REO sales and "Market Value"

[residentialguy]

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

LOL...I thought I stated that once you find out that they want a distressed type value, you tell the client either:
1. they need a different form
2. you can state another value on an addendum
3. to except the market value as defined and realize that distress value may be lower than market value stated.

I may have put in a confusing post where I was telling posters (that insist on stating a distressed or hybrid MV/distressed sale medina value for market value) to at least make it clear to the reader as to what they did and what type of conditions exist in their opinion of mv.

 

[George Hatch]

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

Operative quote:

) A sale of a bank-owned property might have involved
typical motivations, so the fact that it was a foreclosed property
would not render it ineligible as a comp. However, if the
foreclosed property was sold without a typical marketing program, or if it had become stigmatized as a foreclosure, it might need
to be adjusted if used as a comp. Further, some foreclosed properties are in inferior condition, so adjustments for physical
condition may be needed.

We haven't been saying "always" and the AI isn't saying "never". I don't see a conflict between the two.

Sold by a local broker through the MLS and exposure times consistent with the other sales would both indicate to typical marketing programs and no arbitrarily shortened marketing times from the seller's perspective. Physical condition speaks for itself. Stigma is a conclusion to be developed, not necessarily an assumption to be made. Not all market segments are created equal.

Seller programs that limit the pool of buyers to owner-users or to housing advocate programs or properties sold in bulk to investors would obviously be examples of atypical marketing programs and wouldn't be considered anyway.

 

[J Grant]

There is nothing in the AI guide that contradicts my posts...the AI also defended using REO sales as comps (when warranted), to defeat the Neveda Legislator's movement to ban REO sales from MV reports...the Appraisal foundation also put out an advisory opinion stating appraisers need to consider using REO and short sales if it would mean more credible assignment results.

Any sale type can be a distress sale...the question is what impact distress sales, including REO sales when their sale prices meet the level of distress sale , has on value , and whether any of these sales should be used as comps for a subject.

 

[moh malekpour]

Lets compare 5 pillars of definition of market value one by one with regard to Arms length sale and REO sale and see what is the difference between these two sales. If you disagree with my comparison, please explain.

(a) Represents arms length sale
(b) Represents REO sale

1(a)-Arms Length sale: Buyer and seller are typically motivated

1(b)- REO sale: Buyer and seller are typically motivated. [This is the same as 1(a)] agree or disagree? If disagree, pleas explain

2(a)-Arms Lengths sale: both parties are well informed or well advised, and each acting in what he or she considers its or her own best interest.

2(b)- Arms Lengths sale: both parties are well informed or well advised, and each acting in what he or she considers its or her own best interest. [This is the same as 2 (a)] agree or disagree? If disagree, pleas explain


3(a)-Arms Length sale: A reasonable time is allowed for exposure in the open market

3(b)-REO sale: the client restricted time is allowed for exposure in the open market [this is different from 3 (a)] agree or disagree? If disagree, pleas explain


4(a)-Arms Length sale: payment is made in terms of cash in U.S. dollars or in terms financial arrangements thereto.

4(b)- payment is made in terms of cash in U.S. dollars or in terms financial arrangements thereto. [This is the same as 4 (a) agree or disagree? If disagree, pleas explain


5(a)-Arms Length sale: The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concession granted by anyone associated with the sale

5(b) - Arms Length sale: The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concession granted by anyone associated with the sale [this is the same as 5 (b)] agree or disagree? If disagree, pleas explain


As you can the only difference between these two sales as far as market definition is concerned is between 3 (a) and 3 (b).

If you agree with above comparison, then lets go back to comparison of 3 (a) and 3(b)
3(a)-Arms Length sale: A reasonable time that is allowed for exposure in this open market is 1-30 days.

3(b)-REO sale: the client restricted time that is allowed for exposure in this open market is 1-30 days is the [same as 3 (a)] agree or disagree? If disagree, pleas explain


As you can see the exposure time between 3 (a) and 3(b) has been equated in this particular market and based on definition of market value, this REO sale complies with market value definition agree or disagree? If disagree, pleas explain

In this case, the REO sale is not distressed sale or forced sale or liquated sale because its exposure time is reasonable exposure time that is shown in market value definition. agree or disagree? If disagree, pleas explain

 

[JSmith43]

George, you can always delete as many of your prior posts as you deem necessary & as the forum rules allow. Oops! Too late.

A bit of musing now, I think I said as much a few months ago but it might fit into this "discussion":

Regarding exposure time, something interesting can happen with the data when professional flippers compete with regular homeowners for REO inventory.

