vacant and knowing its an REO there is no other evidence.

It confuses me to think I could come in at $170k and then go back a week after they move in and come in at $190k. Was I not suppose to be appraising "market value" in both instances?

Any link to the advisory notices? Maybe they will provide me some better insight.

So you are saying the REO past sales and your REO subject are in the same condition and have the same quality components (inside as well) as a private sale (normal sale)?

If so, you are appraising to market value even though you have a market discount for being offered as REO.

Let me guess, the contract reflects the REO value? And if you appraise to market value using normal sales, you have a paradox; why did the subject sell at a discount.

 

[JRice0220]

So you are saying the REO past sales and your REO subject are in the same condition and have the same quality components (inside as well) as a private sale (normal sale)?

If so, you are appraising to market value even though you have a market discount for being offered as REO.

Let me guess, the contract reflects the REO value? And if you appraise to market value using normal sales, you have a paradox; why did the subject sell at a discount.

Yes condition of the REO sales/subject are comparable to private sales.

It doesn't matter what the contract sales price is as we never appraise based upon a purchase price. That being said yes it would look interesting if I appraised the unit for $20k over contract price/ MLS asking price. But this client wouldn't have an issue with it.

The original question still applies. Would the REO sales warrant an upward adjustment for selling for under "market value"?

 

[residentialguy]

It doesn't matter what the contract sales price is as we never appraise based upon a purchase price. That being said yes it would look interesting if I appraised the unit for $20k over contract price/ MLS asking price. But this client wouldn't have an issue with it.

The original question still applies. Would the REO sales warrant an upward adjustment for selling for under "market value"?

If the market reacts with a different price for this type of sale, then YES. It has undue stimulus to sell. You are appraising to a presumed sale that comes with ideal type of conditions, as defined. It would be misleading to use sales that occurred under distress conditions, fail to adjust the market reaction for the conditions of the market value definition that were not met, and refer to the resulting value as market value.

The fact that you're sale is a REO or Short sale should have no bearing on MV, other than that needs to be considered when explaining why the contract is below market value.

 

[Randolph Kinney]

Yes condition of the REO sales/subject are comparable to private sales.

It doesn't matter what the contract sales price is as we never appraise based upon a purchase price. That being said yes it would look interesting if I appraised the unit for $20k over contract price/ MLS asking price. But this client wouldn't have an issue with it.

The original question still applies. Would the REO sales warrant an upward adjustment for selling for under "market value"?

The argument you have to make on the previous REO sales is that they do not reflect market value as defined by Fannie Mae and require a "stigma" adjustment to reflect what they would sell for if they did fit the definition of market value.

So you should have two value opinions; distressed value and market value. A knowledgable buyer would not pay the same price for a REO property in similar condition and similar quality as a normal sale but demands a discount from market value.

You need to define or reference a source for distressed value.

Write it up and ship it.

 

[residentialguy]

So you should have two value opinions; distressed value and market value. A knowledgable buyer would not pay the same price for a REO property in similar condition and similar quality as a normal sale but demands a discount from market value.

Wow Randolph, I'm speechless. Well said.

 

[Randolph Kinney]

Wow Randolph, I'm speechless. Well said.

I did leave one thing out; the buyers that are buying REOs come from the same buyer pool as normal sales; they aren't investors or flippers that buy to capture the discount from market value that magically disappears along with the REO status on resale.

Lots of easy money there. :icon_idea:

 

[JRice0220]

If the market reacts with a different price for this type of sale, then YES. It has undue stimulus to sell. You are appraising to a presumed sale that comes with ideal type of conditions, as defined. It would be misleading to use sales that occurred under distress conditions, fail to adjust the market reaction for the conditions of the market value definition that were not met, and refer to the resulting value as market value.

The fact that you're sale is a REO or Short sale should have no bearing on MV, other than that needs to be considered when explaining why the contract is below market value.

There it is. Thank you. This is what I have been thinking needed to hear it from an outside source. Just finished talking about this file 10 minutes ago with my boss and we came up with the same thought process.

Thanks guys!!!