REO sales and "Market Value"

[moh malekpour]

Do you use REO addendum for REO property appraisals? Yes or No.
Depends on whether or not the client is requiring it.

If yes. Do you provide the following values?
A-estimate of "as is" and if applicable "as repaired" market value based on reasonable market exposure time. Yes or No
Yes, unless the client instructs otherwise. And while JG disagrees, this is not based on the definition of the 1004. It's in b&w that they want reasonable exposure time, like you did in the 1004. It is a distressed sale. They have to sell it. It is contributing nothing to them. They didn't go buy it. They have to get rid of these properties or they will fail. It is undue stimulus. It does not reflect MV as defined on the 1004 and often because of this variance from the 1004 MV conditions, as I'm sure you've seen, it creates a market reaction with a lower price that does not reflect MV as defined. The reason they are ordering this is because they need to know what to expect when they put this on the market. Therefore, the reasonable exposure value may not be the same value you stated on pg 2 of the 1004.

B-estimate of "as is" and if applicable "as repaired" market value based on client's restricted market exposure time (not to exceed 120 days) Yes or No
Again, unless they say otherwise, you would fill out the complete form. This is on the same principle as "A" above.


Not all REO sales are distressed sales but some are.
I disagree. See above.

Distressed sale is a loaded word and can be any sale such as divorced sale, illness sale, bankruptcy sale, short sale or any other sale.

I agree. These are all distressed sales.

Ok, fair enough. It seems that you use REO addendum for REO appraisal if client required and you provide 4 values in that form if the client required. As far as I know all REO clients that are mostly HUD, Fannie Mae, Freddie, VA and major banks require REO addendums and those values in that addendum but there are always exceptions

. The bank that owns an REO property needs to sell it as soon as possible. That is a fact but bank doesn’t know whether to list it at a discounted price or not because bank is not aware of the condition and location of the property and doesn’t know about marketing time that is required to sell a property in that location. That is why the bank pays for an appraisal before engaging a real estate agent to list the property. The bank wants to know what is the market value of that property based on reasonable exposure time and what is the market value of the property based on its own restricted time frame that needs to sell that property.
All distressed sales have something to do with the exposure time. If they need to list and sell the property quicker than the reasonable exposure time, they need to discount the asking price. If they don't need to sell it quicker than the reasonable exposure time, then they don't need to list and sell it at a discounted sale price.
Another words, if the market exposure time that the appraiser has provided based on 3 comparable sales that has used for that appraisal is equal to the bank’s own restricted exposure time, there is no reason for the bank to list the property at a discounted price because the appraisal shows that the reasonable exposure time is 1-30 days and banks restriction exposure time is also 1-30 days. If the appraisal shows such a market, then why the bank should be forced to list the property at the discounted price? If the bank is not forced to list and sell the property at the discounted price why you want to call that sale a distressed sale?

 

[gregb]

Four local bank clients, with a few REO properties now and then, ask me for a MV appraisal, since they plan to sell them at MV with no discount for time pressure. One of the four asks me for an additional analysis to include a Liquidation Value, with a specified exposure time. None of the four bank clients discount their asking prices below my appraised value, it is pure unemotional marketing with selling times typical for current market conditions and sale prices achieved within 2-4% of appraised value. None of the clients ask for a "REO Addendum" gee, what is that?

 

[residentialguy]

Four local bank clients, with a few REO properties now and then, ask me for a MV appraisal, since they plan to sell them at MV with no discount for time pressure.

The problem is that it's not up to them. They can set it at any price they want, but if it's over priced, it probably won't sell. But buyers will be glad to help take that blood sucking, vacant property off their hands...but not at the price he can buy Joe's nice staged home with full deed warranty and disclosure, no possible illegal foreclosure, less lien problems, less title issues, no stigma and no PITA bank to deal with...to name just of few preferred features. There's something about announcing that you're under distress and the buyers know that there are more issues with REOs and that the house is offering nothing to the seller by holding on to it, rather costing them money, makes them play to their advantage.

But hey, if full market value of a non-distressed sale is what they want, no problem. It won't help them sell unless they price it with the other competing REOs like it. If all the other REOs are selling identical to non-distressed homes...then they have a chance. From the REOs vs Traditional charts I've seen, that's not the case unless the area is vastly REOs. Then the MV may have dropped to the same value as distressed sales.

 

[DMZwerg]

I've done that lots of times. The *only* time I give a contract any more weight than any other sale in my dataset is when my natural inclination is really close but falls a little short of the contract price, that price still being within my opinion of value as a range.

I generally reconcile for a reasonable range of value first before narrowing it to a value conclusion. If the contract price falls at either extreme of that range then I say so in my report.


As a side point to this discussion:

If we never, ever appraise above a contract price how can we possibly justify appraising below one? Sometimes people get hosed and sometimes they score a spectacular deal. The RE market is far from perfect.

I agree with George on this, especially the part in both (aka, this is what I do as well).

