REO sales and "Market Value"

[residentialguy]

the buyer of the property is not going into foreclosure, nor are they going into foreclosure in the near future
(An assumption based on what? Not a reliable assumption

Yes, it is. How many cases do you know that someone buys a house and doesn't make one payment. If that was even close to being a significant portion, the lending process would change. Even if that was the case, it would be a 1-2 year process. So not is it only a reliable assumption, it's fact for all intents and purposes.



hold on jr! The lender intends to liquidate stock. If you're selling baseball cards market rate, and someone has direct access to the same supply you do, but liquidates them under market, tough cookies, as long as they have that stock to sell, your market worth is now at firesale levels until the abundance of stock is corrected

Understood. That would already be reflected in the sale price.


That's because they don't want to sell in a market driven by liquid pricing
Agreed.

As far as the rest, I don't agree with what you're saying. And if that is true, there will not be a bifurcated market. If there is a bifurcated market, then there was something about the two markets that was not equally desirable.

 

[Mile High Trout]

You don't need to adjust a market sale down if you're stacking a mixed high/low set of comps.

The majority proportion of the market represents the typical motivation.

If that majority portion is distressed, well then the presence of distressed examples drives that sale down just fine.

Probably where I draw the line on this issue is the comp selection approach.

My comp selection approach is all about the market climate. Sometimes regardless of sales in the past year, 'practical availability' of offerings has everything to do with comp selection.

If the market is saturated, I pick REO's because that's who the seller is contending with. If the market is slim pickins, I pick the best possible, since that seller has much better footing. That's how it plays out for real world buyers. Buyers in the real world don't often enjoy the luxury of redefining value or price as it would suit their interests the best.

 

[residentialguy]

You don't get it...there is a chain of events that lead to defaults and REO's (otherwise known as market conditions). When market conditions are prevalent in an area, an appraiser needs to understand them.

being underwater is what leads to default. If you bought a house for 300k , or refied for a high amount, and have a mortage of 270k and can only sell it for 200k, you have negative equity. If your mtge payment is twice what it costs to rent the same house, a good chance you are just going to walk.

I understand about neg equity. Here's what you don't seem to get. Anything in the market that makes a difference is reflected on the homeowner's sale prices.

 

[Randolph Kinney]

Are you saying that the recent buyers of the REOs are underwater too? I don't think so, George. Have any other stories I can punch holes in? :new_2gunsfiring_v1:

Welcome to San Elijo Hills California.

I appraised a condo this month that was bought from the bank in 2009 for $290,000. The appraised value was $235,000. Not too bad, only 19% loss.

Buyers that bought in 2011 are underwater too.

 

[J Grant]

good point, Mile High Trout...the principle of subsitution is the driving force behind buyer decisions.n.

If from a buyers' point of view, an REO or short sale is a likely substitute for our subject, then that is the view that shapes the market and the comps.

If our subject is a good condition house, then a good condition private sale, or a good condition REO or short sale would be competition. A neglected or handyman REO won't be competition to our good conditon subject, so why keep dragging that fact in? Some REO properties are in fair or poor condition, and then there are many in average or good condition. Short sales are usually in avearge or better condition. If a house /condo et is not a physically similar and location similar property to your subject, it's not a comp, regardless of sale type.

 

[Mile High Trout]

<>f there is a bifurcated market, then there was something about the two markets that was not equally desirable.

In a perfect world, such things would be true.

In the real world, the gap in the market is driven by a bunch of unscrupulous agents who don't expose their buyers to cost savings offerings because it A takes the Realtor more time and B makes the Realtor less money, and C carries less closing certainty than simply walking in buyers to non distressed offerings at peak prequalification levels.

As an appraiser who did not represent himself as an appraiser in an interested buyer scenario I know all about that. Had to try it a few times to be certain. It's a fact, many a Realtor only shows you the sure thing.

Nope, the gap in the market is from opposed interests for mainly similar properties usually.

Whether you're a buyer who gets to take advantage of cost savings through liquid offerings, depends primarily on your representation, not the actual market. There is always a bifuricated market in distressed example neighborhoods, because there is always a few agents who still set them up and knock them down and quite plainly; don't screw around with less profitable engagements.

 

[Mile High Trout]

Thank you JGrant

If from a buyers' point of view, an REO or short sale is a likely substitute for our subject, then that is they view that shapes the market.

And my point is that, regardless if the buyer was exposed to these offerings or not. They are valid offerings.