The professional flippers often have very good valuation skills (Rex did a flip), but even that may not assure that a flip purchaser is successful. The type of homes they bid most successfully on when competing with owners that intend to live in the home while taking their time fixing it up (for example), are usually homes requiring the most daunting repairs.

The market times are often quite short since the professional flippers have their ducks in a row well beyond what is usually the greater pool of buyers, that tend to occupy the home or hold it as that starter rental that so many do until they find out how ugly that business is for part time dabblers. So, a 2 DOM, 7 days to close doesn't necessarily mean it was a steal.

It is either in the profitable zone or it isn't (a narrow range) for this set of professionals. I'd call that price level based upon flipper purchases disposition value rather than liquidation value when there are plenty of sharks circling the chum, with their act together. They can do their due diligence in near real time, because this is what they do for a profession.

The greater pool of buyers are generally amateurs. They want the same deals, but by the time they get their due diligence done, it was time wasted.
Basically, they are less efficient & will get worn out easier, and not get as good of a deal on average, simply because they are amateurs.

Liquidation value might entail a necessity to sell & close within less than a week.

For more complex real estate there is generally enough of a spread to justify the distinction between liquidation value & disposition value.

Bottlenecks in due diligence that come to mind are valuation related, title verification related and financing related. Not so much financing related for professional flippers. They either have the cash on hand or arrangements with deep pocket sources.

 

[J Grant]

Moh, your post indicates the similarities between MV sales and REO sales, with sometimes price as the difference, sometimes exposure time, and sometimes no measureble difference.

I doubt any of the posters who debate on the other side will answer you point by point though!

 

[JSmith43]

Seller programs that limit the pool of buyers to owner-users or to housing advocate programs or properties sold in bulk to investors would obviously be examples of atypical marketing programs and wouldn't be considered anyway.

Every Real Estate Sign or listing that says Fannie Mae First Look logo on it gives the presumed owner occupants first crack at offers for the 1st 15 days on the listings. Investors supposedly cannot look at the homes until then. I bet that works as well as gun control laws

HUD sales get a 10 day priority when first listed for sale.

The absurdity of it all. We have to talk about markets and market value where the tentacles of government interference are everywhere you turn. If it isn't the Fed screwing with interest rates it's the Pres offering a "cash for clunkers?" mortgage bail out program.

Sure, FIRREA MV is whatever the big gorillas say it is. Most of us are just trying to wait until they say something official, put it in writing & do the best we can to abide by it.

 

[residentialguy]

I doubt any of the posters who debate on the other side will answer you point by point though!

LOL...maybe because of time restraints. It will require a response that will rival the volume of War & Peace.

 

[George Hatch]

As for your musings on the professional flippers, sure, they know what they're doing. They also tend to stick to the properties that have physical conditions levels, too. I'm pretty sure that you recognize that only some of the buyers for the REOs are flippers and that in some market segments a lot of the REOs that don't have physical conditions issues are not purchased by the flippers.

After all, we're not necessarily talking about exposure times of less than a week here, are we? I don't know about you but I think a 21 day or 30 day exposure time give those buyers who want to plenty of time to make their choices. That being self evident in the number of those buyers who are actually doing it.

I'm equally sure that you recognize that the average happy homeowner types didn't ever have that much trouble making their decisions, tendering their offers or scoring their sales back when the market was hot and homes were selling with less than a week of exposure. If you're trying to say the current buyers are dumber and less prepared than the geniuses that bought homes they couldn't afford back in the day, well, let's just say I'd like to see some indication of that before I buy into that notion.


Be that as it may, I'll pose the same question to you that the others have been studiously avoiding. In one of our local residential subdivisions that were originally built out between 2004 and 2008 and where none of the homes have physical conditions issues and 100% of the property owners are losing hundreds of thousands of dollars relative to their original purchases, how many of *those* sales will not involve seller distress of one form or another? What sales will any buyers of those properties be using to base their offers upon?

Do you think they will be travelling to Minnesota to find a $65,000 traditional sale and make location adjustments? Or will they perhaps be using those sales that are most similar, proximate and recent to their intended target?

 

[George Hatch]

Sure, FIRREA MV is whatever the big gorillas say it is. Most of us are just trying to wait until they say something official, put it in writing & do the best we can to abide by it.

What difference will that make? Everything that's been put down in writing on the appraisal side so far has already been saying "not-never" (as well as "not-always"), and it's still not good enough for the "never" advocates.