REO sales and "Market Value"

[residentialguy]

I didn't realize that you loss money when you own a home and housing price go down. I always thought you lost it when you sold. And of course it is relative...if you sell for less, you could probably buy for less than you could when the market was up.

 

[Mr Rex]

But you can't buy as much as you could before because you have lost equity, whether you sell or in theory. The loss is real whether you sell or not. No different than it is with stocks or gambling in Vegas for that matter. Your net worth is your net worth, on paper.

 

[JSmith43]

George, if a relatively new subdivision has zero non distressed transactions at a certain point in time, it has zero non distressed transactions.

The transactions it does have can still be useful benchmarks for bracketing the low end of the market and may or may not be the best stand in for a sale more closely meeting the hypothetical MV conditions. Maybe there is a competitive development where a few recent sales, praise the Lord, were not negotiated short sales or REO and didn't otherwise involve specific elements of distress or forced job relocation without relocation benefits, etc. If the 2 markets were linked in lock step 5 years ago, would not the comparison of those sales to physically matched sales in the reasonable substitute development be a useful analysis to check for a variance (or not)?

What appraiser that values their time and sanity wouldn't hope for evidence that the most easily attainable sales comparisons were also the best evidence of MV as defined? Sometimes convenience & ethics get confusing.
And, I understand appraisers who throw up their hands because their clients don't seem to give a rats arse about the nuances of valuation.

Res, Terell & Zwerg are trying to keep the debate intellectually honest, IMO. I have no idea why they try so hard. Perhaps they were formerly special education instructors. Speaking for myself, I'll just acquire and refine what I believe to be the best ideas & cut back on the volunteer work, for now:icon_lol:

 

[J Grant]

If a buyer overpays/and or their house loses value, they have lost their equity. If they have neg equity, they have to sell as a short sale or default, and may have no $ left to buy another home, even though home prices are lower. Plus their credit is damaged if they ss or default, thus it is hard to get a loan even if they have $ for a downpayment_,

That is the irony of RE...in a buyer s market when prices are low, the very people who need to buy, often can not buy, thus we saw a lot of the low priced inventory being bought by investors and bought for cash.

In a seller's market, the people who can only marginally afford it, are paying hihg because they are using OPM...other people's money....so it doesn't matter to them if they pay 450k instead of 400k that they would have paid 6 months ago...they are paying lthe same montly, plus the lower interest rate qualified them for the higher amount loan.

Many of the high bid contracts I see on purchase appraisals now are kinda scary...a lot of 500k purchases, for example, with a mere 10% down.

 

[George Hatch]

George, if a relatively new subdivision has zero non distressed transactions at a certain point in time, it has zero non distressed transactions.

The transactions it does have can still be useful benchmarks for bracketing the low end of the market and may or may not be the best stand in for a sale more closely meeting the hypothetical MV conditions. Maybe there is a competitive development where a few recent sales, praise the Lord, were not negotiated short sales or REO and didn't otherwise involve specific elements of distress or forced job relocation without relocation benefits, etc. If the 2 markets were linked in lock step 5 years ago, would not the comparison of those sales to physically matched sales in the reasonable substitute development be a useful analysis to check for a variance (or not)?

What appraiser that values their time and sanity wouldn't hope for evidence that the most easily attainable sales comparisons were also the best evidence of MV as defined? Sometimes convenience & ethics get confusing.
And, I understand appraisers who throw up their hands because their clients don't seem to give a rats arse about the nuances of valuation.

Res, Terell & Zwerg are trying to keep the debate intellectually honest, IMO. I have no idea why they try so hard. Perhaps they were formerly special education instructors. Speaking for myself, I'll just acquire and refine what I believe to be the best ideas & cut back on the volunteer work, for now:icon_lol:

I think about the best scenario you can hope for with a 2004-2008 subdivision is to find a seller who bought a short or REO (someone else's massive loss) after 2009 and who isn't looking at a substantial loss if they sell now. Short of that you're going to be stuck looking for homes built and purchased prior to 2003 *and which were never maxed out with a refi during the boom*. Then it's only a matter of location and age adjustments.

Of course, ascribing such heroic lengths to the buyers currently participating in the market might be a stretch. But what the heck; who here in this discussion cares one whit about what the buyers have actually been doing in this buyer's market?

 

[DMZwerg]

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.

Problem with the quote in blue ... How is "Our company has a property we can not legally own for more than three years from acquisition, less now, and thus we HAVE to sell it" ever considered a typically motivated seller?

Like you stated though, even the AI tries to avoid "always" and "never" even though they do state "distressed sales like foreclosures and short sales" which is a point blank statement that all foreclosures and all short sales are distressed sales.

