REO sales and "Market Value"

[J Grant]

Market Value Definition
Per Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA)

Effective August 24, 1990

Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a 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 specific date and the passing of title from seller to buyer under conditions whereby:

(1) Buyer and Seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U. S. Dollars or in terms of financial arrangements comparable thereto; and
(5) 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.

REO sales meet all above terms. They rarely have special fiancing and often are sold for all cash.
Market Value

As defined and explained in Real Estate Defined

This explanation differs from the MV definition on the cert of a lending appraisal. But, will address a few points anyway.

The amount that a property might be expected to realize, usually expressed in monetary terms, when it is offered for sale in an open market, for a reasonable period of time, by a willing seller, in order to enable the property to be brought to the attention of all or most potential and willing buyers and when the transaction is not affected by any special circumstances

The authors don't precisely define "special circumstances". "special" means rare, unusual, out of the norm. When there are enough REO's to impact market activity, these sales, and the cicumstances that produce them, are no longer special. In fact, the circumstances that produce REO sales are directly tied to years of former predominant market activity.

that might affect the buyer, the seller or the property. The best price that a property might reasonably be expected to realize if sold in the normal course of business, after allowing a reasonable time for exposure to potential buyers, and assuming that the buyer and seller are acting in their own best interests,

Buyers of REO's, and sellers, are acting in their own best interests.

have entered into the transaction without any element of compulsion or duress,

This phrase is not in the MV definition we appraise to in a FIRREA appraisal. The phrase instead is , "undue stimulus", which is a lot broader. If every sale without any element of compulsion or duress were exlcuded, half the private owner sales would be excluded, the ones where owners are facing divorce, bankruptcy, job loss, etc.

and the buyer does not have any special relationship or obligation to the seller. The determination of market value is normally based on a set of assumtions, such as the type and condition of the property, the interest held, the nature and conditions prevalent in the market at the date of the valuation and the purpose of the valuation.

When REO's and short sales are prevalent in the market , they certainly meet this last standard, and in fact can define market conditions as prevalent in some cases. When the presence of REO or short sale inventory is no longer a factor in an area, I am more than happy to not deal with them!

 

[residentialguy]

Market Value Definition
Per Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA)

Effective August 24, 1990

Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a 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 specific date and the passing of title from seller to buyer under conditions whereby:

(1) Buyer and Seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U. S. Dollars or in terms of financial arrangements comparable thereto; and
(5) 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.

Market Value

As defined and explained in Real Estate Defined

The amount that a property might be expected to realize, usually expressed in monetary terms, when it is offered for sale in an open market, for a reasonable period of time, by a willing seller, in order to enable the property to be brought to the attention of all or most potential and willing buyers and when the transaction is not affected by any special circumstances that might affect the buyer, the seller or the property. The best price that a property might reasonably be expected to realize if sold in the normal course of business, after allowing a reasonable time for exposure to potential buyers, and assuming that the buyer and seller are acting in their own best interests, have entered into the transaction without any element of compulsion or duress, and the buyer does not have any special relationship or obligation to the seller. The determination of market value is normally based on a set of assumtions, such as the type and condition of the property, the interest held, the nature and conditions prevalent in the market at the date of the valuation and the purpose of the valuation.

Good post Randolph.

I'd like to add one more highlight. What's the purpose of the appraisals? Does the lender want to know the most probable price of a distressed bank owned sale which would effectively cut out their clients, or do they want the most probable price of their client's resale value, without any element of compulsion or duress, special circumstances etc so it can be used for financial purposes with them? Some of you like to ignore intended use...which is ignoring USPAP, as well.

 

[Terrel L. Shields]

This phrase is not in the MV definition we appraise to in a FIRREA appraisal. The phrase instead is , "undue stimulus", which is a lot broader. If every sale without any element of compulsion or duress were exlcuded, half the private owner sales would be excluded, the ones where owners are facing divorce, bankruptcy, job loss, etc.

Exactly and just how few appraisers research enough to determine that? Darn few...Go back to the old textbooks you used. It was what they always talked about, people having to move or going thru divorce.THAT was not an arm's length sale.

Banks are under various amounts of pressure to dispose of their assets that they inherit. That's why the departments handling these are called "Special Assets" " ORE" or "Asset Disposal Group". The fact they attempt some form of due diligence does not make them an ordinary seller.

 

[J Grant]

Good post Randolph.

I'd like to add one more highlight. What's the purpose of the appraisals? Does the lender want to know the most probable price of a distressed bank owned sale which would effectively cut out their clients, or do they want the most probable price of their client's resale value, without any element of compulsion or duress, special circumstances etc so it can be used for financial purposes with them? Some of you like to ignore intended use...which is ignoring USPAP, as well.

You often bring up this point, but it is a moot point.

Unless our report has a different purpose stated, the purpose if MV. Unless it says otherwise on a URAR , the purpose is to provide a MVO per the definition. We are not allowed to change the preprinted cert where the definition is.

If we are doing a general purpose or other non lender form appraisal, we can use or the client can impose, a different value definition,(like the ones you keep trying to provide), such as client wants a value of distressed sale property that would effectively cut out their clients, or other variations ...

 

[Randolph Kinney]

Good post Randolph.

I'd like to add one more highlight. What's the purpose of the appraisals? Does the lender want to know the most probable price of a distressed bank owned sale which would effectively cut out their clients, or do they want the most probable price of their client's resale value, without any element of compulsion or duress, special circumstances etc so it can be used for financial purposes with them? Some of you like to ignore intended use...which is ignoring USPAP, as well.

