REO sales and "Market Value"

[KenAZ]

I have always had a problem with doing an REO appraisal, and providing a value as if the home was a standard sale. In a bi-forcated market, these values are completely different. In your case it is a $20,000 difference. When the bank sells this home, it will be an REO sale, and this value would most likely be obtained through REO sales.

In the OP scenerio, the home is only worth $170,000, since it is an REO. As soon as the sale closes, the unit value jumps to $190,000.

If we are accruately doing an appraisal on the present value, we should appraise at $170,000. If we want to provide a future value after closing, then we would be able to comfortably appraise it at $190,000.

 

[Terrel L. Shields]

In a bi-forcated market, these values are completely different.

Heavy sigh... Yes, dark houses sell for less...typically. But there is only one definition of "market value". In reality the house will (likely) sell at an investor slash stigmatized price. And, yes, the ownership will undoubtably remove that stigma almost instantly. So....the question degenerated into valuing a non-REO house with REO sales, but you are right, the OP is appraising an REO property...

My spin is the same. I believe that a market value relates to the property (REO or not) be meeting the test of Market Value which in itself is an assumption.

That definition applies to the comps AND the subject. So regardless that my REO is ATYPICAL in that it is owned by people who do not want to own it...I am appraising as if it were a typical property where

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus.

REO is not necessarily a "competitive" market. The HO who has a low amount of equity, most of which was lost in the past 5 yr...cannot compete. They do not wish to sell for a loss. In fact, cannot "bring money to the table". A bank can. A bank will take the hit...25% of mortgaged homes are underwater but NOT FOR SALE. Why? They cannot and will not take that loss.
The bank does not have to have a "fair" sale. It can offer special financing (Homepath program, for instance), negotiation mass sales to investors, etc. Whether it elects that option is another matter.

What is undue stimulus? Well, again, banks can and do distort the market. Fannie mae limits who can bid on property...such as banning Realtors and their families.

If I am appraising the REO, then I need to not consider the ownership. I may need to consider the impact upon value of all those "special" deals however, when analyzing the sale of an REO property. Were certain buyers excluded? Did Fannie fix and stage the house under a homepath program? Did they provide closing costs (SP > LP)? A regulated bank? Is the bank being monitored by the FDIC? Do they have a letter setting bank goals for reducing bank owned property or raising capital? What is the true condition of the house....All these play in the issue.

An "As is" value is just that. And the $20,000 differential between the REO and owner sales in the OP are possibly only partly explained by the mere ownership. The condition and the risk one takes in lighting up a dark house could be a factor. But you need to vet every property the same way or change your definition of MV...imho.

 

[J Grant]

I have always had a problem with doing an REO appraisal, and providing a value as if the home was a standard sale. In a bi-forcated market, these values are completely different. In your case it is a $20,000 difference. When the bank sells this home, it will be an REO sale, and this value would most likely be obtained through REO sales.

In the OP scenerio, the home is only worth $170,000, since it is an REO. As soon as the sale closes, the unit value jumps to $190,000.

If we are accruately doing an appraisal on the present value, we should appraise at $170,000. If we want to provide a future value after closing, then we would be able to comfortably appraise it at $190,000.

This is a pretty big assumption...that it is only worth 170k because it is REO, or that if it wasn't REO, it would be worth 190k. (for a MV appraisal, the appraiser has to treat the subject as if it the ownership is not an issue, because the MV assumed terms are the same no matter who actually owns he subject, for MV purpose appraisal, the subject assumes the MV sale terms. ) Treat both REO and non REO subjects the same, that is the proper way to do it. (since I might also use REO comps if needed even with a non REO owned subject, I don't have to change how I appraise depending on who owns my subject)

Read what the OP stated on original post:

The situation (all 1 bedroom units in similar condition): I was asked to appraise a purchase of an REO condo unit within a newer building. There were 2 REO sales (<30DOM) and 2 Private sales within the past 12 months. There are NO active REO listings (beside the subject) and 2 privately owned listings. The REO sales both sold for around $170k while the private sales are $190k-$200k. The active listings are both $190k+.

