REO's as comparables to non-REO

[hastalavista]

Dennis, I will try to be brief too have to go out...I agree with much of your thought process. If you can show a proof of stigma fine, (or if your report is strong enough with fuzzy proof that will probably be sufficient too)

But I think you noted a lot of reasons REO's sell lower and in realtiy, they have nothing to do with stigma, or a "listing stigma".

The reality is this, if an REO and non REO are in same condition, and a buyer looks at both, the REO, because vacant, doesn't show as well. The utilities are off, the rooms look dark, the pool is covered with plastic, there is no furniture. So the buyer offers less. That is an appeal problem, not stigma. Also , buyer often look at REO's just figuring they will try to offer less and see what happens. They offer less not because of a stigma, the realtors encourage it, saying the bank wants to sell etc.

Plus, there are a number of cash buyers purchasing them in some areas and lenders will take less for a quick cash closing. There are so many factors of influence, it is really hard to seprate these factors out from stigma to why prices can be lower for REO's (when they are, not always the case)

Because of this, I don't typically adjust for stigma. I do weight some sales, whether REO or non REO, more heavily, depending on my subject, the market, etc. The reason I do this is because it is extremely hard to prove a stigma exists, and even if it does, to extract an exact amount of it, that might be separate from the vacant status of subject and other influences on price.

J:

I think, while you may be correct in all of the above in many cases, it isn't the case universally and, depending on a market, may not be the rare case.

But be open to the fact that in some markets: (1) REOs are not trashed (I don't think I've seen a trashed REO in a year), (2) utilities are "on" (last 3 I did had their utilities on; I cannot remember past that!), and (3) many of the purchases are financed (not cash buyers).

And you can satisfy yourself as to what affects your market by interviewing the market participants on both sides of the trade (as I do). What I describe will either fit your market or it won't.
What I think is likely is that it may fit sometimes and not fit other times. :new_smile-l:

 

[hastalavista]

Because of this, I don't typically adjust for stigma. I do weight some sales, whether REO or non REO, more heavily, depending on my subject, the market, etc. The reason I do this is because it is extremely hard to prove a stigma exists, and even if it does, to extract an exact amount of it, that might be separate from the vacant status of subject and other influences on price.

(my bold)

What I read is that you typically don't make a line-item adjustment (explicit adjustment) for a stigma. I'm the same way in many cases.
What I also read is that you sometimes consider the REO status in the reconciliation; I refer to this as an implicit adjustment (its made, just not as a line-item); and that implicit adjustment may include stigma (which in your market cannot be readily identified) and other influences such as vacancy (which is easy to identify but maybe just as hard to extract an adjustment for).

I don't see much difference in the analyses that you and I perform; I do see a difference in the adjustment application. That difference, in my opinion, is not significant (since we are presumably both considering the same influence). I just happen to believe in some cases, I can identify, measure, and therefore apply an explicit line item adjustment in the grid rather than make an implicit adjustment in the reconciliation.

 

[J Grant]

I hear you Dennis, and it makes sense. Re, appraisers of course work in different markets, plus may have slightly different ways of applying individual adjustments. But if the anaylsis is sound and based on following guidelines, slight differences in adjusment application will still lead us to derive a credible, supported MV for the subject.

 

[AngelEyes359]

Here is the definition of "stigma" from The Dictionary of Real Estate, 4th ed. (my bold):


Here is the definition of "elements of comparison" from the same source:


I am suggesting that the REO status of a property creates a stigma in some markets, such that the public perception extracts a penalty on its marketability and, hence, its value.
If I am correct, then the question becomes, "Should that stigma be considered as an element of comparison when concluding an opinion of value using the GSE Market Value Definition?"

Is it a stigma?
Is it a relevant element of comparison?
Is it considered when (1) concluding a MV opinion for GSE work and (2) when the subject has such a stigma?

Dennis,

Is "stigma" the best term to describe and explain the reason for lower REO sales prices after all other differences have been accounted for or should it simply be "inferior condition of sale"? If there is stigma associated with an REO we know that it is not deeply embedded or enduring. Whatever stigma there is vanishes the momement title changes hands. The stigma does not endure, carry with or continue to affect the value of the property.

