REO sales and "Market Value"

[moh malekpour]

Some REO sales are distressed sales and some are not. Distressed sales are not only REO sales but they are short sales, foreclosure sales, auction sales, divorced sales, illness sales and some other sales that their owners have an urgency to sell them as soon as possible and for that reason, they are usually willing to list them with discounted asking prices.

An REO property can become a distressed sale in the following situations:
1- The property is located in a deteriorated location where a vacant home can be easily vandalized.
2- The property condition is deteriorated. A bad condition begets more bad condition. a leaky roof or broken plumbing can destroy a vacan home overnight.
3- Market value in the neighborhood is declining. The owner of the REO, the bank, doesn't have the luxury of rgular homeowner to wait for a long time or take the property off the market if it is not sold at the market value. It takes the bank 1-2 years to capture the property from the notice of default, default, foreclosure and finally to REO that legally can list and sell it.
The bank does not collect loan payments for 2 years and the property has not been taken care for 2 year. When the bank has possessed that property legally, waiting too long for sell it at a desirabl market value is not wise because more wait, more loss for the bank. The interested buyers in these properties are usually investors who are looking for a deall and expect to get lower than market value. Banks and agents know it and list the property accordingly.
An REO property can be a non distressed sale and be sold at the market value or very close to market value at the following situations:
1- The property is located in a safe and secure location where no body touches the property no matter how long it remains vacant.
2- The property is in a good condition and it is atracted to typical homebuyers.
3- The property values are increasing or at least are not declining
4- There are limited REO or short sales listings in the market. Less than 20% to 30%

If REO sales in a market represent more than 75% of all sales in that market, then they are going to be dominant sales in that market and an appraiser in that market may have to use some of them as comps. If 50% of those 75% REO sales in the market compete with the 25% of regular sales in conditions and locations, then the appraiser should choose them as comparable sales and there are ways to identify them.
Usually agents don't mention adverse conditions of REO properties and never put any interior photos of damaged area of REO listing in MLS but are very eager to explain about the good conditions and put interior phots of every thing in MLS.

I have done few market analysis to compar the median sale price of REO sales VS regular sales. These were done with very large data usually within the entire city or large zipe code that provided at least 250-300 sales and for a long period of times usually for two years priod divide in 24 quarters. 250-300 sales for each quarter has more chance for accurancy than small and limted number of sale. I found out that in all 24 quartes the median sale price of REO sales were lower than median sale price of regular sales but the range were different for each quarter ranging from 9%-17%. I can use that ratio for adjusting REO sales VS regular sales.

 

[residentialguy]

Some REO sales are distressed sales and some are not.

No, REOs are, by definition distressed sales and labeled as such by the AI. The bank needs to sell them. They're not going to just grow old in them. They are sitting there vacant... not only are have they stopped making money, but they are sucking money...vacant and paying taxes, utilities, upkeep, not to mention the unpaid mortgage that is tied to them.

To make matters worse, they can't sell them for a dime's worth of profit...which is another problem. It's not like the homeowner selling for as high as he can get. Once they meet their mortgage and finance balance, their interest is gone to sell higher. Any amount over that would have to be sent to the evicted homeowner. Banks can't make a penny on the property.

 

[J Grant]

That was a great post. Moh! And it is the market and market reaction that makes a distressed sale...whether that be an REO , short sale, divorce sale, estate sale, etc. A combination of things, location, property condition , price, particular seller hardship, etc. The banks know which REO properties are dogs and which are desireable and price them accordingly, and the good ones often get several offers and sell to the highest bidder. The AI opinion recomends considering using REO as comps when it leads to credible asignment results, as does the appraisal foundation advisory and fannie advisory opinion .

Res Guy, you are correct in that a bank can't sell an REO as a profit, but most people in homes that become REO were underwater on very high $ amount loans (the reason they defaulted in the first place). You know, all those super high prices that appraisers had no problem meeting a few years ago? Those are the homes in REO status. The bank is motivated to get as high a price as possible to pay off the loan. The loan is often worth more than the house will bring even at the highest sale price. Banks are also sensitive to neighborhoods, and try not to dump REO properties, except when they have to. Usually on MLS there is a wait period to allow private buyers to buy, after that they accept investor offers.

Statistics over a large area or zip code or with large groups of properties will usually show the median price of an REO to be lower. So does that impact your subject and subject market, and comps? Each market, house type, and condition are different, and sometimes REO's sell below market, at market, or are bid up above. We have to develop report results using conditions that affect our subject, though a large area or property type statistical can show a general trend, the results may not apply to a particular property .

When was the last time you heard a buyer say, "I'm going to go out and buy a median trend data point?"

 

[residentialguy]

That was a great post. Moh! And it is the market and market reaction that makes a distressed sale

He's mixing the term distressed sale with distressed condition.

Banks are also sensitive to neighborhoods, and try not to dump REO properties, except when they have to.

Exactly...hence the duress.

The loan is often worth more than the house will bring even at the highest sale price.

and often it's not.

When was the last time you heard a buyer say, "I'm going to go out and buy a median trend data point?"

It's not about median, it's about what they want to put up with and risk.

 

[Terrel L. Shields]

No, REOs are, by definition distressed sales

dead on...

they can't sell them for a dime's worth of profit

But they do have creative ways to add in the interest, the legal costs, title costs, etc.

