REO sales and "Market Value"

[DMZwerg]

You only wish it was just the one letter and just the AI. TAF has made similar comments in *official correspondence* to a couple of the wayward state legislatures, too. For example, this one from last year:

My bolds (obviously).

Too bad you don't comprehend what the statements are and are not saying.

The first paragraph sets forth that it could be misleading not to include REOs if other than condition of sale they are truly comparable to the subject, and then goes on to say that when a "glut" exists it would be misleading not to use them as the basis (some or all) of a value conclusion. Have you read anything in what Terrel or I stated indicating that they couldn't be the basis??? If you had sufficient non-distressed sales we wouldn't be having this discussion, so therefore we can assume you have few to no non-distressed sales, so you start there (your basis), analyze, comment and adjust appropriately. Maybe you go to other competing markets where they have non-distressed sales to help you determine appropriate adjustments, or maybe you go back in time to when non-distressed sales coexisted with distressed sales. Distressed sales are your basis but since you are opining MARKET value rather than DISPOSITION value (or even liquidation value) you adjust accordingly. I see nothing in that letter that states otherwise (and it appears to be an inter agency memo, so if you know government you know what weight it really carries despite the names).

Well, OK, what I just stated should be obvious until this final bolded text:
" If the pool of competitive properties includes enough distress properties, those properties will, in effect, establish a value ceiling. "
That sounds really damning to my argument until you read it carefully ... "establish a value ceiling" could be construed to mean "they are the value ceiling" or "they are the basis for a value ceiling" at least by my read.

But then there are a few lines you chose to ignore, the ones that point blank state that this is a political statement intended as a counter to a, at the time, proposed BAN on ANY USE of REOs (something I have actively opposed):

It is our opinion that the proposed legislation could conflict with USPAP. If an appraiser were to perform as required by the proposed legislation, there would likely be many cases where the appraiser’s results were not credible.

Lastly, we believe that the proposed legislation clearly would not establish a jurisdictional exception under USPAP for any appraisals performed for federally related financial transactions.

So, it is a political piece rather than a statement of policy.
So, do you have more of me to have a good chuckle at? :laugh:

 

[DMZwerg]

Nobody has said that distressed sales (of any type) are always directly indicative of the MV.

If you look at the term "always" to mean "since the boom" or "in declining markets" then actually JGrant and at least 2 other posters have stated so in the last 3 years. One went so far as to say the DoMV must be rewritten as it doesn't allow for declining markets. Given "always" to mean "in declining markets" JGrant has (IIRC) stated this within this thread IIRC.

So, with this "nobody" you talk of that would make at least 4 I have heard make such statements :laugh:

 

[JSmith43]

As a practical matter telling our donkeys to - no matter what - go wherever they need to go to find the traditional sale to support the presumably higher value poses a much greater threat to safety/soundness at the lender level. A deal not made may represent a lost opportunity but a deal that shouldn't have been made can and has led to horrendous actual losses of principal. Losses for which the effects are not limited to some bankster's bottom line. Our history has already demonstrated that fact in vivid detail.

The biggest donkey we have to ride is the FIRREA MV definition, seemingly set in stone for all eternity for lending transactions.

BTW, you introduced an ASC letter to head off possible legislation with unintended consequences for appraising is something to illustrate a point here? What about intended use (political persuasion)? Is that the same as the intended use of posting it in this thread? :new_smile-l:

 

[JSmith43]

Zwerg, how did you come up with that so soon?

Pardon me for accidentally repeating one of your points.:icon_lol:

 

[Ms. Janet]

LOL, JSmith...

In 1983 the 8th Edition of The Appraisal of Real Estate (AIREA) defined market value as

"The most probable price in cash, terms equivalent to cash, or in other precisely revealed terms, for which the appraised property will sell in a competitive market under all conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.
Fundamental assumptions and conditions presumed in this definition are
1)buyer and seller are motivated by self-interest
2) buyer and seller are well informed and are acting prudently
3) the property is exposed for a reasonable time on the open market
4) payment is made in cash, its equivalent, or in specified financing terms
5) specified financing, if any, may be the financing actually in place or in terms generally available for the property in its locale on the effective appraisal date
6) the effect if any on the amount of market value of atypical financing, services or fees shall be clearly and precisely revealed in the appraisal report


Unfortunately, nobody really understood this definition....:Eyecrazy:

 

[JSmith43]

Unfortunately, nobody really understood this definition....

The current FIRREA mandated version is only incrementally better, IMO. Add to that the Fannie Mae stuff below the "*" and it pushes appraisers apart more than pulls them together, giving appraisers the wild card phrase of the century (using their best judgement).

 

[George Hatch]

It doesn't take much to come up with nothing.


In #451 he says it was worded poorly (I already predicted that) and in #453 you say they're wrong (I predicted that, too). Like I said before, these are the time-honored responses whenever the people before you who ran these arguments have run into the various inconvenient truths in these bubble-related threads.

DMZs posts don't acknowledge the fact that both entities stated their official positions. Even if they are wrong on an intellectual basis their opinions can still be considered indicative of the current party line. The whole point of standards is to exploit the utility in the market of uniformity and conformity. The point is that the market participants take their cues on appraisal-related issues from the appraisers, not the other way around.

As for my "nobody" comment I stand corrected. I haven't been following the gunbattles between JGrant and others because, well, I normally don't follow them unless she's talking to me. I don't know who else in the thread you're talking about saying they're always the market and I'm not sure she ever said that but I'll have to take you at your word since I don't know one way or the other. So on that basis I stand corrected. Everyone makes mistakes.

I assume at some point the definition of value used for these assignments probably will change. That wouldn't bother me one little bit because, frankly, I don't care what the question is; Highest, lowest, most probable, "New Paradigm", whatever. As long as I do what I say and say what I do I'm good; I'm only responsible for what I do, not how they make their decisions.

 

[George Hatch]

P.S. when I use the term "always" I mean "always" and with no exceptions. No exceptions for the SFR market vs all other property types, no exception for the current half of the current economic cycle, no exception for my neighborhood vs your neighborhood.

If I had meant something other than "always" I would like to think I would have tried to convey that.

The use of that term is not an accident. I've made this point on several occasions in the past and to date none of you have taken up the gauntlet. If it's a fundamental principle that these sales are *never* examples of MV then there can basically be no exceptions. If there are examples, and especially if there are more than a few of them then those examples undermine the "fundamental" foundation upon which your primary argument is based.

If it's a fundamental element then it has to apply all across the board, for all property types and in all markets. Its an external benchmark that cannot vary based on externalities. If it does vary based on externalities then we're looking at an element that is subject to influence from those externalities, which means the answer basically has to be "it depends".

From my perspective some of you guys have painted yourselves into this corner. I didn't do that and I'm not picking on you. I'm just pointing out that you're standing in the corner with a massive logic fail on your hands.

 

[Ms. Janet]

George is right, market value definitions continue to change. In fact, we wrote them ourselves to meet our scope of work. There are many definitions of market value. But, for now I am going to continue with my history lesson :laugh:

The AIREA tried to explain the MV definition in the 8th edition by saying:

"Market Value represents an expected price that should result under specific market conditions"

But, It seems that the 8th edition MV definition was so cumbersome and confusing, a revised MV definition was issued by AIREA in the Rev.Ed. of the Real Estate Appraisal Terminology.

"The most probable price in terms of money which a property should bring in 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."

 

[Randolph Kinney]

293 Because comparable sales are used to develop opinions of market value, the comparable sales
294 must be compliant with the defined value or be adjusted to those requirements. There are many
295 parts to the popular definitions of market value including the condition that “(1) buyer and seller
296 are typically motivated;” Some appraisers consider that this condition in the defined value
297 precludes using comparable sales that were bank owned properties, short sales, or even corporate
298 relocations. While this may be possible in some markets, this cannot be done in many other
299 markets. There are markets where nearly all sales are bank-owned, short sales or other
300 financially distressed sellers. To say these are excluded fails in two ways:
301 (1) It precludes doing any market value appraisal in these markets with nearly all bank
302 owned properties sales unless significant adjustments are made to bring the sales up to a
303 perceived level where the “normal market” would be. The ambiguity of the term “normal
304 market” leaves too much room for debate; and
305 (2) It ignores the public and institutional perception of the words “Market Value.” These
306 terms are seldom argued by people outside the appraisal profession. They are assumed to
307 mean that the value opinion is the amount an appraiser thinks a property would have sold
308 for on the effective date of appraisal.

ResGuy needs help understanding the underpinnings and the basis of the definition of MV and how to apply same. Lets use his defined neighborhood to select comparable sales for market value determination (opinion).