REO sales and "Market Value"

[DMZwerg]

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.

You missed "4- Due to limited market time."

The only case an OREO can be anything other than a distressed sale is when they own the property with the intended use and continued use of their employees (such as a residential unit as the residence of the branch manager or the like, or the bank or office building out of which the bank is running the business) and thus have no restriction as to holding said property.

The bank does not collect loan payments for 2 years <snip> 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.

Actually, they could be down to only 1 year to sell at that point, possibly less if they have insufficient cash reserves and too much such held property, as determined by The Regulators.

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.

Which is the point the property may cross from Disposition Value to Liquidation Value (aka, extreme compulsion to sell and very limited marketing / time frame). Default is Disposition with OREOs, but a foreclosure auction is technically Liquidation (but is not typically applicable to appraiser valuations).

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%

Incorrect on 1, 2, 3 and 4.
Point 2 would seem obvious and correct but for the fact that the marketing time is shortened *AND* the bank HAS TO SELL based on federal law. Note, not just one but both as the bank can not leave it on the market indefinitely.

The only case I know of where what in all other respects should be considered an OREO is with HomePath properties, which seemed to sell at market in some neighborhoods. This confused me at first until I read about the new directives that Fannie and Freddie will, in the future, NOT be allowed to hold properties indefinitely. Then things clicked in "the little grey cells" ... I had noticed a difference in some local markets in regards to HomePath but given the definition of OREOs it did not quite make sense but now that I know Fannie had, at the time, no restriction on marketing time, the reason they were selling closer to market became clear.

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.

Um, no.

I have appraised in a market where over 95% of the sales were OREOs, short sales and other distressed sales and I could still detect a significant and easily measurable difference in the market. Sure that means that the appraiser may have to include some, and they may have some influence on the non-OREO sales, but that does not mean I have to "choose" them, merely that I need to ADDRESS them (mention, consider, and so forth, not mandated to use). mandating that an appraiser use them is as wrong as mandating that he can not use them. It is possible to use them and still opinion Market Value rather than Disposition Value or Liquidation Value, but that involves proper analysis and adjustment. I believe I mentioned one way in my previous post.

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.

Look at listings in general from 5+ years ago and see how few contained interior photos. Didn't matter if they were OREOs or not, in many markets RE Agents just plain didn't include many photos as that was not standard in all markets. Now that it is more standard certain distressed properties can be more easily identified, but not all. Still need to perform due diligence and verify the sales.

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.

Realize that some agents may not have checked the "REO" box and thus you may need to hand sort through all the supposed "non-REOs". I have to do this when creating my graphs for SE WI.

 

[J Grant]

dead on...
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.

Wrong. Show me the part of the definition that excludes REO's or bank ownership of properties. The definition does not have to be changed. Certain appraisers have to follow the definition and not substitute their own family values friendly version of the definition.

The definition refers to 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? Can a realtor show both to the same buyer? Are they both for sale on the same block with for sale signs out front?

The implication of MV from the get go was not Bank Value...it was a value ascribed to actual owners of property.

Really? Every REO was at one time owned by the "actual owner of the property"...sort of. Except, the homeowners had a mortgage, and till they paid if off, they never really "owned" the property. Every homeowner with a mortgage is two late payments away from the "real" owner starting legal procedure to take possession...the bank is always the "real" owner till a mortgage is paid off.

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".

Lenders are the actual owners, they just don't live in the house as long as the "homeowner" on the deed is making payments. Stop making payments for two months, and one month later, with 3 months in arrears, you are no longer a homeowner...you are defaulter on the note, with a limited amount of time to remain in the house.

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

See above comments...sorry, I don't like it at all either, but it is what it is, and appriasers have to look at the causes of REO's, which was the actions of individual homeowners who en masse defaulted...often due to being underwater on high $ loan amounts.

 

[George Hatch]

Here's the gauntlet that not one of you guys has dared to pick up.

The resale activity in those residential subdivisions that sold out at any point between 2003 - 2008, where literally 100% of the sellers are losing $200k or $500k or $1mil off their original purchase prices. We're not talking about $40,000 homes located out in the sticks here.

The properties that are most similar are going to be homes of comparable age and location, so using homes that were originally sold in 1996 isn't going to cut it and travelling from San Diego to Bensonhurst AR for comps isn't going to cut it. We have to deal with happening here.

What's the most probable price going to be based on? Sales of properties by distressed sellers, ya? Regardless of the reason for their distress, whether relo or divorce or estate or whatever, they are obviously booking the loss because they have no other choice.

Spin that.

 

[George Hatch]

So what's your argument when there's no difference in exposure times? Happens a lot, too.

 

[J Grant]

George , I am on board with your posts 100% and think it is amazing that appraisers can't grasp the reality of a changing market .

Some appraisers haveno trouble, apparently, accepting a property flipper as a seller and a SC price above family owned comps, but have a huge problem recognizing a bank as a seller and a home selling below a family owned comp.

 

[George Hatch]

To me, "changing market" means I have to pay attention to this issue in each assignment I work on. In some assignments the data shows one thing and in other assignments it shows the other. I can't operate off of any assumptions one way or the other.

IMO all the elements of the definition of MV are important and relevant to its application, but a couple are even more critical than others. "Most probable price" ranks higher as a priority on my decision tree than so called "cash equivalency". As Terrell has noted, apart from seller concessions everyone from appraisers to lenders to buyers have been basically ignoring that element of the definition altogether.