Contrast this with Jeffery Dahmer's apartment/apartment building or a property impacted by hazardous waste. Ownership could change hands multiple times but potential renters or buyers would still say" it's still Jeffery Dahmer's old place" or "there was waste dump there". Their values would likely impacted by an enduring stigma only the sands of time could cure.

If you were asked to do an "as is" appraisal for MV of Jeffery Dahmer's apartment building right after he was arrested obviously this stigma would have to be addressed.

The stigma in the case of an REO vanishes upon its sale. Does this not point to the seller being the culprit and not the property itself? IMO a disadvantaged seller and a stigmatized property are two distinct things.

 

[hastalavista]

Dennis,

Is "stigma" the best term to describe and explain the reason for lower REO sales prices after all other differences have been account for or should it be simply be "inferior condition of sale"? If there is stigma associated with an REO we know that it is not deeply embedded or enduring. Whatever stigma there is vanishes the moment title changes hands. The stigma does not endure, carry with or continue to affect the value of the property.

Contrast this with Jeffery Dahmer's apartment/apartment building or a property impacted by hazardous waste. Ownership could change hands multiple times but potentional renters or buyers would still say" it's still Jeffery Dahmer's old place" or "there was waste dump there". Their values would likely impacted by an enduring stigma only the sands of time could cure.

If you were asked to do an "as is" appraisal for MV of Jeffery Dahmer's apartment building right after he was arrested obviously this stigma would have to be addressed.

The stigma in the case of an REO vanishes upon its sale. Does this not point to the seller being the culprit and not the property itself? IMO a disadvantaged seller and a stigmatized property are two distinct things.

(my bold)

We can parse stigma; it isn't my favorite term, but it is useful and one that Fannie uses (so, there's some authority for its use).

Most of the stigmas we are familiar with do exist (linger) over time. But the time-duration is due to the public perception; remove the stigma, and the adverse perception begins to disappear. Some stigmas disappear quicker than others. The home where the Manson Family killed Sharon Tate and others had a long-duration stigma. There are other properties that have adverse influences that, once remedied, disappear immediately.


I think the really relevant question is this: Is the stigma (or, whatever you prefer to call it) an element of comparison that needs to be considered in a market value appraisal (using the definition we use in our GSE work)?
How consistent are our opinions of value for the subject with the definition of market value if our opinion is not the "most probable price" the subject will fetch because we are not considering an element of comparison that the remainder of the market is considering?

The simple answer to the above is that "MV does not consider such things as listing status as an element of comparison for market value analysis on the subject".
That may be, and I've been asking if anyone has such a reference. If you find it, please post it.

 

[JSmith43]

Whatever stigma there is vanishes the momement title changes hands. The stigma does not endure, carry with or continue to affect the value of the property.

Are you sure? Consider the implications of the MERS suits. Setting aside the MERS related issues, previously foreclosed properties have a much higher incidence of title flaws. They can pop up years later.

Chasing down an owner's policy (typically originated at the REO Lender friendly title company) and getting timely satisfaction is not always easy. The big title companies don't pass out indemnification letters like Christmas Cards any more. A foreclosure related error in the title may be more like a cold sore virus in temporary remission, that only comes out in the open under the stress of a new closing

 

[AngelEyes359]

Are you sure? Consider the implications of the MERS suits. Setting aside the MERS related issues, previously foreclosed properties have a much higher incidence of title flaws. They can pop up years later.

Chasing down an owner's policy (typically originated at the REO Lender friendly title company) and getting timely satisfaction is not always easy. The big title companies don't pass out indemnification letters like Christmas Cards any more. A foreclosure related error in the title may be more like a cold sore virus in temporary remission, that only comes out in the open under the stress of a new closing

Good point on MERS. I stand corrected. We as appraisers may assume clear marketable title in our reports but that does not mean every buyer does. That being said I am not convinced that title chain concerns have prevaded the consiciousness of the typical buyer. I don't think the typical buyer reads Zero Hedge or Market Ticker three times a week. The title companies predictably are not going to want to eat this problem on new policies and I'm sure there are new convoluted "exclusions"designed to insure the premium money continues to flow in one direction.