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.

So, let me get this straight, if I can find even 2 non-distressed sales that sold in under 10 days then ALL sales suddenly become non-distressed sales as long as they are marketed for 10+ days and have no other features of distress?? Even if average and median marketing times are longer than 10 days??? And even if maximum CDOM is over 3 years????

How brain-blown would that be? Yet it fits the criteria of your statement exactly as it only takes two to create a plural.
You may understand what you meant and you may be taking due diligence in analyzing marketing time, but that does not mean that people who read what you wrote and may even agree with you are actually doing so ... actually, if they agree with what you wrote there the probability is higher that they don't follow due diligence in analyzing market time as you do.

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.

There, again, you miss word it a bit ... such probably *SHOULDN'T* be considered, because a) they are not marketed to the same market and b) again are not arms length transactions nor typically motivated, and could only be valid if thoroughly analyzed, commented on and appropriately adjusted, just like REOs and other distressed sales.

 

[DMZwerg]

There is nothing in the AI guide that contradicts my posts...

Yes it does ... all over the place.

the AI also defended using REO sales as comps (when warranted)

When and where warranted AND APPROPRIATE, and even then with ANALYSIS, COMMENT AND APPROPRIATE ADJUSTMENT.
The document did NOT call for the willy-nilly use of REOs.

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.

Which is not the same as stating they are comparable.
I can use sales of properties that are NOT comparable, and use them in a way such that they aid in the credibility of assignment results, but that does NOT *make* them comparables and I have to properly analyze them, comment on their inclusion and usage, and I have to use appropriate adjustments.

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.

No, any sale may or may not be a distressed sale, but some sale types are distressed sales by definition. Distressed sales are NOT comparable (and thus not comps) when dealing with the FIRREA DoMV but can be used to help support opinion of value. Substitutes when other data is lacking.

 

[DMZwerg]

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

Buyer may be typically motivated; seller is under compulsion to sell (possibly extreme compulsion).

Bank has to sell within 3 years and has holding costs on property without receiving use nor income off said thus can not choose to sell or not to sell as a typically motivated seller can so choose.

Extreme compulsion could exist as of time of sale if bank examiner had come through and ordered the bank to get there liquid and illiquid assets bank into proper order within 30days or risk fines and possible forced dissolution of the bank.

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.

Like most of the rest this may or may not actually be the case even in an otherwise apparently arms-length transaction. Just because the buyer and seller do not know each other does not mean the transaction is automatically "arms length".

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

Bank may or may not be well-advised (aka, broker could be looking to bilk off fast transactions and flips); may not be well informed (broker may have submitted bias BPO or have withheld information, and the bank may have much more limited ability to check on local conditions or know the local area that an owner-occupier should; the interests of the bank are rarely if ever the same as an owner-occupier and may well be acting on corporate policy rather than its own best interests.

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

For 3a this could exceed 6 years, for 3b this is under 3 years and typically much shorter. Realize that until foreclosure it is technically NOT the bank's property thus an REO property could be on the market continually for 3+ years yet only been listed by the bank as owner for 5 days. So, at which point does exposure time really start?

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

Where this might not be the same is with HomePath and other special financing, see below.

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

HomePath and such are textbook examples of special or creative financing.

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

Really? Odd. I found many more than just that one.

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.

Actually, in my local market, a reasonable marketing time is up to 180-1800+ days, with 150-300+ being most typical. Funny how most REOs are not on the market that long and tend to max closer to 170 days. arms-length (as you put it) seem to average 80-270+ days.

I don't know of any market locally where only 1-30 days is reasonable except for liquidation value.

 

[Joyce Potts]

I didn't realize that you loss money when you own a home and housing price go down. I always thought you lost it when you sold. And of course it is relative...if you sell for less, you could probably buy for less than you could when the market was up.

So when you apply for a loan and your property(s) are worth 40% less, on paper of course, how does that impact your financial statement? How about that Fannie Mae stock that you bought at $25.00 a share and is now worth only a shifting of the decimal point.

On paper of course. It's all on paper. It's just paper. It's not real money. It's not REAL VALUE.

 

[JSmith43]

So when you apply for a loan and your property(s) are worth 40% less, on paper of course, how does that impact your financial statement? How about that Fannie Mae stock that you bought at $25.00 a share and is now worth only a shifting of the decimal point.

On paper of course. It's all on paper. It's just paper. It's not real money. It's not REAL VALUE.

Joyce, thanks for the refresher on the difference between cash based and accrual accounting. Was that the point?