REO's as comparables to non-REO

[J Grant]

I go back to post 118 in regards to static definition

There is no such thing as a "static defintion", that is a made up term .

And "moving defintion" sounds like a traffic violation, it is also not an appraisal term applicable to MV.

 

[residentialguy]

I was recently in a discussion with a peer who said that the value of the subject (REO) shouldn't be any different if the status was non-REO and if one is appraising it using the definition of market value.
Her position was that the REO status of the subject has no impact on the market value under any circumstances.

I agree with your peer on this one. Assuming the purpose of the report is to find the market value of the subject, the fact that the subject is owned by a lender, becomes irrlevant for the purposes of the appraisal.

If you are talking about the REO status of the subject and not the comps, I would have to agree with Grant on this. :new_shocked:

The subject would most likely not lend support to your est market value. I just appraised a REO sale that sold for $414k. It appraised at $500.

I'm surprised with this Denis. Are you sure you didn't mean the comps? Huge difference.

 

[hastalavista]

I was recently in a discussion with a peer who said that the value of the subject (REO) shouldn't be any different if the status was non-REO and if one is appraising it using the definition of market value.
Her position was that the REO status of the subject has no impact on the market value under any circumstances.

I agree with your peer on this one. Assuming the purpose of the report is to find the market value of the subject, the fact that the subject is owned by a lender, becomes irrlevant for the purposes of the appraisal.

Its not who owns the property that is significant, but if that ownership affects market reaction by the buyer pool.

In some markets, buyers will intentionally offer a lower price for REO properties than non-REO properties. This low-bid dynamic has nothing to do with the condition of the property but everything to do with the perception of the buyer regarding the property's ownership. In effect, the listing status (or, ownership) becomes a relevant element of comparison.

The as-is market value of an REO property is what it would sell for, as-is (as-is an REO).

If the market demonstrates a price differentiation due to the status, does that not become a relevant characteristic in comparable selection?

And, if there are similar, like-for-like properties (REO status), would those not be the best comparables?

If the answer is yes to the above, then by selecting the best comparables (similar REOs) to value the subject (an REO), and if the market differentiates between REO and non-REO based on the listing status, then the value concluded using the REO sales as comparables would be different than the value concluded using non-REO sales without adjusting for the market reaction to the listing status.

But if the subject is an REO, and the appraisal is "as-is", and the market does react to the listing status differences, then using a non-REO as a comparable for an REO without analyzing (and, I'd argue, adjusting for) the difference will conclude a value that isn't "as is" for the subject.

This is a transactional adjustment. The listing status affects the market perception. Buyers pay less for these homes and that differentiation can be identified and measured in the market. The listing status becomes an element of comparison used by the buyer pool in its decision-making processes.
Sellers want to sell for as much as they can, but they cannot sell for more than what the market is willing to pay. Therefore, the best price the seller can achieve, when acting in its best interest, and while being willing sellers (I want to sell the property for as much as I can), is limited to what the market will pay. This is a buyer-driven force which is dependent on buyer perceptions.

When the listing status (think "stigma") of a subject property becomes an identifiable element of comparison, then its market value can be different with the stigma vs. without it.
Same definition of value; two different subjects.

 

[residentialguy]

I go back to post 118 in regards to static definition

There is no such thing as a "static defintion", that is a made up term .

And "moving defintion" sounds like a traffic violation, it is also not an appraisal term applicable to MV.

Oh please....it is a descriptive term to describe how it is viewed. The word Trinity (to describe Father, Son & Holy Ghost) is not in the Bible, either...should we not use that? In fact, the word Bible is not in the Bible. Throw that out!

Good grief :mellow:

 

[residentialguy]

The as-is market value of an REO property is what it would sell for, as-is (as-is an REO).

The client is not asking for the most probable price of a REO. I used to think that until I came here...got on the right path when I stated that. The client is not asking about the subject condition of sale. When the buyer owns it, it is no longer an REO.

 

[Terrel L. Shields]

I am confident each side will view this differently....
Any transaction in the market is a sale, but not all sales are comparable. Consider the type of transaction and physical characteristics of any sale before considering the sale a comparable.

