REO's as comparables to non-REO

[DMZwerg]

exactly...so how do I calculate that??? paired sales?

Simply put, REOs make *&^% poor proxy for "market value" under the best of circumstance and would require adjustment UP in all but the worse of bad markets imho. And measuring how much is a dart board exercise.

woohoo

Sure, I ramble on for page after page and Terrel comes by and sums up all mu posting is a single sentence!

 

[J Grant]

With all due respect to both Terrel and DMZ, I disagree with parts of his statement, succinct though it sounds. Don't have time to post more now, perhaps later.

 

[J Grant]

REOs make *&^% poor proxy for "market value

I have to leave for afternoon...can anyone post guidelines from a credible source for picking comps?
Can anyone find a link or quote that says we pick comps for being market value?

Isn't market value the SOW for denfing a theoretical sale of the SUBJECT, that we then compare the comps to? (re, the SOW is the purpose of finding the most probable price of the subject ( as if the SUBJECT were sold according to the defition of market value, nowhere is it refrerenced the comps terms of sale have to fit the definition of market value )

RE, when some say the REO's make poor proxies becasue they are not MV, do they mean to say because they are not arms length? (in their view)

 

[Verne Hebert]

Mr. Rex's post quite a few pages back was profound................the whole market is under duress.

And I agree........and therefore it becomes a normal, but different market than we have seen. A normally "duressful market".

Everybody wants to sell their product.

We know the motivation.

Hang on to your hats. There is alot of correcting yet to be done.

 

[hastalavista]

Let me see ... is the seller a participant in the sale?
How about the lender?
Does or does not Condition 5 in the Definition of Market Value (FNMA form 1004) mention or not mention the words "granted by anyone associated with the sale"?
I just want to verify that I haven't stepped into a parallel dimension or something where the the definition might be worded differently ...
Why wouldn't I question the financing on any short sale and consider them in general to NOT be the same as a traditional sale?

Fair enough. Here is my opinion:
In your analysis, you seem to be putting the buyer and seller(s) on the same side of the equation. Perhaps this is where we disagree.
I do not put them on the same side of the equation. I put them on opposite sides of the equation.
The dynamics of the sellers (homeowner and lender(s)) are on one side and the dynamic of the buyer(s) is on the other.
It doesn't matter what transpires between the sellers (do I recoup all, part, or none of the loan) if the buyer has made his highest offer and is ready to move-on to alternative substitutes if his offer is not accepted. That is why I do not agree (my opinion) with the assertion that the negotiation between the homeowner and lien-holder are seller concessions or special financing per se.

I am also beginning to believe that there are significant geographic differences in the short-sale and REO dynamic. This, too, is my opinion.
I do not run into a lot of resistance when trying to determine the inside story from agents/brokers on REOs and short-sales in the markets I work in. Some I cannot get in touch with, true, but the majority will take the time to discuss the dynamics with me.
My market data, my discussions with market participants, and my research of the specifics of transactions in the markets where I work, lead me to different conclusions than the ones you have made.
All my opinion, of course, and specific to my market.

 

[J Grant]

Except for the condition of sale. That always must be market value as defined.
__________________
No, no exceptions. The SOW of market value is for the SUBJECT. The SUBJECT and only the subject till death do us part. Why? Beacause all comps are adjusted to the subject, including condition of sale for the comps. We appraise the subject , as if it were sold on the effective date of the apprasial, WITH THE ASSUMPTION THAT THE THEORETICAL SALE OF THE SUBJECT PROPERTY on the effective date was consumated per market value terms, market value defined as not subject to special financing, arms length, etc AS IT APPLIES TO THE THEORETICAL SALE OF THE SUBJECT. The reason being, if the appraiser assumes the subject were to sell on the effective date , he/she then can go about the purpose of the assignment, finding the most probable price of the subject as if it were sold with a sale at market value terms, because, that gives a standard for the appraiser to adjust the comps too.

