REO sales and "Market Value"

[George Hatch]

If the marketplace for a certain property type is an auction and the typical manner of exposure and negotiation of price is by bidding then such sales can represent market value.

Oranges can be sold door-to-door, at the local farmer's market, in the supermarkets, at the distribution warehouses, straight off the tree at the farm or even in the form of commodity futures. Any of those transactions can represent the market value and who the seller or buyer is makes no difference in those prices - nobody cares.

So as a concept "typical buyer" means what it means within the context of the dataset at hand, not as a benchmark against an arbitrary external standard.

I didn't notice any of you guys talking about discounting investor purchases back during the runup based on their intention to flip rather than occupy. Back when they represented 35% and 40% of the buyers nobody was talking about vetting them or adjusting those sales prices our based on who they were or what their motivations were. You guys still aren't talking about vetting them on the basis that they never intended to occupy the property. Many of the investors who are selling do not have the means to not sell - they have to sell, no matter what because they don't have the resources to carry them indefinitely.

IMO you guys aren't being consistent, either with the manner that you handled it back then vs now or in the manner in which you assume owner-occupancy to be the defining factor vs non-owner occupancy.

 

[George Hatch]

Lack of flips does not prove there is no difference, stigma, or adjustment needed.

Stigma is an element to be demonstrated, not a presumption to be made. When there's no evidence of discounts attributable to stigma among the sales then it is what it is.

 

[George Hatch]

Lack of flips does not prove there is no difference, stigma, or adjustment needed.

Stigma is an element to be demonstrated, not a presumption to be made. When there's no evidence of discounts attributable to stigma among the sales then it is what it is.

We don't look at our data to support our presumptions, we look at our data to see what it indicates.

 

[Randolph Kinney]

Yeah, that can be proof of a condition of sale adjustment between an REO and an non-REO

(hey look, I am agreeing with Mr. Kinney woohoo)

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?

This was marketed as "Freddie Mac First Look Initiative / Owner Occupied offers only within the first 15 days". It sold in 10.

Quote:
Originally Posted by JRice0220
No special financing involved. 30 year FHA.
FHA is mortgage insurance. It is not the lender that grants a mortgage with its terms and conditions.

Quote:
In an effort to help stabilize communities and support the nation’s housing recovery, Freddie Mac's First Look® Initiative gives homebuyers like you the ability to purchase a HomeSteps home during its initial 15 days of listing (30 days in Nevada), without competition from investors. You do not need to be a first-time homebuyer as long as the home is your primary or secondary residence. Purchasers who do not intend to occupy the home or intend to use it for investment purposes (e.g., renting) are not eligible for the First Look Initiative but can submit offers that will be considered once the First Look period has expired.

http://www.freddiemac.com/homeowners...wned_home.html
Homesteps program for Freddie Mac Foreclosures

Loans are made through Freddie Mac's lender partners as Freddie Mac does not make direct loans.

Special Financing is not offered on all properties.

Special Financing is only offered on properties in habitable condition.

Special Financing is available to owner-occupant and investor purchasers, though on different terms.

Minimum down payments are 5% for owner-occupants and 2% may be from gift funds.

Higher allowable debt ratios (You can afford more house).

Competitive interest rate (approximately 1/4 percent below the average retail rate).

The 3.5% seller contribution is to be used towards closing costs, including a home warranty, if desired and available.

Buyers should consult their lenders for guidance on financing. Lenders and mortgage products may impose their own limitations on the use of the 3.5% incentive. For example, the lender may consider the incentive a Seller Contribution and limit the amount to 3.0%. In those instances, the remaining 0.5% will no longer be available to the buyer.

One aspect of any sale and particularly REO sales, sometimes that comes with special financing and the sale is not marketed as a normal sale, as in this case.

Now, if this was used as a comparable sale in a future appraisal ...

 

[residentialguy]

It's whether such activity can become so prevalent that they represent the most probable price and drive the pricing for the entire market.

It's the most probable price of a distressed bank sale, no doubt. No doubt they affect prices of market sales. Whether it is the most probable price of a market sale will been shown by the prices of the market sales.

 

[CANative]

It's the most probable price of a distressed bank sale, no doubt. No doust it will affect market sales. Whether it is the most probable price of a market sale will been shown by the prices of the market sales.

IT'S A MARKET SALE!!! The bank decides to sell it, it gets exposure via the local MLS, potential buyers look at it, and finally a buyer decides to purchase it.

The bank certainly has it's own calculus to deal with but so does everyone else.

 

[residentialguy]

If you take that to mean it sold in the market, yes, you're correct. I said that meaning it's a distressed sale, not a market sale that is reflective of our defined Market Value of 2ndry mtg. A liquidation sale is sold in the market. A non arm's length sale could be sold in the market....it's not market value, as defined.