If the active listings are 190k, will they sell for 190k? What is the list to sell ratio, and how long have they been on the market ? If they sell at a reduced price lower than 190k, then the subject may not be worth 190k...one has to ask if at least one of the owner sales were over priced, because it sold for 200k, and now there are two listings at 190k.

Note that the REO's sold for under 30 DOM. That shows they are desireable...well, who wouldn't want to buy the identical one bedroom unit at a better price? What was the marketing times on the higher priced one bedroom owner sales? And what market exposure will you use in report? (on the 1004 page, on the REO addendum, if there is a limited time market value asked for, esp if it is 30 days, that would be a second value opinion likely near the 170k sold price in 30 days of the REO's).

But, the 1073 condo form is MV in typical market exposure. Which might give one room to adjust the REO's up for market exposure. What are similar units selling for in copmeting buildings, and are they REO or regular sales?

Finally, why were there 2 out of 4 sales REO's in subject building? A market fluke, the end of REO inventory? Or is it a problem building with marketabillity issues? How many units out of total rented?

So many questions need to be asked. One has to look at each report individually, whether REO's are present or not. Spend more time on the immediate subject and the REO's , ask why they occurred, consider them as well as the non REO sales...that will reveal MV much more credibly, then relying on assumptions based on data that may or may not be applicable to subject.

 

[Mr Rex]

I have always had a problem with doing an REO appraisal, and providing a value as if the home was a standard sale. In a bi-forcated market, these values are completely different. In your case it is a $20,000 difference. When the bank sells this home, it will be an REO sale, and this value would most likely be obtained through REO sales.

In the OP scenerio, the home is only worth $170,000, since it is an REO. As soon as the sale closes, the unit value jumps to $190,000.

If we are accruately doing an appraisal on the present value, we should appraise at $170,000. If we want to provide a future value after closing, then we would be able to comfortably appraise it at $190,000.

You need to review the definition of market value. Your verbiage indicates a lack of full understanding of the definition and the requirements therein. Just because a property sells at $100 as REO doesn't make $100 the market value. Just like a lone seller wiling to pay $200 doesn't make the market value $200. Market value has a defintion, and in the current market, REOs are very seldom equal to market value.

 

[Joyce Potts]

I have always had a problem with doing an REO appraisal, and providing a value as if the home was a standard sale. In a bi-forcated market, these values are completely different. In your case it is a $20,000 difference. When the bank sells this home, it will be an REO sale, and this value would most likely be obtained through REO sales.

In the OP scenerio, the home is only worth $170,000, since it is an REO. As soon as the sale closes, the unit value jumps to $190,000.

If we are accruately doing an appraisal on the present value, we should appraise at $170,000. If we want to provide a future value after closing, then we would be able to comfortably appraise it at $190,000.

Ever think about the definition of Market Value between a Fannie REO appraisal and a loan origination appraisal? Oh wait, they're usually on same form and have the same definition.

Let's take your thought process one step further. Isn't the purpose of a loan original appraisal essentially to provide the lender with a basis of the market value as of an effective date based on the arm's-length defintiion of market value? Yet, if they find themselves foreclosing on the very same property and must sell that DISTRESSED property to recoup what they're owed, doesn't that make our subject property DISTRESSED?

Who's on first?

 

[J Grant]

Joyce, no the bank taking ownership does not autmotically make our subject property distressed. It is neutral, a home that is now lender owned.

The subject might be be a distressed sale, IF after it it closes, it sold below MV, or in a very short marketing time .

But till that happens, the subject is a house owned by a lender. If the lender engages an appraiser to opine MV, then the fact that it is lender owned is not a factor, because if is a MV purpose appraisal, subject is appraised according to the set of presumed sale terms in the MV definition.

