REO sales and "Market Value"

[JSmith43]

I'm trying out for the Chris Christi "blunt talk" award. Anyone else want to play with the facts?:icon_lol:

Next point:

Hi Ken, there is wheat among the chaff in this thread. Some of the posts will answer your question.

PE will give you a fine answer if he has the time.

So, I'll pass since the question was directed at him.

 

[J Grant]

KenAZ, It would be interesting if banks asked for an "REO value", but as we know, they don't (or if they do, I've never been assigned one).

Problem is, how would they project what an "REO value" would if the borrower defaults in say five or ten years? And the REO value would be different if the subject were in good condition, or poor condition, and would also depend on if it was one of the few REO's listed, or there were many around...so a generic REO value might be hard to predict.

If a MV is 100k, it should not be hard for banks to discount that amount down to safety margin of 10% less, for example, if that is where they feel comfortable lending. Or, they can ask for more cash down...,
PE made an excellent post. I was addressing some of his points.

JSmith, instead of critiquing my post, why not make your ownr contribution.? I assumed a downward list to sell ratio, because that is what is most frequently seen in markets, even in good markets..though there are trends where it is close to 100% and times when properties sell above list . I asked the OP what the marketing times on these listings are. If they are priced 190k+, and have been on the market 60 days, for example (we dont' know the marketing times), it might be fair to say they will sell for less than list price.

If you think those listings will sell for more than list price, why not make a post that supports that theory?

MV def is most probable price...and nobody knows, before they start an assignment, where that will be. It could be the high end, the low end, or a mid range of value. When we start an assignment, we are not supposed to have a pre conceived direction of the MV. Appraisers starting assignments that an REO as subject will automatically appraise "lower" , or should appraise at some kind of "REO value" are starting with an assumption of where the value should be for that assignment.

 

[DMZwerg]

DMZ, where in the market value definition does it say that "Typically motivated", excludes fear, or complusion to sell?

"undue stimulus"

Also, reference definition of Disposition Value ("seller is under compulsion to sell") and definition of Liquidation Value ("seller is under extreme compulsion to sell"). Therefore if the definition of Disposition Value states that "under compulsion to sell" does not equate to "typically motivated" (note that buyer is still "typically motivated" under that definition) then it could be presumed that ANY similar definition that uses the words "typically motivated" excludes "under compulsion".

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.

Nope.
Job loss is "undue stimulus"
relocation can be "undue stimulus"
panic sell is "undue stimulus"

Don't believe me? Ask Mr. Hatch and Mr. Kinney what they think on those points, also on Estate sales (which I say may or may not be under undue stimulus, but have to be research/verified).

You are applying a utopian standard of what "typically motivated means" (you and some others it seems).

Um, yes. That is what a definition is all about.
The definition *IS* the utopian standard and the appraiser adjusts potential comps accordingly to the definition. If I were appraising under Liquidation Value and only had potential comps that were NOT under extremely limited marketing and NOT under extreme compulsion to sell I would have to seek out some basis for adjustments (analyze) and then adjust what comps I have accordingly, providing comment on why I had to use those.

Why is that so hard to grasp?

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)

And they were correct for doing so.

Now, the definition is "most probabale price".

The definition was literally rewritten??? Who did it, and under what authority?
Do you not comprehend what you are saying here? (aka, that YOU decided to rewrite the definition on a whim?)

Typically motivated means what is typical for that market and set of market conditions and economic forces affecting predominant activity.

Again, it is *YOU* who is rewriting the definition to fit what is easier for you. What you have stated is not that definition as written. "Typical" is not the same word or word usage as "typically", part of speech (N, V, adv., adj.) means a lot as to what various words mean, especially in combination.

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.

Why bother? I have hundreds of times and you never listened. The whole problem is that you "don't see". Look below for my response to George Hatch.

 

[DMZwerg]

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.

You may want to reread again, paying particular attention to what I high-lighed in red.

"Distressed sales such as foreclosure sales" - indicates the AI considers ALL foreclosures and short sales to be distressed sales. So condition of sale is considered different by the AI and a type of sale adjustment is warranted.

