REO sales and "Market Value"

[Terrel L. Shields]

Since the average REO takes over a year to go from delinquent to sold and the average REO was/is on the market for no less than what is owed on it...? How many of you are adjusting an REO for having a marketing time that exceeds one year?

I would aver the average REO around here is on the market for 6 months, many over a year, and have sit vacant for up to 2 years. I know the house of another appraiser that was in default for over 2 years and they finally moved late last year. Her house sits vacant and does not have a Realtor sign on it yet.They did not file bankruptcy nor contest the foreclosure.

I just saw the papers on a foreclosure we did. The sheriff's in Oklahoma send out 3 "knowledgeable" people to appraise such property. One was a nice log home - lakeview - 2,997 SF and 7 years old. The owner had bought it from a flipper who paid $135,000 for it from HUD in 2007. They sold it for $265,000 within 6 mo. or so. The buyer then went under last year. He had also bought 40 acres about 2006 for $116,000. The sheriffs appraisers valued the properties at $160,000 and $9000....insensible conclusions...$225 an acre for the land tract?...court values are just that. I was in court and testified on the value of a mineral right. I had an adjacent property that has sold the mineral rights for $750 an acre within 4 months of the court. The judge decreed the mineral value to be zero.

Again, I don't beleive in contextual definitions.:Eyecrazy:...what the definition of is is...If every market event becomes "tha' market" then there is no market value. We jack it up when times are good, we supress it when times are bad. If a terrorist act takes place, the value is instantly zero....for a day, 2...maybe a month. So 6 months later we are still using zero as the value...

 

[PropertyEconomics]

One of the problems with making upward adjustments on REO sales (bank owned sales) when there are significant buyers of those sales that are owner-occupants, and the market shows REOs sales compete effectively for owner-occupant buyer pool, those sales are accepted as market value sales.

A case on point is a recent bankruptcy court decision, which stated:




UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF CALIFORNIA
Case No. 09-13595-JM13

[url]http://www.casb.uscourts.gov/pdf/opinions/09_13595.pdf[/URL]

The court can disagree, naturally it is their stage, but I do not think how any given judge applies their knowledge it not prima facia evidence they are correct or that is how something should be completed.

They make their own rules and once they have drawn their conclusions, short of appeal, their word stands. Thankfully only decisions of appellate or higher set precedent.

 

[Randolph Kinney]

For a Ch 13 proceeding there is a favorable SC case (Rash) which benefitted the creditor & required what they consider replacement cost. The court did not contemplate that to mean replacement cost (cost to build new), but merely the retail cost to replace an item of personal property or real estate.

RK is taking these cases out of context because it fits his preferred narrative and might impress someone like you. Bankruptcy court has a whole different set of agendas & nomenclature. Apples and Figs.

I suggest you read up on the bankruptcy code and process.

The case that was cited is known as Chapter 13 lien stripping.

In a process called lien stripping, a secured debt like a second mortgage or car loan may be reduced to the value of the collateral backing the loan and divided into portions of secured and unsecured debt.

Under sections 506(a) and 506(d) of the U.S. Bankruptcy Code, through Chapter 13 lien stripping, a loan is secured up to the amount of the fair market value of the collateral, and the remaining balance of the loan is classified as unsecured debt.

In the cited Chapter 13 case, both debtor and creditor real estate appraisers submitted their appraisals of the subject home.

So you are wrong about "merely the retail cost to replace an item of personal property or real estate."

P.S.

Importantly, different rules apply for loans secured by primary residences. A second mortgage on a home can be stripped only if the current fair market value of the home does not exceed the value of the first mortgage.

For example, assume the current value of a primary residence is $400,000, the first mortgage was for $500,000 and a second mortgage was taken for $150,000. Because there is no equity remaining in the home after accounting for the first mortgage, the second mortgage can be converted to an unsecured loan and stripped.

However, if the current value of the primary residence is $600,000, the second mortgage cannot be stripped. This is because, after $500,000 is secured for the first mortgage, $100,000 in equity is available to secure the second mortgage. If the second loan was not secured by a primary residence, $100,000 would be secured debt and the remaining $50,000 would be converted to unsecured debt through lien stripping.

But, the unique rules for loans on primary residences say that, as long as there is equity remaining for the second mortgage on a primary residence, the second mortgage cannot be divided into secured and unsecured debt and stripped. In the second example, then, the entire $150,000 second mortgage would remain secured debt because it was secured by a primary residence.

 

[JSmith43]

http://www.abiworld.org/committees/newsletters/consumer/vol1num1/february-1.html

The reported bankruptcy court decisions have followed Donley. For example, in In re Tripplett, the court analyzed the holding in Rash, and pointed out the distinctions between a chapter 13 cramdown (the action being taken in Rash) and a chapter 7 redemption. In a cramdown under §1325(a)(5)(B), a chapter 13 debtor “keeps the collateral over the creditor’s objection and provides the creditor, over the life of the plan, with the equivalent of the present value of the collateral.” 256 B.R. at 597. This subjects the creditor to deprivation of the collateral and its value, exposing the creditor to two risks if the debtor subsequently defaults. The courts have acknowledged these risks in chapter 13, and provide for the creditor to receive replacement cost when assessing the valuation of the collateral. In a chapter 7 redemption, however, the creditor receives an immediate value for the collateral, and does not suffer any damage from a potential depreciation of the collateral or a default by debtor. The courts looking at this issue have reasoned that the Supreme Court in Rash merely intended to benefit a creditor with added protection in cramdown under chapter 13, but did not intend for the same standard to apply in a chapter 7 redemption, where such added protection is not needed.

All of the reported cases have followed Donley. The proposed bankruptcy reform legislation would amend §722 to explicitly provide for “retail replacement value.” Nonetheless, under the current law, liquidation value, and not replacement value, is the standard for determining value in a chapter 7 redemption.

 

[AnonApprsr]

I just had to explain this to a broker earlier. REO status by itself means nothing. The condition/upkeep and marketing of the property do.

 

[JSmith43]

I just had to explain this to a broker earlier. REO status by itself means nothing. The condition/upkeep and marketing of the property do.

So, if a buyer wanted to pay $1,000 more for the Owner occupied home next to the model match REO you'd blame that on improper marketing?

Oh, & I am skeptical that the broker asked for your advice but I can believe that you would give it freely:icon_lol:

 

[J Grant]

Terrel, the time that it takes an REO to go from delinquent to sold is not the time it is "on the market". The REO days on market is counted from when the REO is listed and avail to buyers to see and tour and make offers on, same as any other listing. The time from delinquent to when house is put on the market is not counted as marketing time.

 

[Terrel L. Shields]

Terrel, the time that it takes an REO to go from delinquent to sold is not the time it is "on the market".

OK...but a high percent are offered as short sales long before they go into foreclosure...isn't that relevant?

 

[J Grant]

I don't believe a high % were offered as short sales...but, if the home were offered as a short sale prior, and did not sell, and then goes into foreclosure and is put up for sale a year later, they are two sep listings in two different time frames.

 

[Randolph Kinney]

JSmith43 no doubt has done many Chapter 13 lien stripping (second mortgage) appraisals involving a primary single family home where the owner-occupant intends to continue occupying the home.

So JSmith43, what definition of value did you use and how is it defined? Who is your client and intended users?