Researching a bit of history concerning FIRREA, a little white paper published by the Appraisal Institue, quoting:

199
200 The failure of USPAP to treat Market Value as a special concept has lead to a proliferation of
201 Market Value definitions, dilution of the Market Value concept, and great confusion in the
202 marketplace. For example, Market Value under FIRREA is not identical to Market Value in the

Market Value Initiative White Paper

November 22, 1999 Draft - revised December 7, 1999

203 secondary mortgage market, is not the same as Market Value for the Employee Relocation
204 Council, is not the same as Fair Market Value in various court juridictions, and is not the same as
205 Fair Market Value as defined in the Uniform Appraisal Standards for Federal Land Acquisitions.
206 USPAP must clarify Market Value for appraisers, courts, governmental entities and other users of
207 appraisal services. USPAP should be the recognized authority for guidance on what elements
208 constitute a Market Value opinion.

332
333 We propose the following solutions to the trends described in this White Paper.
334
335 1. Focus Standards 1 and 2 on the development and reporting of Market Value opinions of real
336 property interests. If one develops and reports an opinion of market value, he or she must
337 conform to Standards 1 and 2.
338
339 These recommended changes will: a) strengthen, clarify and consolidate the use of Market
340 Value, the benchmark of real estate valuation worldwide, and eliminate confusion in the
341 marketplace over differences in types of value; b) ensure that USPAP contains Standards that
342 focus on the original concerns FIRREA sought to address, namely ethical and competent
343 appraisals of the market value of real estate serving as collateral for federally insured
344 transactions; c) increase enforceability of Standards relating to appraisals governed by
345 FIRREA through such clarity; and d) bring consistency with worldwide standards and
346 understanding, thereby helping to open global markets to appraisers.

 

[J Grant]

Exactly and just how few appraisers research enough to determine that? Darn few...Go back to the old textbooks you used. It was what they always talked about, people having to move or going thru divorce.THAT was not an arm's length sale.

Banks are under various amounts of pressure to dispose of their assets that they inherit. That's why the departments handling these are called "Special Assets" " ORE" or "Asset Disposal Group". The fact they attempt some form of due diligence does not make them an ordinary seller.

Terrel, years ago, they used to teach ( and I was taught, an "idealized" MV sale, the one that excluded any circumstances of pressure such as divorce, etc. That was back when the MV def was highest probable price, and a seller was assumed to have unlimited time to sell, be under no complusion, could hold out for highest price etc.

The MV def changed from most probable highest price, to most probable price, and the words compulsion are no longer in play, it is now undue stimulus. Accounting for a changing society (not that the changes are good, but they happened). With aprox 50% of the population that was married now divorced, how can divorce sales be excluded? They can't. People remain in homes, marriages, jobs, areas, shorter times then in previous decades...I'd love to go back to Ozzy and Harriet standards , standards of more stability and less stress, but those standards are not always relevant to today's home market, unfortunately.

 

[residentialguy]

USPAP is clear that we are to be clear in understanding our instructions/SOW. It's obvious from this thread and the many threads like this that the definition of MV is NOT clear, therefore to abide by USPAP, it is necessary to verify our SOW so that the report is not misleading. The AI also suggests that appraisers should verify this.

If REOS and Shorts are the majority of sales, call the client and ask if they want the most probable price of the subject in a distressed sale, or the most probable price of a non-distressed sale.

 

[J Grant]

Randolph, I agree. The authorities (if ther are any), need to specify exactly what should be included, or excluded in a MV def purpose appraisal, so that all appraisers are on the same page. Either that, or open the definition up, one or the other. Right now it is a quasi definition with allusions to specific concepts without defining a limit to them.

 

[J Grant]

USPAP is clear that we are to be clear in our instructions of the SOW. It's obvious from this and the many threads like this that MV is NOT clear, therefore to abide by USPAP, it is necessary to verify our SOW so that the report is not misleading. The AI also suggests that appraisers should verify this.

If REOS and Shorts are the majority of sales, call the client and ask if they want the most probable price of the subject in a distressed sale, or the most probable price of a non-distressed sale.

Your last statement is ridiculous, and has norhing to do with USPAP. We have to appraise to the definition on the cert of the form. Your client assigned you a MV purpose appraisal. Now, in the middle, after research, you call them and ask if they want something else?

If you do call a client, and they tell you they want the "most probable price of a non distressed sale", and thus you have revised the definition of MV, then how do you handle that?

Where do you state that on the form, and what do you do about the fact that we are not allowed to change or modifiy the pre printed cert def of MV?

 

[residentialguy]

Your last statement is ridiculous, and has norhing to do with USPAP. We have to appraise to the definition on the cert of the form.

WRONG. You need to get your head out of the form.

PER USPAP:

INTENDED USE:

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​

​

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the use or uses of an appraiser’s reported appraisal, appraisal review, or appraisal consultingassignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.​

SOW RULE

An appraiser must properly identify the problem to be solved in order to determine the appropriate scope of work.​

FYI, And here are the instructions of the intended user who created that form.​

When using an REO sale or short sale as a comparable sale, the appraiser must make appropriate adjustments to account for any market reaction to differences between the REO or short sale property and the subject property, including, but not limited to, differences in property condition.​