I agree that they state that they should not be categorically discounted (a point I seem to disagree with Terrel on), but they go on to say that they only "might be useable as comps" and go on to say that "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."

Hmm, so let us see what I have been saying ... "when using an REO sale the appraiser must analyze, comment and adjust; adjustment may be zero". Why does that sound so familiar, like I just read the exact same thin in the prior paragraph?

So, the AI says:

1. REOs and short sales are distressed sales.
2. Distressed sales might not even be useable as comps.
3. Distressed sales usually don't meet the conditions in the definition of market value.
4. Might be atypical seller motivations (e.g. highly motivated seller)
5. That foreclosures only MIGHT involve typical seller motivations.
6. Physical condition is yet another possible difference that may need to be separately addressed.
7. Physical condition and condition of sale are two different things.
8. In the case of distressed sale the appraiser must either: a) adjust; or b) comment as to why no adjustment was necessary.

Wow, seems to read to me like exactly what I have been saying all along.
Any problem with those 8 points Mr.Hatch?

 

[J Grant]

DMZ, we can argue the exact meanings and applications of the individual words endlessly, the fact is, undue stimulus is never precisley defined nor limited, and people keep throwing around LV when clearly, REO sales sold under typical market exposure and conditions still are considered as data in MV reports, the Nevada legislator and other states who tried to ban their use in reports could not get them taken out of MV consideration.

We each have our views, however the advisory letter put out by the appraisal foundation and guidance from the AI and FHA and Fannie support the postition that REO and short sales need to be concisered or used when doing so will lead to credible assignment results (despite the AI referring to them as distressed sales)

Any adjustments to them are up to the individual appraiser.

 

[DMZwerg]

Terr,

You're welcome to read it however you want but it still says what it says and more specifically it doesn't say what you guys are saying you're reading into it.

What part of

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.

are you guys not understanding? They aren't saying it's always like that but they are *clearly* and *repeatedly* acknowledging that it can sometimes play out that way.

Read it as a negative and see if it is still true (aka, a standard logic test).

"A sale of a bank-owned property might *NOT* have involved typical motivations"

Hmm, odd how that still holds true. All in the definition of the word "might" as it implies a rare chance ((usually" implies most common chance, and must implies always).

My read of that statement is that the barest whisper of a chance exists that, in the limited time frame or context, it is possible that the bank might have motivations equivalent to typical motivations. Since later in context it provides a couple of "ifs" which cover some of what all has to happen for those motivations to be even be considered comparable to "typical" is actually detailed (aka, a typical marketing program and no stigma).

Continuing with the negative logic analysis:

"A sale of a bank-owned property might *NOT* have involved typical motivations, so the fact that it was a foreclosed property would <--> render it ineligible as a comp. "
​

So, using reverse logic if typical motivations would not render it ineligible, then non-typical motivations would (or "likely would"; it could be argued that the <not> in the second half could be replaced by <likely> given the use of "might")
So that logic passes the logic test as well.

Reading comprehension is much more than just scanning things and picking out a few phrases, it involves beating it up left, right, and analyzing what is stated, how, in context, and what affect applying logic tests to the statements may have. I feel I have done so with this document and it appears to back up what I have been saying right along. It is somewhat less supportive of Terrel's position, but as for ResGuy and I it is what we have been trying to state right along (and have been ignored if not outright decried for stating).

 

[DMZwerg]

When an REO deserves to be adjusted up, such as when a market is in recovery, or the REO inventory is waning, (or a condition adjustment, ) then I agree, an unadjusted REO can lead to over valuation.

But in a declining market, or one with ongoing heavy REO inventory, or a market with intrinsic adverse problems that likely will have long term REO and abandoned properties, then adjusting an REO up can lead to over valuation.

Do you understand what Guidenote 11 point blank stated???

You must ALWAYS adjust REOs or comment as to why you did not!

In other words you have to: analyze, comment and adjust (adjustment can be zero)

So why are you even bothering to argue?

 

[residentialguy]

Did you not notice that 2731 Knox Ave N has 397 days on market?

Did you not notice that 2951 Colfax Ave N has 190 days on market?

