REO sales and "Market Value"

[J Grant]

Compulsion to sell, distressed sales...whatever labels you want to assign, and whatever seller motivations are there, if it is enough of market activity to impact prices and presents competition to your subject, you need to disclose it, analyize it, and possibly include comps that represent this part of market activity.

How else can your client make lending or other decisions if you don't present an accurate picture of the market? An appraiser can adjust for any distressed sale or atypical seller motivation if they feel warranted.

The purpose of an appraisal is to derive credible assignment results.

What market forces led to the original owners of these properties defaulting? Do you think you can make these market forces go away by ignoring them? A market can comprise low sales, high sales, mid range sales. NOTHING in the market value defintions implies, or instructs appraisers to exclude lower priced sales. Undue stimulus can adjusted for at either extreme of the market.

Your subject quality and condition and market conditions will define the comps. Nobody is sayint to use a rundown poor conditon REO comp to a good condition house. You would not use a rundown poor condition non REO sale either. If someone can't figure out what comps to use in a volatile market, that is an appraiser problem, not a market problem. We have to appraise in our current markets even when conditions are not ideal.

 

[residentialguy]

Moh, I understand there are situations that can be more extreme. But saying that a guy has a bomb strapped to his kid and it will blow up unless he comes up with 100,000 in 1 week doesn't make the other less extreme. Sure, the bank has large assets...but take $300,000 mtg and start multiplying it by the number of houses they have and you have a problem. Tell me that this isn't a big problem: http://www.doctorhousingbubble.com/...dtier-los-angeles-orange-country-real-estate/

"Over 40 percent of the 2,000,000 foreclosures have not had a payment in two years. This isn’t even factoring in the 4 million delinquent loans that are working their way into the REO side of the equation.
The other part of the equation is that a REO is a open book to the buyer. People will take advantages of weakness and when the seller announces that he's got 1000's of houses sitting vacant that have to sell or he'll go under....buyer's, out of the goodness of their heart, will help them out...if they discount it a little bit."


Now I've seen REOs all over the board in pricing. I'm talking about huge variances from matched paired properties. Why? The writers of market value put much emphasis on conditions of that presumed sale, including motivation/stimulus. That's something we need to verify. You verify if concessions are there affecting the price. Wouldn't you verify motivations? If you had a sale that was 20% lower that didn't have any reason for that kind of discount. Wouldn't you call to find out? "oh, the seller's child had brain cancer and they needed to sell for the surgery". That would explain that 20% variance, wouldn't it. I try to call on every sale that I can to make sure nothing is there that is affecting the sale price. We need to. Here's the problem. You can't find out the specific motivation of a property owned by a bank. The agent doesn't know if they had a glut of REOs acquired and the books have to be wiped by 20% or they'll go bust. And plenty of banks have gone bust over the housing. REO agents are the most worthless agents on the planet. You can't even get good information about the condition of the property from them. You can't call the bank. I can't find out information on my own house much less trying to find out the inner works at play of a foreclosed house. So now you have a sale that you have no idea to what extent the forces are at play with their duress.

And again, REOs have issues...I went over a few. Buyer's don't like them as much. There is no good reason to use a REO when you have good traditional sales available. They are not as reliable and the market reacts differently towards them. Sometimes you have to use them. It's not a cookie cutter world out there.

Work with what you have. I just did 2 duplexes. Only 2 duplex sales in the whole city...a REO and a Short. Nice.

 

[DMZwerg]

Like I said before, during the many previous iterations we've had of this discussion over the years the progression of the discussion is always the same. After you guys fail to find any appraisal references that significantly support your perspective

So, the Appraisal Institute Guidenote 11 somehow FAILS to to state point blank "Distressed sales such as foreclosures and short sales"?

That is news to me.

you complain about those references being poorly worded or incorrect or in conflict with what the geniuses at NAR or Fannie say about appraising.

I did not state those references are bad, just that the line you supposedly quoted, WITHOUT reference, did not sound correct. So, where did you pull that line from and what was the context surrounding it?

BTW, three years ago was when we were discussing this same subject and you did NOT find or quote any definitions or references to conclusively support your point then either. woohoo Your support always seems to be "this is what I believe" so how can anyone challenge a matter of faith & belief rather than logic & reasoning if the other person refuses to listen?

FTR, each of your predecessors before you have eventually said the same thing about these references so we're really not breaking any new ground here, either.

Actually, Guidenote 11 did not exist 3 years ago.

Let's talk about what can happen in the real world with exposure times:

I've already commented on the fact that I have personally seen a number of datasets where the two subsets fully overlap and have no discernible difference in either exposure times or sales prices (after consideration for condition, of course). I've seen it often enough that I don't consider it a red herring.