 

[residentialguy]

Another words, if the market exposure time that the appraiser has provided based on 3 comparable sales that has used for that appraisal is equal to the bank’s own restricted exposure time, there is no reason for the bank to list the property at a discounted price because the appraisal shows that the reasonable exposure time is 1-30 days and banks restriction exposure time is also 1-30 days.

The problem is that they aren't equally desirable sales to non-distressed and the fact that they are REOs puts the sale in the buyer's court. You need to match apples to apples. If there are other non-distressed houses for sale, any half way intelligent buyer will demand a discount or buy the non-distressed, less risky sale. If the REOs are selling for 5-10% less than non-distressed and you opine REO value at the non-distressed sale level, you've given them a misleading appraisal.

 

[moh malekpour]

The problem is that they aren't equally desirable sales to non-distressed and the fact that they are REOs puts the sale in the buyer's court. You need to match apples to apples. If there are other non-distressed houses for sale, any half way intelligent buyer will demand a discount or buy the non-distressed, less risky sale. If the REOs are selling for 5-10% less than non-distressed and you opine REO value at the non-distressed sale level, you've given them a misleading appraisal.

Problem is that you call every REO sale a distressed sale. It doesn't matter if that property has a C2 condition, Q2 quality construction, ocean front location and panoramic ocean view and competes in every thing with any other non REO property in the neighborhood and the market exposure time is exactly the same as the client restricted exposure time, you still think that it is a distressed sale.
If you are a buyer why do you expect a discount on this property that has everything the other non REO properties have? If you are the bank owner of that property why should you sell your property less than other non-REO properties when you know that your property competes in every thing with non-REO properties and the exposure time for non-REO sales are the same as your restricted exposure time? Do you think banks are stupid?

 

[JSmith43]

If the appraisal shows such a market, then why the bank should be forced to list the property at the discounted price? If the bank is not forced to list and sell the property at the discounted price why you want to call that sale a distressed sale?

Maybe some of the well informed buyers read the paper and factor in the odds of something ugly happening down the road in a REO transaction, something hard to discover ahead of time.

Example:http://www.blacklistednews.com/Fixing_the_Mortgage_Mess%3A_The_Game-changing_Implications_of_Bain_v._MERS_/21214/0/38/38/Y/M.html

It sounds like a bank customer that is indifferent to their own marketing position. That doesn't mean a buyer is indifferent.

 

[JSmith43]

Side Point? To me, that is the MAIN point. You put it very well.

I've said the same thing more than once in the past but all it attracted was Skippy accusations. How does George rate all this butt kissing?

 

[residentialguy]

If you are a buyer why do you expect a discount on this property that has everything the other non REO properties have?

I just gave a partial list of issues in post 303 [URL="http://appraisersforum.com/showpost.php?p=2288956&postcount=303"][url]http://appraisersforum.com/showpost.php?p=2288956&postcount=303[/URL][/URL]

Many buyers won't even look at REOs because of the issues with REOs.

If you are the bank owner of that property why should you sell your property less than other non-REO properties when you know that your property competes in every thing with non-REO properties and the exposure time for non-REO sales are the same as your restricted exposure time? Do you think banks are stupid?

They don't have much choice. They have to get rid of them. They aren't living in them or renting them...it's just sucking money and losing more value every day it sits vacant. They aren't stupid...it's smarter to take a little loss and get out from under them. Not to mention they can't make a profit on them. If the price reaches the amount owed, they have no incentive to press on because it would go to the homeowner that just shafted them.

Bottom line is if they want the most probable price that they (a lender) can sell the home for, why would you not look at other comparable lender sales?. If they are selling the same as traditional sellers, fine. But your support should be from sales that are as closest in every way to the type of sale conditions you're finding value to.

 

[J Grant]

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Type of sale conditions is only one aspect of principle of substitution. Like I said, I don't have the rigid views Res Guy does,, that MV is always the highest value (it is the most probable price), and that all REO's sell low as distress sales. They may or may not sell lower than a non REO sale. That still does not mean they are not selling at market value...they are selling at the lower end of market value, just as a flip sale, or highly decorated builder model, may sell at the high end of market value.

When I do an REO as subject appraisal, nothing changes from the way I do a non REO as subject. If lender sales make the best substitute comps, i'll use them, if non lender sales make the best substitute comps, I'll use them. If adjustments up for REO is iseen in the market, I'll make them, if not, I won't.

Res Guy routinely excludes REO sales from appraisals and always adjusts them up, thus, when he has an REO as subject, he has to "change" methodology, thus all the calls to the lender and explanations that he is appraising the subject as a bank owned distress sale etc.

The REO addendum, if there is one, is the place for a discounted value in a shorter marketing time. The client then has information they can work with, a MV price, including other REO comps if appropriate, and then a price in a limited market exposure, a discount off the MV opinion according to what similar sales bring in the limited market exposure time.