That leaves 3 investor flip sales with 39 cumulative days on market or less.

How does that work with - They need to move it quickly.

LOL...the listing wasn't being truthful. 2731 Knox was a REO. It had special financing (20k grant) that affected the price. Sorry Randolph, I know that's going to leave toe jam in your mouth. :laugh:

As far as flips priced aggressively, that was a general statement for professional investors. You'll always have a few newbies that that don't know the rules and bought a house after watching "flip that house"

But for the investor, if they aren't living in it, time is money. It's typically priced aggressively.

I'm not going to keep digging on every sale...every time I do, you just go further in the tank. Besides, you haven't paid me for my prior research...so you're fired. We'll just end this with, yes, I do appraise in areas where virtually where virtually 100% of the surrounding properties are Distressed or Flips and I have proved it...certainly more than any of the other posters claiming the same, who you don't seem to want to Vet. Sounds personal.

 

[DMZwerg]

When they bought low, the sale was REO, atypical motivation, bifurcated, investment value, yada yada...but when the same investor takes the property and flips it and sells high, suddenly everything about the sale is typical? What happened to the adjustment to the typical traditional sale you were eager to make when it was an REO?

When it sold to the "flipper" (or rehabber, or landlord) it was investment value.
The true "flipper" is trying to make money on the difference between the price they paid when they bought and the price they get when they sell, and they home this will be above the combined costs of rehab (as needed) and holding costs. Thing is, unlike a bank, they are under no compulsion to sell within the next 3 years as they can legally own the land. Now, they may be more highly motivated (looking to make a quick buck and turn it over) so an appraiser should still analyze, comment and adjust when he notices "proof" of it being an "investor flip" (generally try to confirm with RE agents), but if investor flips are occurring that can be looked at as "proof" of REO stigma and a bifurcated market. The investor flip may or may not sell for "market", but at least the motivations of the buyer could be more typical (aka, the buyer is not counting on stigma or a highly motivated bank seller).

When a rehabber sells it is like the investor flipper.

So, of the investor types I mentioned that leaves the "landlord". Sometimes "landlords" are investor or rehabber flippers looking to minimize holding costs (and possibly make a profit) until the market improves, and in that case would normally be a "typically motivated seller" when it comes time to sell. Otherwise a true "landlord" is looking to make (or maximize) money on rent, and possibly minimize holding costs, yet enjoy depreciation, then, when years have gone by and the property is sufficiently depreciated, they typically try to EXCHANGE for additional properties to minimize capital gains yet have entirely new properties to depreciate, thus often making them anything but typically motivated sellers.

That, I think, is some of the things other posters are trying to convey when they state "investment value" rather than "market value".

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?

Exactly.
Saavy lenders have tracked distressed property values and thus should have a formula for the probable distressed value, risk, and so forth. REO addendum would typically only be necessary to help them make such determinations, but the form is wonky on the DoMV (should probably define Disposition Value and ask for that, then define Liquidation Value and ask for that rather than just asking for limited marketing times and such).

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

Actually, yes it does, in a way. When the lender goes to sell it is a distressed property, by definition.

 

[J Grant]

Originally Posted by J Grant
Now, the definition is "most probabale price".

The definition was literally rewritten??? Who did it, and under what authority?
Do you not comprehend what you are saying here? (aka, that YOU decided to rewrite the definition on a whim?)

Yes, he definition of MV for appraisals was rewritten in the last decade...it used to be the "most highes probable price a seller would sell for and a buyer would pay",. It has been hcanged to, "the most probable price a property should bring"...a major shift in emphasis.

The theory used to be, that the typical seller would and could wait till they got a reasonably high price, and was not under any compulsion to sell. The def was changed to encompass the real world range of sellers (and buyers) out there, many of whom are under some level of distress, compulsion, etc...and that includes private sellers and buyers, who have a wide range of motivations. When more lenders entered as sellers, nobody changed the MV definition, and thus the issue for appraisers.

The level at which distress or compulsion becomes undue and atypical is seen in impact on prices and or marketing times, and the appraiser can explain and adjust for that.