REO's as comparables to non-REO

[hastalavista]

He said when there are nothing but REOs to consider, they do represent the market value (no upward adjustment when its 100% REOs).


And he emphatically knows the market see no value variance if it is 100% REO, how????

If he's going to apply this "No sales, no value" philosophy to this line adjustment, it should apply to every line adjustment, should it not?

He's already stated that REO are not Market Value here:
Q: Are REOs, by definition, non-market transactions?
A: Yes. The seller is a lender who is under duress to sell the property as quickly as possible.

Now, if 100% are REO, this duress disappears?? Lenders don't have to sell, now? Did he smell like Gin, by any chance? :new_all_coholic:

(my bold)
He was straight.
And, he was careful and specific to say that while REOs were not market transactions (due to the duress) they could sell at market value.

I saw the inconsistency as well. I agree with Angel in her suspicion; it makes sense that there is a tipping point where the predominance of REO sales is such that a lone (or a few) traditional sales are simply not enough to compete separately. (You can guess where this inconsistency leads me, but as I said, I'm dropping my former position).

I also think this: in a case where the subject neighborhood is super-saturated with REOs, and if one feels compelled to go to another, competing neighborhood to get the traditional sale, one has to be very careful to match the same REO dynamic in that competing market.

 

[Terrel L. Shields]

its fair to say that the segment of buyers interested in REOs is limited

no value variance if it is 100% REO, how????

if the tree falls in the forest and no one is there to hear it, it must not have made a sound....is that the arguement?

If I use only one comp and it is the nearest property...and it is an REO...gee what more proof would I need? The subject obviously will sell at the same price... I've been drinking, in case you haven't noticed...but not that brand of Kool-Aid. How many times will the three closest sales be REO if 50% of all sales are REO?...Statistically speaking? Does that make it a "market"??

 

[JSmith43]

Res,

I appreciate your argument but I suspect this guy is spot on in the 90%> greater comment. It's not that the duress has disappeared from the REOs. At this point, the potentially competitive non REO properties have just been overwhelmed and dragged down by the REO onslaught. It is a tough task as a potential seller to command a significant premium when 90% of the competing similar properties are priced significantly cheaper.

AngelEyes, that is a good explanation.

The guy did pretty well, winging it in a classroom setting. This part bugged me just like it did ResGuy:

A. No. In the case where the market (or sub-market) are all REO sales, that becomes the market value for the subject.

If he had a more articulate, thoughtful moment, I bet he would have said:

"At the point where REO has been 100% of the market sales for a sustained period of time, it is most likely the best evidence of market value for the subject. It is a situation where the low end of the value range is solidly defined by the abundant data, and at the same time, the ability to measure REO stigma is thwarted by a sustained period lacking Market Value (non distressed, compulsory) sales. There is simply no way to define the upper end of the range with equal certainty." That's how he might have fleshed it out, had Denis not wore him out with the preceding questions

That still isn't 100% right in a theoretical sense, but it would be a practical response, in this GSE dominated realm. Much can be gleaned via interviews of potential market participants. Asking enough active agents and buyers to simply put into dollars how much more, if any, they would advise/decide to offer on a physically identical non REO property (if one became available-pocket listing, anyone?) than the identical REO property they are standing in on the same block overlooking the same park.

On the commercial side, it is important to interview investors with respect to the yield they seek for a particular risk class and size property investment. Why would this not be compelling on the residential side to glean the basis of an adjustment via interview responses?

Where's that poll I posted? It was 100% last I checked, that a well advised, well informed buyer would pay more for a non-REO. The question as to how much more, was left open.

 

[AngelEyes359]

Suspect is not good enough.
I just appraised a property with over 90% REO...there was still a +/-10% variance.

If the REOs and fair sales have no variance in market value and you prove that, then there is no problem. Your researched has shown that the REO market is selling for the same as a fair sale, therefore no adjustments are necessary. But you can't assume it. Period.

Sounds like a nice neighborhood to work in. Suspect is a starting point. Adjusting or not adjusting should be born out by data from the market place. At 90% you still have data to prove your case. At 100% REO sales, something which is very unlikely to occur in the real world because some owner occupant is going to eventually need to sell, could not one look backwards to when the make up was less than 100% for clues? Question Mark?