 

[J Grant]

Mentor, that is a good reminder about title problems, but so far they are rare...I do not claim to be a title expert, if a buyer purchases title insurance at a closing does that protect the buyer for any future issues?

 

[AngelEyes359]

(my bold)




The simple answer to the above is that "MV does not consider such things as listing status as an element of comparison for market value analysis on the subject".
That may be, and I've been asking if anyone has such a reference. If you find it, please post it.

Denis,

Good question. The best I can do is point you to the word "fair" in the definition of market value. When we are appraising a property for market value we are coming up with a theoritical value of what the property would sell under all conditions requisite for a fair sale. It's not relevant that the subject property owner is in distress. We are assuming for the sake of this particular value that there is no distress. Seller identity or status should not change a property's market value. What's relevant is that the comparables used are a consistent with fair conditions of sale or else adjusted or reconcilled for differences if the market shows it is warranted.

 

[hastalavista]

Denis,

Good question. The best I can do is point you to the word "fair" in the definition of market value. When we are appraising a property for market value we are coming up with a theoritical value of what the property would sell under all conditions requisite for a fair sale. It's not relevant that the subject property owner is in distress. We are assuming for the sake of this particular value that there is no distress. Seller identity or status should not change a property's market value. What's relevant is that the comparables used are a consistent with fair conditions of sale or else adjusted or reconcilled for differences if the market shows it is warranted.

(my underscore)

I don't assume that all REO sales are distressed.


Let me repeat back what what I understand you to be saying:
We should assume that if market participants discount properties in their bid-decisions due to a listing status-type (in this case, REO), that is not a relevant element of comparison to consider if the subject is an REO.

And, if that is the case, then presumably, all things being equal, all homes that are REOs and are appraised for GSE purposes will appraise higher than what the market participants are willing to pay, if there is the negative influence attributable to REO-listing status.

And the basis (I'm asking) for the above is because when considering the value of a subject, its listing status is not a consideration, even when it is an element of comparison used by market participants and an identifiable reaction to it can be measured, because market value definition prohibits its consideration, if it exists? (that's worded rather inelegantly, but I think you get my gist ).



After 6 years as a forum member, you'd think I would know how to run a poll. I'm trying to figure it out; and won't get to it until tomorrow. But once I do, here is my poll question:

You are asked to appraise a property that is REO. The purpose of the appraisal is to determine its market value using the GSE definition. In this neighborhood, there is an even mix of REO properties and non-REO properties. The subject has been well maintained; no condition issues and the lender has maintained the landscaping. It is vacant.
You have found 6-sales which are very similar to the subject and require very few adjustments; there are 3-REOs and 3-non REOs. Your adjustments are solid. You client requires six closed sales and these are the ones you will use. When you put the adjustments on the grid, you find the following: The non-REOs all adjust out to between $300k and $305k. The REOs adjust to between $290k and $295k. Except for small differences, they are all the same. No adjustment is made for the listing status of the comps. One of the non-REO sales was vacant. It sold for $302k.
There are no large adjustments (maybe an A/C unit or a half-bath at $2k). Your adjusted range is $290k to $305k.
Which of the following best describes your reconciliation:

1. These homes are effectively the same except for the REO status. My subject is an REO, so I'm going to give most consideration to those similar same-type sales and arrive at a point-value near the lower end of the value range.
2. These homes are effectively the same except for the REO status. However, I do not consider the subject's REO status to be relevant, so I am going to arrive at a point-value near the upper end of the value range.
3. At this stage, I don't consider the status-type to be relevant; since they are all similar, I'm going to reconcile at the mid-point of the value range.
4. Flawed poll! I'd make an adjustment to the REO sales since they sale below the non-REOs, and I'd tighten my range to $300k to $305k.
5. Your whacked. None of the above is how I think!