For example, the appraiser finds a comp that is a good substitute for the subject , but the comp had some special financing, $5000 seller paid cash back at closing. The duty of the appraiser is not to reject that comp because it was sold with special financing and thus "was not a market value sale". The duty of the appraiser is to consider the comp, and if they choose to use it, adjust the $5000 special financing of the comp up to the the subject, ( which is assumed for appraisal purposes to have a value not based on special financing, aka the market value term sof sale, thus establishing a standard for the appraiser to adjust the comps up or down to)

I have seen appraisers post things to the effect of, "I ran data and it showed that the median price for Orange Grove subdivision was $150,000, and then I ran a search that showed REO's were selling for $100,000, so since they are so far from market value I am not going to use them. ". A MEDIAN OR AVERAGE PRICE IS NOT THE SAME AS MARKET VALUE FOR THE SUBJECT.

It is like double aprpaising. The appraiser is assigned the duty of finding market value, aka the most probable price for theh subject, as if it were sold the effective date of the appraisal, assuming sale terms for the subject meeting the definition of market value (not subject to special finanancing etc) In other words, the appaiser is supposed to start the appraisal not knowing what market value is for the subject.
Even if the appraiser did an appraisal on the same street yesterday, and has an idea of what some homes are selling for, they still have to approach the new assignment not knowing what market value is for the subject.

Now, if that appraiser, when starting to research, did some kind of data run and decided not to use half the comps becasue they did not meet the terms of "market value", how is that possible? THE APPRAISER IS NOT SUPPOSED TO KNOW WHAT MARKET VALUE IS FOR THE SUBJECT UNTIL THEY DO THE APPRAISAL. The problem is, they are eliminating whole groups of comparables, be they REO or any other sale type, because they don't meet some supposed definition of market value sales, but the definition of a market value sale is the SOW to establish value of the subject, not a comp selection tool.

Re, just read a case study of a discpinary hearing in another state, where the case was, did the appraiser approach the assignment with a pre conceived notion of market value? Re, an appraisal is not supposed to be done to a preconceived notion of market value. We all are familiar with the example of a subject having a sales contract for 250k, and the appraiser who chooses comps that makes the value of 250k, which is shaping an appraisal to fit a preconceived notion of market value ( the 250 k sales contract).

But, the appraiser eliminating entire groups of possible comps, because they don't meet a preconcieved notion of market value, is doing the same thing ( even if for the best of intentions). Re, if an appraiser rejects an entire group of comsp, because they sold below a median value, for example, even if they are REO's, the appraiser is starting the assignement wtih a pre determined notion of market value. (RE, saying to themselves something like, market value for subject in Orange Grove can't be any sales selling more than 20% below the median price, because all homes 20% less than the median price are REO's according to my search) (let alone that the search may be unreliable , since many realtors and MLS boards mis categorize sale types)

The ruling was that an appraiser should not do an appraisal according to a pre determined notion of market value, even if the predertmined notion is the apprasier's own .

That is not to say people should use REO or short sales, or that they shouldn't adjust for them if they do use them. But, to eliminate them we decide at the start of the appraisal that they are so far away from market value, is wrong. It is starting the appraisal with a preconceived notion of what market value should be for the sujbect, and then elimating comps we think are too far from that, and then using those comps to prove market value! Those comps, even for the best of intentions, can end up being just as cherry picked as an appraiser choosing comps to support a 250k sales contract.


We choose the comps based on the prinicple of substitution, and then, then if we feel they need adjusting to the TERMS OF MARKET VALUE AS A CONDITON OF THE SUBJECT THEORETICAL SALE ON DATE OF APPRAISAL, we adjust for variances such as special financing for the comp, up to the subject theoretical sale.

 

[residentialguy]

Except for the condition of sale. That always must be market value as defined.
__________________
No, no exceptions. The SOW of market value is for the SUBJECT.

The subject property is what you are appraising...not arguing that. But the SOW work can change per instructions of the client. You must give them the value they are looking for. That is what you base your SOW on.