I'll kill a deal if the Realtor did not properly represent the interests of the buyer. Just because someone has a high price tag does not mean the lender needs to loan on that amount. The lender loans on substitutable market value. If the seller had to sell tomorrow, they'd compete with liquid offerings and would be like: How in the heck could we have been so stupid as to pay this much more for this home, when we could have gotten the same thing for less!? That's when they get mad at agents, and the agents somehow redirect to the appraiser. It's a big mess.

But that's a great example of the primary purpose of the appraiser. The appraiser is a non advocate. Regardless of how it makes you feel, or anyone else feel; Learned information is learned information. If you discover the offering is overpriced compared to the substitutable worth on the market, it's your position as a non advocate to state that.

 

[Randolph Kinney]

Getting to Know Underwater Homeowners

http://www.forbes.com/sites/stanhumphries/2012/08/24/getting-to-know-underwater-homeowners/

According to the second quarter 2012 Zillow Negative Equity Report, 30.9% of homeowners are underwater, owing a combined $1.15 trillion more than their homes are worth. The extent and magnitude of negative equity, however, varies widely by the age of the borrower and when a home was purchased

Looking at our sample of borrowers, we see that negative equity is most common in younger age brackets with 39% of borrowers age 20 to 24, 48% of borrowers age 25 to 29, and 51% of borrowers age 30 to 34, underwater on their mortgages. All told, 48% of borrowers under the age of 40 are underwater on their mortgages.

As one might expect, the transaction years in which negative equity and delinquency are most common are the years in which the housing market was at its peak. Negative equity is most common among homeowners who purchased their homes in 2006 and 2007, with about 53% of borrowers who purchased homes in those years underwater. Delinquency is also most common among those who purchased their homes during the height of the bubble, 2005 through 2007, with a precipitous fall in delinquency in subsequent years.

 

[Mile High Trout]

An 'REO sale' is better defined as simply; a distressed seller sale.

An 'arms length sale' is better defined as a non distressed sale.

All else being equal, these two motivations of two different types of sellers eventually meet in the middle, as sales progress and time moves onward. Only when there are not REO offerings practically available, is it time to disregard the valuation presented by REO sales. This is a crucial consideration because if nothing is active anymore in REO stock, you'd be a real goon to drive down current offering values based on past valuations from periods of over saturated offerings. And it can change in a heartbeat, based on buyer acceptance. It's all about practical availability.

If there are 0 active REO's, that's really good for pumping up distressed sale examples. After all 'as of today', a regular buyer would pay the price because there were not REO's to lookie lookie at.

If there are many active REO's, that's a really good reason to tone down on prospective high dollar values. One presumes that the buyer was not typically motivated because they're paying more for the same item. If the buyer paid more to 'save on closing hassle', that's a separate consideration from market value. Who's to say the next guy will find that same 'value in processing efficiency'? Sorry, don't confuse value in the deal, for value in the home. The two stand apart. This may go against normal logic where we assume that processing efficiency is equatable to increased cost on what is coined; arms length sales, but is it really? Are thrifty consumers really anomolus? And with a constant default rate creeping on 10% if what they say is true; One can safely assume 1 in 10 appraisals will result in a defaulted borrower and resulting forensic review will most certainly question why the borrower paid more for something that could have been substituted for less.

 

[Randolph Kinney]

Negative Equity Problem Could Make Foreclosure Crisis Even Worse

http://www.usnews.com/news/blogs/ho...blem-could-make-foreclosure-crisis-even-worse

Almost 60 percent of the nation's largest metropolitan areas saw increased foreclosure activity in the first half of 2012, according to a recent report from foreclosure information website RealtyTrac, with troubled states California and Florida cropping up again as major sources of the country's foreclosure woes.

As if that weren't bad enough, things could get a lot worse thanks to the gigantic negative equity problem, which has pushed many homeowners to the brink of foreclosure and put immense pressure on household finances.

Loans currently in the foreclosure process amount to about $45 billion in negative equity, according to RealtyTrac CEO Brandon Moore. But that figure balloons to $1.2 trillion when you add in the more than 12 million underwater mortgages that haven't started the foreclosure process—26 times the negative equity currently associated with troubled loans.

"40 million Americans choose to pay a mortgage every month and even if just a small fraction of those choose not to do so, things can compound and get much worse pretty quickly," Moore says.

For the time being, the vast majority of those 12 million or so Americans with underwater mortgages continue to make their monthly payments, but the longer the housing market and economy stay stuck in the mud, the more likely it is they could run into trouble.