That's why, if I have to choose between "most probable" and "not motivated" (which is basically what these guys are arguing is the true definition of market value) I think the obvious choice is most probable and "typical buyer/typical seller". What's typical in the market? Short of a court order or other jurisdictional influence - which is how "undue motivation" is defined in legal jargon - what else *always* represents undue motivation in all markets under all circumstances no matter what?

I mean, if we're arguing fundamentals here then we're basically talking about absolutes, meaning few or no exceptions. Always, not sometimes.

So what is the question we're answering in these appraisals? Most probable price in the market, right? So do we mean that or do we not?

 

[DMZwerg]

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.

Go read the definition of Disposition Value.
Hint: #4 is "Seller is under compulsion to sell."
That is straight out of "The Dictionary of Real Estate Appraisal" 4th Edition, by the AI.

Therefore if the seller is under compulsion to sell said property meets the definition of Disposition Value rather than the FIRREA Def of Market Value. Period.

Therefore using said property as a comp without comment and proper adjustment will not yield Market Value but rather Disposition Value.


Don't believe me? Well, read what George posted ... then go read the AI document on appraising in these markets and how they point blank say REOs, foreclosures and short sales are distressed sales.

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).

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.

Banking laws state plainly that banks CAN NOT be property owners except for 3 exceptions (IIRC) and those are basically: home office and commercial branch offices, properties held for residential by staff, and properties held for recreational use by staff. I may be a bit vague on the exception but those are what I recall, and banks can *ONLY* hold other properties for a maximum of 3 years, renewable once for an additional 3 years. Foreclosure generally takes up to if not upwards of 1 year from the time the bank formally seizes claim to the property (applying their mortgage lien) to the point at which the former owner is evicted (up to 1 year) and title cleared (which can be longer given 2nd & 3rd mortgages, tax liens, and so forth). So the bank has under 2 years to sell ... pick a neighborhood and tell me what the median and maximum CDOM is for said neighborhood. Is it under 365 days?
Now realize that The Banking Regulator(s) can demand a bank liquidate holdings (remember, they can hold property for a MAXIMUM of 3 years, there is no minimum) before the Regulators get bank in 30 days. So, is 30 days above of below even median CDOM when REOs are eliminated from the picture? If median non-REO CDOM is over 30 days then in the case of any OREO that sold in under 30 days it is possible the bank was under EXTREME COMPULSION to sell and liquidated the property, and if there was a sudden drop in list price or the property sold for below list on an OREO with above 30 CDOM it is possible that The Regulators had spoken and again the bank was under extreme pressure to sell.

That is the reality of OREOs ... the only real question is how extreme of pressure the bank was under at the time they sold the property (the pressure exists in all cases).

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.

Actually, it isn't that simple.
Note that I didn't say that REOs can "drive the market" just that they are NOT the market when discussing FIRREA or "fair" Market Value. In the case in resorts where REOs were actually selling for *MORE* than non-REOs it was evident a "panic sell" point had been hit and the properties dropped from the higher "resort" sales prices towards the prices the locals could afford. REOs did drive the market but *NONE* of the sales were Market Value, at least until the prices started to stabilize. Even in that situation REOs did not represent "the most probable" price as they were behind the ball by months compared to the Disposition Value and often Liquidation Value of homes being sold by "ordinary" sellers.

 

[DMZwerg]

See above comments...sorry, I don't like it at all either, but it is what it is, and appriasers have to look at the causes of REO's, which was the actions of individual homeowners who en masse defaulted...often due to being underwater on high $ loan amounts.

Show him where distressed sales are to be included.
You ask to be shown where REOs are to be excluded, but they are by definition distressed sales, so why would they be included?

As to where it says they are to be excluded:
We have mentioned the banks being under COMPULSION to sell (which fails point 1 of the FIRREA Def of MV). We have pointed reasons for foreshortened marketing times (which fails point 3). We have pointed out the words "fair sale" (which was considered "redundant" given the FIRREA definition and AO8 IIRC). We have pointed out "price not affected by undue stimulus" (which given that OREOs are duistressed sales as per AI and other sources should be a no brainer).

So, how many times do we have to go round and round on this subject?

 

[DMZwerg]

So what's your argument when there's no difference in exposure times? Happens a lot, too.

A stopped clock can be correct twice a day.

Just because exposure time may be the same does NOT mean the bank was not under extreme compulsion at the time (let alone "ordinary" compulsion) just as it doesn't indicate the other sale was not a distressed sale as well for some reason. How many times have you confirmed a sale and heard the Realtor say that it was "priced to sell" or "priced right to sell"? Given that indicates the Realtor knew the property was somewhat under priced, likely in an effort to sell it quickly, then one could infer limited marketing time or such, no? :icon_mrgreen:

 

[J Grant]

DMZ, it seems to me that you think by labeling things, by calling certain sales "distressed" or their value "liquidation value", you can ignore market activity and exclude portions of the definition of MV....which include an open and competitive market, and like it or not, what you call "distress sales" are part of the open and competitive market. Call them whatever you like, if buyers that might consider your subject are also buying short or REO sales, you are producing a misleading report by dismissing that activity simply by slapping the label "distress sale" on them.

And if AI refers to REO property as distress sales, which they might in some instances, they have also put out advisory opinions to appraisers to consider them when they are part of market activity. The appraisal foundation put out a similar advisory opinion, ignore it if you want, but you are ingoring guidance from two of the best sources of appraisal practice.