 

[Terrel L. Shields]

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?

That would mean you under-appraised it the first time.... This notion of Market Value varies within the eyes of the beholder and that the METHOD or terms of sale changes the definitoin of MV like George suggests is nonsense... The price of Oranges has a retail price and a wholesale price that is based on local market condition. A bank is never a "typical" seller. A bank may or may not get a price that is proxy of MV, but it still does not nor ever will meet the definition used by Fannie Mae.

Graaskamp saw the problem decades ago and suggested that appraisers should be responsible for reporting the "Most Probable Price" which would allow the appraiser to basically ignore the motivations of buyers and sellers and try to determine what the most likely price would be in the circumstance of the sale.

 

[J Grant]

The Appraisal foundation and AI advisory says otherwise, that a REO sale ( call it distress sale if you wish, but technically, it is an REO sale), can be used as a comp for a mv def purpose appraisal.

People are throwing around the term liquidation value randomly, an REO or short sale sold with reasonable market exposure on MLS , even if it sells for less than a non REO sale, does not meet the standard of a liquidation sale.

A liquidation sale, by definition, is NOT sold on the open market, or under prevailing market terms/exposure. An REO sold for liquidation value would be from a sheriff sale, or 3 day bid auction, for example.

 

[DMZwerg]

If the marketplace for a certain property type is an auction and the typical manner of exposure and negotiation of price is by bidding then such sales can represent market value.

Actually, they can represent *A* market value (as in one of many definitions) in that market.

Oranges can be sold door-to-door, at the local farmer's market, in the supermarkets, at the distribution warehouses, straight off the tree at the farm or even in the form of commodity futures. Any of those transactions can represent the market value and who the seller or buyer is makes no difference in those prices - nobody cares.

But they are all different markets. Also there are different markets for ripe, under ripe (but already picked) and over ripe fruit. Straight off the tree under ripe fruit would not be picked unless slated to be shipped and over ripe fruit would tend to be for local consumption or juice only, therefore if the local market is the local stand then ripe and over ripe fruit would be the standard for that market and almost to under ripe would be for wholesale resulting in two separate market segments possibly existing in the exact same grove (or local NBHD). Appraisers should care about that as although there may be no apparent local ripe fruit sales 2 weeks before the first fruit ripens the market actually does exist it is just there is no product currently marketed that meets market price (aka, the produce does not yet exist). Now the discount wholesale market may exist starting a week or so before full ripening, again before the local market is going, and so on and so forth. The fruit that isn't ripe does not meet the definition of a product able to be sold in one market but does in another. The farmer will look at where and how he can maximize his returns by being able to supply both the wholesale and local fresh markets (note the plural).

But we are talking houses. Consider MLS to be a group of farmers "offices" be they his kitchen or whatnot. The houses offered may be considered fair market or one of a number of other sub-markets (investors, flippers, rehabbers, etc) and marketed to any of those diverse segments based on the will, whim, and needs of the owner. Since banks have to sell they are more likely to have the houses priced for the investor/flipper/rehabber sub-markets rather than the fair market as they can not wait (often) 180 days to sell let alone over 3 years. The property is distressed and while listed on the same "stick a tack in with a picture" bulletin board (aka, MLS or such) it is not necessarily marketed to the same group. Not to the same buyers. Reason in part is the risk involved.

In other words who's on first, what's on second, and I don't know is on third. I am Abbott so who is not understanding Costello?

So as a concept "typical buyer" means what it means within the context of the dataset at hand, not as a benchmark against an arbitrary external standard.

In general, yes. But when some appraisers don't seem to be able to recognize that different sub-markets and market segments exist without an express codebook in their hands I have to say "NO" because said appraisers are not addressing WHICH market (aka, they assume if it is on MLS it is all one market, never mind that so are 2-4 families, vacant land, apartment buildings and other commercial properties ... do all those buyers count as "typical buyer" for SFRs as well since they are all on MLS?)

I didn't notice any of you guys talking about discounting investor purchases back during the runup based on their intention to flip rather than occupy.

I did. With my mentor before the bust.
Also, while still a trainee, questioned one appraiser in the office about the "logic" of "pushing" values (I saw it as incorrect).
Not my fault you were not there at the time.

Heck, my mentor's mentor mentioned Florida and I expressed concerns about investing unseen like that.

You guys still aren't talking about vetting them on the basis that they never intended to occupy the property

Actually, I inquire about both buyer AND seller motivations when verifying comps. Not my job to vet buyers, only try to determine motivation.

IMO you guys aren't being consistent, either with the manner that you handled it back then vs now or in the manner in which you assume owner-occupancy to be the defining factor vs non-owner occupancy.

Prove it.
You say I wasn't consistent then find a post on this forum from me prior to 2009 where I say the opposite of what I am saying now.