REO sales and "Market Value"

[George Hatch]

You're being thick. Think outside your own neighborhood. Can a stopped clock be right 1000 times a day?

Why is exposure time an element of these definitions? Because one that's significantly less than normal can be of effect on value. And that particular effect doesn't come into play unless there is a difference.

Think, McFly. If we're talking about fundamentals then we're talking about what is and isn't possible, not about what we have or haven't seen so far.

 

[DMZwerg]

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.

Most probable price given a seller who would like to but is not under any pressure to sell ( and thus can afford to sell or not and even take it off the market to list later if he feels the market is running "too cold") is almost certainly going to be higher than that of distressed properties.

So, what about using the Cost Approach to help confirm value opinion?
If the current selling prices of houses is less than the cost to build then there is no incentive to build, but if *ANY* new construction exists then there is obviously some who feel there is value and new construction may be feasible (under certain conditions) and thus value new can be "tested" using cost manuals. SCA is only one of the approaches to value and different approaches can be used to test one another, adjustments, and so forth.

 

[George Hatch]

The question at hand is not about what would happen if the Vulcans made first contact and offered the human race dilithium crystal technology and warp drive. The question is what's the most probable price for the sales in that subdivision going to be based on.

BTW, I'm talking about literally hundreds of such subdivisions in this region. It's by no means an isolated or contrived example.

 

[DMZwerg]

You're being thick. Think outside your own neighborhood. Can a stopped clock be right 1000 times a day?

Yes, if it only has a second hand.


ASctually you are the one that needs to think outside his own neighborhood as it is very apparent you believe that any Definition of Value can be tweaked, twisted or otherwise made to adapt to any individual market and that only the one need be applied (aka, the FIRREA Definition). USPAP states that the Definition of Value used must be stated in the report, etc., and that there are many different definitions of value. Heck, there are many different definitions of MARKET value, which is why I keep mentioning FIRREA.

Here is a definition of market value I used in a recent report:

Fair Market Value *:
The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.
* Treasury Regulations, Subchapter B, Sec. 20.2031-1
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OREOs can fail under "having reasonable knowledge of relevant facts" and by default fail under "neither being under compulsion" (banks are under compulsion to sell).

So, when discussing definitions of value are you matching the definition to the market or the market to the definition?

 

[CANative]

The MV definition applies to the subject property under appraisal, not the comparable sales used to develop the MV opinion. They sell for a price, not a value.

 

[J Grant]

Thanks, Can Native, for the reminder, I have made the same points in previous posts on the topic.

Certain people are never going to change their view despite the evidence...

 

[DMZwerg]

Why is exposure time an element of these definitions? Because one that's significantly less than normal can be of effect on value. And that particular effect doesn't come into play unless there is a difference.

Think, McFly. If we're talking about fundamentals then we're talking about what is and isn't possible, not about what we have or haven't seen so far.

Actually it is not marketing time itself that usually has an affect on value, but rather marketing time is an indicator of seller motivations.

Example: a house was on the market for 5 days. What can you tell me about the motivations of the seller and the price paid by the buyer?
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Actually, you can not say that the seller was NOT unduly motivated to sell based on that (but you can suspect they were) nor can you assume the buyer paid the highest probable price the property would bring on the open market (from an older definition of value) as it is more likely it was "snapped up quick" by somebody who "saw a deal". It is not conclusive proof one way or the other.

Now look at a property that was on the market for over 3 years and just sold. If the property sold for very close to list price and the price had not suddenly dropped near the end then an appraiser would likely assume it sold at or near market and it would likely be a sound comp as long as it did not show signs of physical distress. In fact, looking at SFRs in a 3 county area I see some CDOMs at 1500+ days (high for sold is 1960 days, high for actives is 2312 days, all from last 3 years). Given OREOs by law must sell within 3 years or less, and likely less then 2 years when first marketed, and in some cases less than 60 days, how can a bank hold onto a property for 6+ years before selling?

Averages were 138 and 175 days respectively (sales, actives) but that INCLUDES REOs (changes to 145 & 177 average CDOM when many REOs, shorts, and ones without RECR excluded). Median DOM for last 12 months is also 10 days higher when said are excluded. Average DOM & CDOM drops like a rock when only REOs are included (median drops by 20-30 days to 45-55 days)

So, if they are the same why do average and maximum CDOM and especially median DOM suddenly drop like a rock?
Do they drop in your market?
Do you analyze DOM & CDOM separately for REOs, non-REOs and combined and look at average, median and maximum DOM and CDOM for each?

You asked "what if they are the same?" so I am asking back, "Are they really the same?"

 

[George Hatch]

he fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.
* Treasury Regulations, Subchapter B, Sec. 20.2031-1

Compulsion in this usage doesn't mean what you apparently think it means.

How would you go about compelling a buyer to buy?

Don't forget, this definition of value didn't just materialize via a transporter beam from an orbiting starship. It came about in response to legal decisions a long time ago and involved legal issues that had zero to do with economic conditions.

You can argue that a lender is legally compelled to sell but that's not exactly true. They can hold or let the bad loan sit on their books if they have the assets to write the loan down or at least the acquiescence of their regulators to hold off. The proof of that is self-evident because that's exactly what's happening with the majority of their bad loans.