Do they want to know the most probable price of a quick sale? Most probable price of a liquidation sale? Most probable price of a fair sale (as defined by FNMA)? Most probable price of a REO sale?

The subject is the same (although may want as repaired value, per plans and specs, etc)...but under what condition of sale do they want a value for?

Again, I go back to FNMA MV as defined.

What would the subject sell for if Joe owned the house and put his house on the market without undue stimulus, such as job relocation, going to lose the house, etc and sold to Jane who had no motivation or stimulus for that house that would cause here to pay more for it, (i.e. it was where she was born, special concessions, etc)?

Joe decides to put his house on the market. It is saturated with REOs. Obviously, the REOs have driven the prices down. How much could Joe sell the house for with an adequate market exposure and no special concessions influencing value, etc? (fits all confines of MV definition)

Any variance the market sees in the value of that type of sale over a REO sale, an adjustment is necessary to that REO comp.

 

[J Grant]

But the SOW work can change per instructions of the client. You must give them the value they are looking for. That is what you base your SOW on.
Do they want to know the most probable price of a quick sale? Most probable price of a liquidation sale? Most probable price of a fair sale (as defined by FNMA? Most probable price of a REO sale? The subject is the same (although may want as repaired value, per plans and specs, etc)...but under what condition of sale do they want a value for?

To respond, this is how I was taught and I beleive that USPAP sees it. UNLESS a client asks for liquidation value (very rare in res appraising), and you identify on the report that you are appraising for liquidation value, then that is what you are appraising for. If you sign off on the report that you are apprasiing for a quick sale value.

But, most times in res appraising, it spells out, either on teh form, or the addendum, or in the narrative, that you are appraising for market value. It doesn't matter if the owner wants a quick sale, the value you are signing your name to on the report is to find the MV for the subject, then that is what you are trying to find (the SOW, to find market value for the subject, does not change, just because the owner says he wants a quick sale, or the owner is a bank and you assume they want liquidation value.

In other words, THE SOW DEFINES THE PUPROSE, NOT THE INDIVUDAL OWNER/SELLER AND THEIR NEEDS OR WHAT YOU ASSUME ARE THIER NEEDS.

THE SOW IS TO FIND MOST PROBABLE PRICE AS IF THE SUBJECT WERE FOR SALE ON EFFECTIVE DATE AND SOLD ACCORDING TO THE DEFINITION OF MARKET VALUE, ( as if sold with no special financing, not under duress etc) The fact that the owner may be a bank motivated by duress no longer matters, the owner is now, for report purposes, per the defintion of MV , a 'tpically motivated seller"...for the subject theoretical sale on effective date, which is what the most probable price is based on)

I will again, try give an example of homes an appraiser is sent out to appraise. Enough of Cherry Lane, let's go to Orange Street in the orange Grove subdivision.

For simplicity, let's say all the homes the appraiser is sent out to appraise are 1500 sf homes with pools in the same average condition.

Subject for appraisal one is 8 Orange Street. The owner is refinancing and follows appraiser around whining, "I need to get 240k to get approved, please give me a high appraisal". IT DOESN'T MATTER WHAT THE OWNER WANTS, THE SOW IS TO FIND MARKET VALUE FOR THE SUBJECT.

Next the appraiser goes next door to 10 Orange Street. This home is a listing with a pending contract. The pushy realtor follows the appraiser around, saying the contract price is 270k and includes furniture and the sale better go through or she'sll badmouth him. IT DOESN'T MATTER THAT THE CONTRACT SAYS OR IF IT INCLUDES FURNITURE, THE SOW IS TO APPRAISE THE HOUSE FOR MARKET VALUE, NOT INCULDING PERSONAL PROPERTY.