On the REO addendum an opinion of MV is asked for in lender imposed reduced marketing time, that value might be lower and be what some would call a "distressed sale" value (though it may not, if lender imposed marketing time is 60 days and typical marketing time is 60 days, there would be no diff in value)

 

[PropertyEconomics]

I have always had a problem with doing an REO appraisal, and providing a value as if the home was a standard sale. In a bi-forcated market, these values are completely different. In your case it is a $20,000 difference. When the bank sells this home, it will be an REO sale, and this value would most likely be obtained through REO sales.

In the OP scenerio, the home is only worth $170,000, since it is an REO. As soon as the sale closes, the unit value jumps to $190,000.

If we are accruately doing an appraisal on the present value, we should appraise at $170,000. If we want to provide a future value after closing, then we would be able to comfortably appraise it at $190,000.

This argument would suggest that a single day can result in a change in VALUE of $20,000 ... which simply is beyond reason. While the PRICE may be $170,000 as an REO .. you have adequately demonstrated here the VALUE is $190,000 ..... poor managment, all other things being equal, should not result in a VALUE punishment but may well result in a PRICE loss.

PRICE and VALUE, as used in the above example are not the same but the definition of Market Value is that which is being sought ....

 

[J Grant]

Both 170k and 190k are prices. Where is the value? (PE above isolated value form MV).

Who got more value...the buyer who paid 170k, or the buyer who paid 190k, for identical units? Which buyer has more instant equity after purchase, assuming MV is closer to 190k? Which buyer might have lost value? The OP states that there are now 2 listings of owner sales, both priced around 190k...so if they sell (after a list to sell discount ) at 185k, the buyer who paid 190k just lost value, and the buyer at 170k gained value.

That is why MV is defined as the most probable price, not the highest probable price.

 

[JSmith43]

The OP states that there are now 2 listings of owner sales, both priced around 190k...so if they sell (after a list to sell discount ) at 185k, the buyer who paid 190k just lost value, and the buyer at 170k gained value.

That is why MV is defined as the most probable price, not the highest probable price.

Jgrant, your posts are so often full of errors, conveniently in favor of your point of the moment.

The OP said the competing listings were 190,000+, not "priced around 190,000."

Additionally, why do you assume a LP/SP adjustment downward? Do you know the direction his market is moving?

Sloppy thinking at best.

And, for a punch line, you say "That is why MV is defined as the most probable price, not the highest probable price." which is a total misrepresentation of what posters have been saying.

That kind of behavior is really quite pathetic. The upside is that your desperation to cling to an unsupported narrative becomes ever more obvious, even to the casual reader.

I wish I could have made a more positive comment, but some of your posts deserve "warning signs" if not a yellow tape perimeter & chalk outline around where truth died.

 

[KenAZ]

This argument would suggest that a single day can result in a change in VALUE of $20,000 ... which simply is beyond reason. While the PRICE may be $170,000 as an REO .. you have adequately demonstrated here the VALUE is $190,000 ..... poor managment, all other things being equal, should not result in a VALUE punishment but may well result in a PRICE loss.

PRICE and VALUE, as used in the above example are not the same but the definition of Market Value is that which is being sought ....

I am thinking outside the box here. My overall opinion is that appraisers have been regulated out of being as useful as they could be.

When we do an REO appraisal, are we ever asked to provide the REO value? Is there even a definition of an REO value? Typically we will be asked to provide a Quick Sale value, which is equally useless. Instead we supply a unrealistic MV that may or may not represent the actual potential sales price of an REO home.

The super secret real purpose of the appraisal (if it is a sale or refi) is to determine the value of the home in case the home is foreclosed. If we appraise a home for $200,000, will the bank get that value for it if they aquire it? How about we provide them a much more realistic REO value (Like I said, it does not exist in our industry at this time)

We are never asked to provide that value, and no one cares, until the next wave of foreclosures hit, and the lenders all in a sudden are shocked that they can't get the appraisal values for these homes.

I know, I know. If we provided the actual REO values of homes, then the ratios would be ruined and fewer people would qualify for the loan. We would never come in at sales price (So What?). Who cares what the sales price is, as long the loan is BELOW the REO value. They can pay $300,000 for all anyone cares, but all the bank will finance is the $180,000 REO value.