REO sales and "Market Value"

[residentialguy]

The big problem is that the REO addendum wrongly uses the term Market Value. No big surprise there.

Home owners often are confused. They call me and say they want me to find out the market value of their home so they know what to list it at. At that point, I explain what MV is and start asking questions, "Are you asking me to find out what you should list your house at?"... "is there a certain time frame you need it sold in?", etc. Once I find out what they need and how they're going to use the report, only then can I develop a meaningful report.

 

[J Grant]

That makes sense for a listing appraisal for a homewner, many don't understand how marketing time can impact value.

 

[residentialguy]

It may not even be an appraisal they're wanting after all. Giving an opinion of what price they should list their house at is not an appraisal.

 

[DMZwerg]

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.

Condition (physical) - a property may or may not be in distressed physical condition
Quality and amenities - quality of construction has no factor on whether or not a property is in distressed condition or not; amenities may but only due to lack of existence or ability to operate.

Terms of sale - a property may or may not be a distressed sale depending on the motivations of the seller.

You may want to look at the following links for definitions of distressed sales ...
[url]http://financial-dictionary.thefreedictionary.com/distressed+sale[/URL]
or
[url]http://www.answers.com/topic/distress-sale[/URL]
... or you may want to look at the Dictionary of Real Estate Appraisal for the definition of Distress Sale and even Guidenote 11 by the Appraisal Institute ( [url]http://www.appraisalinstitute.org/ppc/downloads/2011_guidenote_11.pdf[/URL] ) page 3 under heading Distressed Sales as Comparables where it states: "Distressed sales such as foreclosure sales and short sales are common in a declining market."

Most appraisers here, even if they feel they can use REOs in (at least some) market value appraisals without adjustment, analysis or even comment, understand that REOs *ARE*, by definition, distressed sales.

I can not see why you would decry ResGuy from stating so when the AI, APB and so forth all agree that foreclosures and short sales are two of the many types of distressed sales.

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?

Because if the bank does NOT sell they can be fined, closed and liquidated. It is against the law for a bank to hold any piece of property for more than 3 years UNLESS it meets certain specific exceptions ... REOs do not meet these. Also the bank has holding costs without income stream from said and face depreciation due to vacancy, deterioration, and in many areas vandalism (City of Kenosha had a new built but vacant property explode a few years back; Deutsche Bank got sued by L.A. as being one of the city's largest slumlords). Banks are not necessarily "dumb" but they are corporate entities and therefore may do things as matter of policy or due to outside pressure (bank inspectors and banking regulations) that a typically motivated seller would not be FORCED into doing. That is why REOs are widely recognized as being distressed sales by default.

 

[NORTON]

It may not even be an appraisal they're wanting after all. Giving an opinion of what price they should list their house at is not an appraisal.

but what happens when the public considers them the same? especially since they are both developed by an appraiser?

 

[DMZwerg]

Type of sale conditions is only one aspect of principle of substitution.

That is true, and it is good you are finally recognizing that it is a factor of comparability, but ...

Like I said, I don't have the rigid views Res Guy does,, that MV is always the highest value

ResGuy *NEVER* stated that in any of his posts that I have read. He just does not agree that the value of distressed sales *IS* market value.

and that all REO's sell low as distress sales. They may or may not sell lower than a non REO sale.

REOs *ARE* distressed sales, by definition.

Nothing says that a distressed sale can not sell at market, but an appraiser needs to analyze, comments AND adjust when using distressed sales (which do not meet the FIRREA DoMV) in an appraisal where value opined is defined to be the FIRREA DoMV.

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.

I don't recall him stating that he excludes them, that would be Terrel that states that. IIRC ResGuy considers them, realizes the market is bifurcated, and then does not use said non-comparables if possible, and if use feels necessary, analyzes, comments and adjusts. At least that is what I have gotten from my reads of his posts on the forums.

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.

Yep, and opinion of Disposition Value only belongs on that page IMO. ResGuy has actually stated he is a bit more flexible than I on that point and has stated that "REO value" (aka Disposition Value) could be put on the 1004 if proper comments (and analysis) is used. Again, from my reads of his posts, so I could be mistaken).

 

[DMZwerg]

And, finally, you cannot fault a "cash" sale and then discount that unless you can prove that MV definition excludes cash buyers or that the buyer is stupid (ill informed.) In most cases, the cash buyer is very well informed or they would not have cash to begin with.

I have actually run into that with two comps in two different appraisals I completed within the last month.
Out of state buyer came in and paid cash, and the amount paid was clearly well above what was indicated by the other NON-distressed sales (aka, I confirmed all sales) and the RE Agents confirmed higher than market was paid by those two buyers. One was a relocation (buyer had a specific list of what he wanted and was willing to pay for it), the other was for a recreation property. The buyers of those two properties were NOT typically motivated ... not common to see around here but it happens from time to time with higher end homes.

Otherwise I agree with Terrel ... one should never adjust cash or "traditional" sales down to REO prices when the definition of value one is operating under is FIRREA or equivalent Definition of Market Value (which exclude distressed and non-arms length transaction sales).

 

[residentialguy]

Yes DMZ, except for your last post, you have correctly stated my position. In regards to the 1004, you need to state MV as defined on page 2. You can add a different value on another page, like on a REO addendum and include that in your report. But page 2 is reserved for the pre-printed definition of MV. Maybe I didn't make that very clear or misspoke (typed). Sometimes it's hard to state things clearly while bashing my head on the edge of my desk.

m2:

 

[JSmith43]

Jgrant, Read the Appraisal Institute's guide note 11 (one of the links posted by Zwerg).

After that, consider deleting most of your 10,000 posts (if it were possible) and call it a day

 

[DMZwerg]

Yes DMZ, except for your last post, you have correctly stated my position. In regards to the 1004, you need to state MV as defined on page 2. You can add a different value on another page, like on a REO addendum and include that in your report. But page 2 is reserved for the pre-printed definition of MV. Maybe I didn't make that very clear or misspoke (typed). Sometimes it's hard to state things clearly while bashing my head on the edge of my desk.

m2:

In one of your replies to JGrant you stated that the appraiser can (and should), when doing an appraisal of an REO, call and confirm which value the bank wanted ... implying the DoMV on the 1004 could be "adjusted". The implication was that it could be reported on just a plain 1004 and not 1004 w. REO Addendum. I know in the past we were usually on the same page as to 1004 has to be MV whereas REO Addendum implies Disposition Value. Goes to show I actually read your posts as well and may or may not always agree 100% with what you and Terrel state