Now the appraiser goes next door to 12 Orange Street. This is a vacant house and he gets in with a lockbox. It was assigned as owned by an REO lender, and the purpose is market value. The only additonal thing the client asks for is an REO addendum with three listings, and whehter there would be discount form the market value if the sujbect were to theoretically sell in 60-90 days. IT DOESN'T MATTER THAT THE HOUSE IS OWNED BY AN REO LENDER, THE SOW FOR THE SUBJECT IS STILL TO FIND MARKET VALUE.

Next, the appraiser goes next door to 14 Orange Grove. It s a vacant lot, and the appraiser was given a floorplan of a spec house that is to be built . The the appraisal is made to provide market value, subject to completion of plans and specs. THE SOW IS STILL TO FIND MARKET VALUE FOR THE SUBJECT, THE ONLY DIFFERENCE IS AS PER COMPLETED, IT STILL IS ASKING FOR MARKET VALUE (as completed)

For the first three homes, 8, 10, and 12 Orange Street, if they were built the same year, same condition etc same size etc, the comps for all three homes would most likely be the same. Selected as the best competition, most similar in physical charateristics, location, etc. They are supposed to arms length, that is not bought and sold by related parites.

Why would the comps change just because 12 Orange Street is owned by a bank and not a person? THE SOW IS THE SAME FOR ALL THE APPRAISALS, FIND MARKT VALUE AS IF THE SUBJEC WERE SOLD NOT UNDER DURESS ETC. That takes precedence, as it were, over the "real" seller and their inidvidual needs, whether the real seller is a bank or not, for appraisal puproses, the seller is assumed to have typical motivation.


In other words, the SOW to find market value for the subject, "erases" the motivatioon of an individual owner, including a bank, and replaces it with the theoretical motivation , per the defintion of MV of a "typical" seller.

The apparsier now goes on to select the best comps, according to guidelines for selectinon per the prinicple of substitution.

When doing an appraisal for MV, the appsaiser is nto supposed to "shape" the value, according to what the owner or client wants (or what the appraiser thinks the owner wants.)

You are doing an estate sale. The assignment is for market value ( there may be asecond date of death retrospective value, but for now, let's keep it market value). On Oct 1st, the appraiser goes in the house and a distruaght heir name Ralph pleads with the appraiser to make the value low for tax purposes. Does the appraiser run around finding the lowest comps and bring it in at 150K? Was that his scope of work, to find the value the customer/client said they were looking for? No, the appraiser has to find the value the assignment per USPAP is looking for, assuming the aprpaiser signs off on the Fannie Form, or narrative, that he appraised the house per the definition of market value.

Because what if appraiser ran out and got lowest comps to satsify the value Ralph said he was looking for, and then, that night, his sister the angry heiress, ister, calls up screaming that she needs the house appraised high ?

Then the appraiser going to do, run out and find high comps and change the value to 250K? NO. The appraiser, was supposed to ignore both of them, if he signs off that he is appraising for market value, and appraise the subject for SOW per market value, not the individual motivation of any of the parties (even if they are paying him).

Thus, if the indivudiual bank owner of the REO is subject to undue stimulus, it doesn't matter, BECAUSE THE SOW FOR THE SUBJECT OVRERIDES THE BANK'S UNDUE STIMULUS AND THE HOUSE IS APPRAISED PER DEFINTION OF MARKET VALUE, NOT SUBJECT TO UNDUE STIMULUS . The only difference in an REO aprpaisal is the REO addendum with listings, and asking an as repaird value ( still based on market value, only as if repaired, if there are repairs)

On REO addendum sometimes it is asked if there would be a discount if the subject were to be sold in 60-90 days. That amount is still based on the market value on page of sales comparison, so it is still a SOW for market value asignment. (Although a value for 60-90 days is asked for, does not mean the bank has to sell it in 60-90 days, )

Running out of energy, hope I covererd enough points.

 

[JSmith43]

I tend to skip long posts unless they are my own. Please cut to the chase

 

[Doctor Manhattan]

I tend to skip long posts unless they are my own. Please cut to the chase

hear hear !! :icon_lol: