Not to delve into the issue of how to determine the amount of adjustment, for me central to the whole issue is that some folks are MARKING DOWN the arm's length, homeowner to homeowner sales to meet the REO price rather than marking up the REO price to that of the uncompelled transaction.
T, I think the above is a rare downward adjustment that is seldom made. My area of FL was one of the hardest hit with REO activity, and I believe I made downward adjustments of non REO sales twice in 3 years. Both involved flip sale situations where the flips were above market and needed a downward adjustment. I think you are concerned about something that is an extremely small part of appraisal activity.
Once again. No one was using REO sales in 2005 and marking down sales then.
Why would they? First of all, there were hardly any REO sales in 2005. And if there were, non REO's were clearly selling for more and in short marketing times, why would anyone adjust them down? The market was rising then. Here in FL, where areas in decline are starting to recover, I would not mark a non REO sale down.
Why are they doing it now? Did the definition of MV change? If it did not then the sales need to be treated the same way.
No, the definition did not change, but markets change. The better appraisers, imo do treat sales the same way, while recognizing changing market conditions. The pertinent question for 2005 is not why appraisers were not using REO sales, it is why they did not adjust for over priced flip sales, builder sales, exotic financing.
In a market where REOs are so overwhelming that homeowner to homeowner sales cannot be differentiated, at the very worst, the HO 2 HO sale is still "Market Value" and you cannot make a case that a homeowner selling his home will have to take less than the REO sales.
In some areas, sadly, at the worst of the decline, that is what happened ( and still happens in troubled condo complexes or subdifvisions with issues ). The homewoners do end up competing and if they want to sell, sell at short sale prices, or default and their home becomes an REO. That may not be desireable market activity, but it is normal in some specific cases. Other cases, when enough investors buy, renovate, and resell for higher prices, values rise again and private owners can sell at higher prices, because now the former REO homes are now higher priced renovated listngs.
Investors buy value. If they have a choice between the occupied home and a vacant house REO...both at identical pricing and condition/age/size...they will take the occupied dwelling every time. They buy on one metric and one alone. What is the price I pay v. the rents I can get.
If an investor has to buy both homes for same price and everything about the homes are the same, some investors might buy the REO. They can close right away and get a tenant in right away. Dealing with a homeowner and their time line can be a PITA. An owner buyer might prefer an occupied house as it more homey feeling, but if they needed an immediate closing for some reaon, they might chose the vacant REO. Most home buyers for personal use would prefer owner occpied, but if an REO has superior features or view or location, they will pick that .