An REO may be a proxy for market data in the absence of other non-REO data. That is, the REO has ovewhelmed the open market, but it never makes an REO "market" without changing the definition Market value. The implication of MV from the get go was not Bank Value...it was a value ascribed to actual owners of property. Lenders were never meant as owners except to occupy that property needed for a bank. Houses thus owned are compromised from ever meeting the test of "market value".

I know that is not a uniformly held belief of appraisers...but then again many appraisers also spend their summers in Roswell....

 

[DMZwerg]

I think it's downright stoopid to assume the "traditional" sales in such situations don't involve any seller distress. Just because it's not disclosed doesn't mean it's not there.

Are you familiar with set theory?

Distressed sales and OREOs are NOT fully contained subsets of each other.

OREOs may be Distressed Sales by definition but the reverse is not true, aka a sale can be a distressed sale without a bank even being involved. Could be a relocation, seller could have lost their job, or maybe their spouse was murdered in that house and they can not stand to set foot back in it. Since ANY examples of non-OREO sales being distressed sales then distressed sales are NOT a fully contained subset of OREOs.

So, distressed sales can involve non-OREOs. Therefore, as you mentioned, some distressed sales may not show overtly that they are so. Thus it is important to verify sales (with agents, etc.) to determine if a sale is distressed and thus whether it is a better indication of disposition value or even liquidation value. If the appraiser has determined a sale is distressed then he can not, in good conscience, use such a sale as a comp in an appraisal where the Def of Value is (fair) Market Value (such as the FIRREA definition) without analysis, comment and appropriate adjustment.

In other words, the whole market could be distressed, as in each and every property. I have seen that happen in some resort areas during the crash/readjustment". Just because ever sale is distressed does not "make" them the market in regards to the FIRREA Definition of Market Value but rather makes them about the only sales data one has for some limited period of time and thus makes the data the appraiser's opinion of value be less solid. Cost approach, income approach, ratios carried forward from older data and so forth may be the only real ways to opine as to Market Value in such complex markets.




BTW, I haven't seen you decry the AI document on this (aka, that foreclosures, etc., are all distressed sales). I mentioned both Fannie and the AI.

 

[J Grant]

We can't susbcribe attributes to MV that aren't there, such as that it favors private owners or maintaining high prices. Show me the part in it that says that. It doesn't define who the buyers or sellers are. It does not say an owner can't be a bank, a property flipper, or a builder. It does not say a buyer can't be an investor or property flipper. People who presume that MV means a family buyer or private owner buyer or seller are reading something into the definition that is not there.

The MV definition does not "imply" that banks can't be property owners, it does not imply anything...appraisers are the ones who want to read implications into the definition that suit their personal viewpoint.

Part of the MV definition is what a property should bring in an open and competitive market. Are REO and short sales part of the open and competitive market to your subject? If they are, then that answers that part of the definition as to what sales and listings need to be considered.

 

[George Hatch]

The question has never been about whether distressed sales exist (they obviously do) or whether the banks are ever compelled to sell an REO (they are). It's whether such activity can become so prevalent that they represent the most probable price and drive the pricing for the entire market. It's about whether all the other sellers in a market segment can be equally stressed (and in some cases they are). Simple as that.

The lenders now seem to favor short sales over foreclosure even though the losses are still huge. Lots of those shorts aren't disclosed as such, hence the overlap between so many of those "undisclosed motivation" sellers and those with the obvious disclosures.


Whining about the semantics is just a tangent. You guys are reduced to doing that because the market activity in some areas of the nation don't fit your narrative. Maybe that's not happening in the markets where the average home price is $60k but when you get up to the $500k markets there's a lot more money on the line and less incentive to play it safe. It just is.

I notice that you guys always limit your arguments to houses, too, as if they operate on a completely different set of economic fundamentals. That's just too convenient for you, isn't it? Not even Terrell could argue that REOs or other distressed sales don't run the table in many of those non-residential market segments.

If the ONLY inventory on the market that is selling are distressed sales and those sellers are the typical sellers and those buyers are the typical buyers then what's the most probable price going to be based on? It's obvious, and I'm just not inclined to travel to BFE in search of the supposedly unmotivated seller to use that sale as a comparable.

 

[George Hatch]

BTW, I think I'd like Moh's analysis in this region better if he was qualifying the datasets he was comparing by condition. I mean, if one dataset has a larger number of properties with condition issues and the other has a larger number of newly remodeled flips then condition is definitely going to be of effect on the medians.

That should be pretty obvious.

I find myself making many more and much larger adjustments for physical condition among those sales requiring it than for conditions of sale. Again, those adjustments are based on those individual properties on an as necessary basis, not some predetermined "adjustment list".

 

[Joyce Potts]

BTW, I think I'd like Moh's analysis in this region better if he was qualifying the datasets he was comparing by condition. I mean, if one dataset has a larger number of properties with condition issues and the other has a larger number of newly remodeled flips then condition is definitely going to be of effect on the medians.

That should be pretty obvious.

I find myself making many more and much larger adjustments for physical condition among those sales requiring it than for conditions of sale. Again, those adjustments are based on those individual properties on an as necessary basis, not my "adjustment list".

No argument from me.