(4-6) 2. Selection of Comparable Sales for Analysis
Identify the relevant market based on the area in which the property competes and the forces/dynamics that affect the comparable sale properties. This is necessary in relating the sales to the subject. Consider the amount of time that has elapsed between the sale date and the effective date of the appraisal. Sales data should not exceed six months between the date of the appraisal and the sale date of the comparable, and must not exceed twelve months. An explanation is required for sales dates in excess of six months. Consider neighborhood and other external factors that influence property value, including real estate and non-real estate influences. For example, when most of the neighborhood's residents are employed by one major employer who is relocating out of the region, the neighborhood may experience a decline in values. The term "non-real estate influenced", however, must never include racial composition. Consider the quality and quantity of data available for the given assignment. A lack of quality data in a market may force reliance on data in a similar market not necessarily the subject's immediate market area. However, clearly explain and justify any sales from outside the subject's immediate market area
3. Excluded Sales Transactions
When using conventional sales data, the appraiser must be aware of the terms of the sale and adjust the conventional sales price to reflect any unusual terms. For example, there are sales that must be excluded; however, some transactions may be included but adjusted for factors such as below-market financing to provide a cash equivalent sales price.

 

[residentialguy]

Thank you, Terrel!

 

[hastalavista]

When the buyer owns it, it is no longer an REO.

Exactly.
How is this different from a stigma; purchase by an outside party removes the listing status which creates the market differentiation? Once the status is changed, the stigma disappears.

The client is asking for the market value of the subject, as-is.
If its listing status creates a stigma that is (a) identifiable and (b) measurable, should that listing status not be considered as an element of comparison (in my scenario, the market is using it as such).

I read a willingness to adjust REO comparables upward because they are stigmatized in the market. They are market transactions that are adjusted for their identified difference.
But if the subject has that same influence (stigma), and the appraisal is "as-is", how does one ignore that stigma if it is an element of comparison that the market uses to price the subject (as-is)?

The only counter argument I know is: REOs are not market sales, therefore their stigmatization (if it exists) is not of consideration when they are the subject.

I understand that argument but I disagree with its foundation.

If a property is stigmatized and that stigma affects its value, and an as-is market value is required, how is that stigma not considered in the valuation?

 

[J Grant]

Thank you for posting this!

Any transaction in the market is a sale, but not all sales are comparable. Consider the type of transaction and physical characteristics of any sale before considering the sale a comparable.

The above is true, of course, but like you said, open to interpreation. It does not say specificaly the type of transaction that does not make it a sale a comprable. A transaction far below typical price between father and son, for example, is a sale, but not a comparable due to terms of sale.

(4-6) 2. Selection of Comparable Sales for Analysis
Identify the relevant market based on the area in which the property competes and the forces/dynamics that affect the comparable sale properties.

Exactly! When short sales/REO activity are forces and dynamic in the area, how can we ignore them?


This is necessary in relating the sales to the subject. Consider the amount of time that has elapsed between the sale date and the effective date of the appraisal. Sales data should not exceed six months between the date of the appraisal and the sale date of the comparable, and must not exceed twelve months. An explanation is required for sales dates in excess of six months.
That is true for both REO and non REO. Finally, an easy one.

Consider neighborhood and other external factors that influence property value, including real estate and non-real estate influences. For example, when most of the neighborhood's residents are employed by one major employer who is relocating out of the region, the neighborhood may experience a decline in values.

Just what we are referring to, when a lot of homes become REO and short sales, a neighborhood may experience a decline in values. So why would they be excluded from analysis or as comps?

The term "non-real estate influenced", however, must never include racial composition. Consider the quality and quantity of data available for the given assignment. A lack of quality data in a market may force reliance on data in a similar market not necessarily the subject's immediate market area. However, clearly explain and justify any sales from outside the subject's immediate market area
Above applies here to apprasiers who recomended going 2 miles away to find a "traditional sale", rather than use sales in area.


3. Excluded Sales Transactions
When using conventional sales data, the appraiser must be aware of the terms of the sale and adjust the conventional sales price to reflect any unusual terms. For example, there are sales that must be excluded; however, some transactions may be included but adjusted for factors such as below-market financing to provide a cash equivalent sales price.

Yes, of course, adjust for terms of sale when needed.
But, does the above state that the sales to be excluded are REO or short sales? It does not say that. It leaves the selection of sales to be excluded up to the appraiser . ( why the appraiser decides to exclude some sales is why we are debating).Nowhere above does it state or imply, that an appraiser should "exclude sales that are not traditional sales", or "exclude sales that are not market value sales"

_________________

 

[residentialguy]

Exactly! When short sales/REO activity are forces and dynamic in the area, how can we ignore them?

There you go with the "ignore them" comment. No one is saying to ignore them. We have stated this over and over again and you still insist on misleading others to what is being said. It is becoming purposeful lie, now. Please stop!