So, you are saying that in some limited cases the marketing time between REOs and non-REOs in a particular market can appear to be the same. OK. That does not disprove REOs being a subgroup of distressed sales, just indicates that either ALL the current market may be distressed sales OR in that local period of time there is currently no discernible difference in exposure time. So what about the errant MAXIMUM CDOM, are they identical as well. Not average, not median, but MAX. Is there a discernible difference there? If there is then the two subsets don't actually fully overlap. Also check average as well as median, Q1 and Q3 (aka, the interquartile range) as although the sets may overlap the distributions may not be the same. Only tf they are all perfect matches would have me scratching my head a bit.

Either you keep missing it when I comment on that or you have dismissed the possibility altogether on the basis that you think I'm lying just to make a point. Either way, I can't help you there. It's become apparent to me that you intend to believe what you want to believe regardless of what the AI said about it or what TAF said about it.

Funny, I have been saying the same thing, aka that you are determined to believe whatever you wishh despite what the AI, VA, various state assessors, TAF and so forth state on the matter. Could be due to interpretation but to me it seems VERY clear that they all state there is a difference, but some moderate that by stating that it is not proper to unilaterally ban the use of REOs when no other sales data exists in the time frame. Doesn't say they ARE comps, but that the use should not be banned (big difference, and based on fine points of exact wording)

I particularly disagree with your blanket assumption that REOs are never marketed to owner-users

I never said that they "were never marketed to" but rather that "they are not 'the market' ". Word order and exact words used ... it makes a difference you know. I even qualified it to state that I can think of cases where they actually could be, but how rare and limited of an exception that was (aka, entire market is captive to one lender and "typical" is relocation ... namely VA and military housing).

Some owner-users are clearly not deterred by such concerns as evidenced by them paying just as much for the REO as their neighbor did for the outgunned traditional sale.

Again, never said that REOs could not even sell for MORE than what would appear to be a "traditional" sale. I have posted and reposted examples of freefall in a resort market, but in such case ALL sellers are highly motivated and generally disposition value and liquidation value are the rule rather than market value. Is that the case in the markets wherein you are contending exposure time is identical? In my local markets when that occurred REOs were actually pending for longer than the other distressed sales.

After all, isn't that exactly what happens when the traditional sale doesn't sell for any more than the REOs nearby?

What I have been saying right along is that the appraiser would need to ANALYZE the REO (and in this case also the "traditional" sale to verify it is not also some form of distressed sale), COMMENT on why the REO is being used, and ADJUST accordingly. How many times 3 years ago did I state "the adjustment COULD be zero"? I recall about 12 times back then and another dozen or so since.

Still, even if marketing time is the same and prices are identical (to the penny) that does not change the FACT that an REO is a DISTRESSED SALE. A traditional seller can chose to sell today, tomorrow, or not at all, but by law a bank can not choose that third option. Therein lies the difference even if no other difference is apparent and why the additional analysis, comment and adjustment is necessary when using REOs.

You can say you've never seen it but you can't say it doesn't exist.<snip> BTW, I have no problems taking at your word if you say you've never seen it - that's because I recognize that markets vary and they don't all march to the same beat.

And here, again, you try to put words in my mouth. I must be wrong because I have "never seen" what you have seen. You ASSUME there and it shows you didn't read my posts three years ago nor for the last 2 years. :laugh:

As for motivated sellers, if everyone in pa particular market segment who's selling is selling because they fear the consequences of not selling then why do we assume the banks are any more compelled than anyone else?

Selling for reason of fear is a "compulsion" and thus NOT Market Value (FIRREA) but rather disposition value. Exposure time is limited by fear that if not a quick sell then won't sell.

The following other types of sales are generally not market value:

Estate Sales
Relocation Sales (when party sells to a RELO company or is moving a significant distance)
Short sales
REOs
Panic sales
​

I probably missed a few, but that is a brief list. In most of those cases the seller is much more highly motivated than what is considered "typically motivated".

how else would a purely rational person act in a significantly declining market?

Your markets are still declining? How is any seller "typically motivated" in a declining market? In such the pressure is always there to sell quickly and avoid further potential loss of assets.

Do we really assume a bank is *more* distressed than the short seller who has recognized they'll *never* recover the PV of their lost equity and on that basis can't afford to continue to pay $1000/month more for their housing just so they can say they didn't walk away?

More? Less? Does it matter when BOTH are distressed sales and thus do not meet the Definition of Market Value as per the AI? (aka, where the FIRREA definition came from originally, and as published in the Dictionary of Real Estate Appraisal published by the AI)

 

[DMZwerg]

Compulsion to sell, distressed sales...whatever labels you want to assign, and whatever seller motivations are there, if it is enough of market activity to impact prices and presents competition to your subject, you need to disclose it, analyize it, and possibly include comps that represent this part of market activity.

I agree with all but the the implication after "possibly use" where you say "represent this part of market activity". The reason? If the distressed sales are not pertinent to the segment you are appraising (under DoMV used) then none ever have to be included but rather the other segments disclosed and commented on. Only the affect they have on that segment needs be discussed, and if you have sufficient other comps than the affect is likely already addressed in the sales prices of those.

If the appraiser feels he HAS to include said (due to lack of comps or such) then they have to analyze, comment and adjust said distressed sales.
How else can your client make lending or other decisions if you don't present an accurate picture of the market? An appraiser can adjust for any distressed sale or atypical seller motivation if they feel warranted.

 

[J Grant]

DMZ, where in the market value definition does it say that "Typically motivated", excludes fear, or complusion to sell? If a lot of sellers on the market are fearful prices will go lower, or feel compelled to sell because of job losses etc, those become typically motivated sellers.

You are applying a utopian standard of what "typically motivated means" (you and some others it seems). Instructors used to use a "typially motivated " seller example of someone who does not need to sell, who has ample time to sell, etc. such examples were appropriate a decade ago. (and even then they were an assumption, but they did match the MV definition then of highest probable price)

Now, the definition is "most probabale price". Typically motivated means what is typical for that market and set of market conditions and economic forces affecting predominant activity. Show me, please, the official statement, from a source, where typically motivated seller is defined as a seller who does not have to sell and has no distress motivation. Show me a source that states a typically motivated buyer can never be an investor, or that a MV sale is always a "traditional sale".

You guys are reading implied meanings and assumptions into the MV definition. Your "version " of MV definition might be more Utopian, or family friendly, but it is not the actual MV definition as written, and for lender apprisals, the MV definition is printed on the cert and can't be modified .

I don't see the term "traditional sale" in the MV defintion as the benchmark for MV, I don't see "typically motivated buyers and sellers" as excluding certain groups, such as lenders as sellers or investors as buyers, and I don't see distress or quick sale or flipping for profit excluded as motivations. There is always a range of buyers and sellers and motivations present. The extreme end of prices whether high or low, and random outlier activity is not typical, but actions of buyers and sellers that comprise signficant portions of sales and listings, become what is typical , for the duration of time while the correlating economic forces are affect that market.

 

[J Grant]

I agree with all but the the implication after "possibly use" where you say "represent this part of market activity". The reason? If the distressed sales are not pertinent to the segment you are appraising (under DoMV used) then none ever have to be included but rather the other segments disclosed and commented on. Only the affect they have on that segment needs be discussed, and if you have sufficient other comps than the affect is likely already addressed in the sales prices of those.

Agree. I never said or implied that an appraiser has to use REO sales. We use them when they present direct competition to our subject, when the likely typically motivated buyer for our subject would consider a similar age/condition /location home that is REO owned, as a substitute.

If the appraiser feels he HAS to include said (due to lack of comps or such) then they have to analyze, comment and adjust said distressed sales.

Agree..partially. An appraiser does not only include REO sales because there are no other comps. The decision to choose comps are what will yield most credible and supportable results ...if the market is showing an adjustment for what you call "distressed sales, then make one.

How else can your client make lending or other decisions if you don't present an accurate picture of the market? An appraiser can adjust for any distressed sale or atypical seller motivation if they feel warranted.

Agree, the lender /client has to make decisions based on real data and dislosure of market conditions...though we ultimately do filter out sales for our comp selection, the process of why and what standards have been used to do so has to be disclosed, and more than that, the process has to be credible for the market. If an appraiser filters out 70% of sales in a declining market because those sales sold "low", and the appraiser feels "low" sales don't represent MV, that is not a credible reason for the filter, because the reason is opposite to what the market is doing.

 

[residentialguy]

If an appraiser filters out 70% of sales in a declining market because those sales sold "low", and the appraiser feels "low" sales don't represent MV, that is not a credible reason for the filter, because the reason is opposite to what the market is doing.

No one here says to filter because of price. Stop misstating people's position. Seriously. It's not about price. If something was causing the REOs to sell higher, I wouldn't filter out the lower traditional type of sales and use the higher REOs. I would filter out the sales that have stray the farthest from the type of sale represented in the definition of Market value. If I were to use a REO, whether it's higher or lower, I would adjust it so it reflects the most probable price of the subject in a presumed sale with the conditions stated in the definition of MV.

 

[George Hatch]

So, the Appraisal Institute Guidenote 11 somehow FAILS to to state point blank "Distressed sales such as foreclosures and short sales"?

That is news to me.



I did not state those references are bad, just that the line you supposedly quoted, WITHOUT reference, did not sound correct. So, where did you pull that line from and what was the context surrounding it?

Sorry, my bad. I thought you had actually read the guide note and were familiar enough with the contents to recognize the paragraph in it that I quoted.

I won't make that mistake again. FTR, I took that paragraph out of the reference you seem to think contradicts it. The difference between our respective understandings of the guide note is that I actually read it for content.

Distressed Sales as Comparables

Distressed sales such as foreclosure sales and short sales are common in a declining market. Depending on the severity of the local market downturn, some, many, or even all sales that occur do so under distressed conditions.

Appraisers cannot categorically discount foreclosures and short sales as potential comps in the sales comparison approach. However, due to differences between their conditions of sale and the conditions outlined in the market value definition they might not be usable as comps. Foreclosures and short sales usually do not meet the conditions outlined in the definition of market value. A short sale or a sale of a property that occurred prior to a foreclosure might have involved atypical seller motivations (e.g., a highly motivated seller.) 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.

As is always the case in selecting sales to use as comparables, appraisers must investigate the circumstances of each transaction, including whether atypical motivations were involved, sales concessions were involved, the property was exposed on the market for a typical amount of time, the marketing program was typical, or the property condition was compromised. Adjustments might need to be made for these circumstances. When it is necessary to use a distressed sale as a comp, the appraiser must carefully analyze the current local market to determine if an adjustment for conditions of sale is needed. If no adjustment is warranted, the lack of adjustment should be explained.

Physical condition and conditions of sale are two distinctly different factors that must be considered separately. They may be related to some degree in a distressed market, but not necessarily. An appraiser must not assume, for example, that a property was in inferior condition simply because it was a foreclosure.

The level of investigation needed to meet the requirement for sufficient diligence is generally more than is needed in nondistressed market situations. Further, supporting such adjustments can be particularly challenging when there are few current transactions to analyze. Competency in performing such investigation and analysis are required.

Taken it context I think the part I quoted is even less supportive of what you seem to think is going on in the guide note than if you were to try to take it out of context.


In case your missing the AIs point they are saying - in a couple different ways - that appraisers shouldn't make the assumptions about all those transactions that you're saying we should be making.

As far as I can tell there's nothing in this guide note that supports your side of our disagreement. I'm afraid you're going to need to go back to the drawing board. And next time I highly recommend you read the reference in full before getting excited about what you think it means.

 

[George Hatch]

P.S. Read that section of the guide note again for content and pay attention to what they're actually saying, as opposed to what you think they should be saying. I really don't see how you can continue to stick your head in the sand after this - they're saying exactly what you don't want them to say.

 

[Terrel L. Shields]

I read it the way DMZ does... sorry 'bout that.
A foreclosed property wasn't considered a fit sale in 2002 and it isn't a fit sale today short there being absolutely no other sales.

On Kathleen Hayes, Bloomberg's "The Hayes Advantage" she interviewed Michael Feder of Radar Logic which tracks sales in major MSAs nationwide. He very cleared stated there as a "bifricated" market of REOs and homeowner-homeowner sales. He clearly stated that the REOs (on average I presume) sell for LESS and are commonly bought by INVESTORS.... You are dealing with investor value.

He went on to say that in inteviewing investors, REOs had come up in price and as a consequence investors were telling them that they couldn't meet their goal (6-8% return??) at higher prices and were dropping out.

Robert Shillers index made good evidence that housing is bottoming and prices may stablize and rebound. But Feder's interpretation is that there is a "latent" inventory of houses that are underwater but the owners continue to live there and to pay on their mortgages. By his estimate over 25% of all homes with loans (some 44 million in the US) are in this boat. Those 15 million or so homes MAY very well come on the market if prices inprove....bailing out as soon as they are no longer underwater. That, in turn, only drives the prices down again or at least stalls them.

When you apply this "Investor Value" to an owner occupied home, the homeowner is rightfully pizt. And if he puts it on the market and sells for MORE??? what say ye then? That the buyer is stupid? or you've misread the market. I am confident few of those who are strangling prices at the lowest common denominator will admit they are wrong. I track those sales in my community. I want to see how I am doing. I vet my own work against the actual sale of both REOs and owner occupied houses.

It is one reason I feel the way I do. We kept valuing houses for one builder for less than he was selling them for...why was he getting a premium? Turns out he probably wasn't getting a "premium". His competitors in the same and similar subdivisions were short cash and selling for less. Two went under and one of my comps was built by a builder who filed bankruptcy early in the bust but is still going. This builder had enough cash to hold out. He wasn't fighting a construction loan deadline that the other builders were.