 

[George Hatch]

Actually it is not marketing time itself that usually has an affect on value, but rather marketing time is an indicator of seller motivations.

Example: a house was on the market for 5 days. What can you tell me about the motivations of the seller and the price paid by the buyer?
​

Actually, you can not say that the seller was NOT unduly motivated to sell based on that (but you can suspect they were) nor can you assume the buyer paid the highest probable price the property would bring on the open market (from an older definition of value) as it is more likely it was "snapped up quick" by somebody who "saw a deal". It is not conclusive proof one way or the other.

Now look at a property that was on the market for over 3 years and just sold. If the property sold for very close to list price and the price had not suddenly dropped near the end then an appraiser would likely assume it sold at or near market and it would likely be a sound comp as long as it did not show signs of physical distress. In fact, looking at SFRs in a 3 county area I see some CDOMs at 1500+ days (high for sold is 1960 days, high for actives is 2312 days, all from last 3 years). Given OREOs by law must sell within 3 years or less, and likely less then 2 years when first marketed, and in some cases less than 60 days, how can a bank hold onto a property for 6+ years before selling?

Averages were 138 and 175 days respectively (sales, actives) but that INCLUDES REOs (changes to 145 & 177 average CDOM when many REOs, shorts, and ones without RECR excluded). Median DOM for last 12 months is also 10 days higher when said are excluded. Average DOM & CDOM drops like a rock when only REOs are included (median drops by 20-30 days to 45-55 days)

So, if they are the same why do average and maximum CDOM and especially median DOM suddenly drop like a rock?
Do they drop in your market?
Do you analyze DOM & CDOM separately for REOs, non-REOs and combined and look at average, median and maximum DOM and CDOM for each?

You asked "what if they are the same?" so I am asking back, "Are they really the same?"

First of all, I cited the many assignment I've worked on where there was no difference in exposure times between the two groups. I'm not denying any of the many assignments I've worked on where there were differences, including big differences. The latter is not in argument but it also isn't the situation I posed to you.

So now you're saying that when the data isn't cooperating with your presumption that the exposure time is not a significant element of that definition of disposition value or liquidation value but is important only to the extent that it implies undue motivations?

That feeble attempt isn't very intellectually honest, is it? You're using the equivalent of reading tea leaves to divine the intent independent of the verbiage chosen to communicate them. That wouldn't even work in a debate at the high school level.


I mean, I can go back to any appraisal text that relates to the arbitrary limitations in exposure time itself as being the cause of the different price. you were saying that yourself right up until I pointed out the obvious.


Anyways, that's still all a tangent because you haven't answered the question of what those sale prices are going to do in that recently built subdivision. I mean, everyone knows the answer, but for once I'd like to see you acknowledge the obvious.

 

[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. 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.

Actually, if you want to know where it says such things, look at the various definitions of value. If you want to know where it says you may need to consider different definitions of value see ...

http://www.appraisalfoundation.org/ 03-Valuation Advisory 3 - Residential Appraising in a Declining Market Final 050712.pdf
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... and look at lines 34-46, 54-56, and especially 69-77 as well as 106-108, 111-116 & 117-118.
Voluntary compliance (not mandatory) but it is an Advisory by an authoritative source.


Then there is http://www.appraisalinstitute.org/ppc/downloads/2011_guidenote_11.pdf which states on page 3 "Distressed sales such as foreclosure sales and short sales are common in a declining market. Depending on the severity of the local market downturn, some, many, or even all sales that occur do so under distressed conditions." Bold mine, but right there the AI has stated that foreclosures and short sales are, by definition, distressed sales. It goes on to say "However, due to differences between their conditions of sale and the conditions outlined in the market value definition they might not be useable as comps." Again bold mine.

I have been saying for 2-3 years now that when using an REO as a comp that the REO has to be analyzed, commented on *OR* adjusted. I admit I was mistaken, as in Guidenote 11 the AI says the same thing but without the "or" (aka, my mistake was that it should be an "and" not an "or"). From page 4 "When it is necessary to use a distressed sale as a comp, the
appraiser must carefully analyze the current local market to determine if an adjustment for conditions of sale is needed. If no
adjustment is warranted, the lack of adjustment should be explained."
The document goes on to define Disposition Value and Liquidation Value (p.4) on on the top of page 5 state: "The appraiser’s analysis must be consistent with the type of value being sought. ... More likely, comps that sold under different conditions than stated in the value definition must be used and then adjusted as necessary and appropriate." That is the point Terrel and I diverge on a bit ... I say REOs can be used but if and only if analyzed, commented on and properly adjusted whereas he takes the view to that they are not market and should not be used (AFAICT, I could be slighting Terrel here and putting words into his mouth).
Finally, here is the "proof" JGrant wants, 2nd paragraph top of page 5 in Guidenote 11 "Appraisers must be careful to identify when sales are occurring at market value, disposition value or liquidation value. Even when the only sales occurring are distressed sales, they do not represent market value if they do not meet the conditions of the definition of market value."