 

[Noreen]

I am wondering what opinions are about using REO properties when appraising a non-REO property for a refinance. The property I am doing is a 1959 Rambler that has an updated kitchen, siding, flooring etc. All done about 6 years ago. The entire neighborhood is 1955-1961 Ramblers many in the same condition and with the same amount of updating as the subject. Most of the sales in the past 6 months are REO's (not short sales). The broker wants me to go outside the neighborhood (as far as need be) in order to use only non-REO's for comparables. He suggested using a comp that was 1.5 miles away and out of the neighborhood. The REO's in the immediate neighborhood are in the same condition and are selling in the same amount of time as non-REO's. What does everyone else do? Am I ok using REO sales? I have looked on fanniemae.com for info but haven't found anything on this subject. If anyone can lead me in the right direction for more info i would appreciate it.

I can tell you there is a prominent appraiser (RE Appraisal Board) who also teaches here in NH who believes that if that is the market competition, then you cannot ignore them. I personally would grid the neighborhood sales then try to find arms length sales and extract the economic impact. Let's face it, if you don't have the money to make your mortgage payments, you don't have the money to maintain the structure. Market competition is market competition.

 

[VegasWayne]

Sounds like a nice neighborhood to work in. Suspect is a starting point. Adjusting or not adjusting should be born out by data from the market place. At 90% you still have data to prove your case. At 100% REO sales, something which is very unlikely to occur in the real world because some owner occupant is going to eventually need to sell, could not one look backwards to when the make up was less than 100% for clues? Question Mark?

Come to Las Vegas, 100% REO sales happened all the time. Looking back two or three years to find the "fair market" sale only told you that values had plummeted. Currently short sales are a larger part of the market, but finding the elusive "fair market" sale can be a problem that can't be solved.

 

[AngelEyes359]

Come to Las Vegas, 100% REO sales happened all the time. Looking back two or three years to find the "fair market" sale only told you that values had plummeted. Currently short sales are a larger part of the market, but finding the elusive "fair market" sale can be a problem that can't be solved.

That is horrible. I don't envy you Wayne. Sounds like people who move to Vegas stay in Vegas.

 

[residentialguy]

In all of the similar communities in Las Vegas, there was not 1 homeowner that just decided to move within the past year?

 

[J Grant]

This is all very helpful in terms of deciding to adjust for a condition of sale for REO's. Besides that, as the instructor said and FHA says and Fannie guidelines say, if REO's are present as competition to the subject property, then consider their use as sales.

It is a narrow foucs for appraisers to determine whether to use REO sales based only on whether or not the appraiser will have to make a condition of sale adjustment to the subject.

To perform the anaylsis necessary to choose the correct comps as subsitution for the subject to derive MV, the appraiser has to spend a lot of time looking at the buyer side of market participants. Would they buy an REO, as well as a non REO house that is similar to the subject in condition, size, appeal to the subject? If the answer is yes, REO competition would need to be considered as comps.

We have to remember that most buyers, including investors, work with realtors. and realtors have the listings at their disposal. So, what are the realtors likely to show the buyer for your subject?

Drive around the streets surrounding your subject. Do the realtor signs say REO or non REO? You don't think potential buyers in the area are not driving around looking at the signs?

When a potential buyer calls a realtor , how do you think the conversation goes?

Buyer: "Hello. My wife and I were driving around Orange Grove and saw your signs and we know there are some good deals out there. We are intersted in a 3 bedroom home with a pool and would like a good deal, but I don't want a handyman special."

Realtor " I have five 3 bedroom listings in Orange Grove with pools. Three of them are REO's, but I am not going to show them to you, because the seller is a bank with atypical motivation and they don't represent market value"

I don't think realtor end of the conversation would go like that.

The realtor end of the conversation would go like this:

Realtor: "I have five 3 bedroom pool home listings in Orange Grove. Three of them are REO's. One is wreck, so that is not what you want. The other REO's, one needs a little work but it is a great deal. The other is in average conditon. The other listings I have are owner occupied, they are priced a little high, but both owners are desperate and need to sell and are open to offers. Would you like to see all four listings?"

Buyer: "Yes. How about Saturday."

 

[residentialguy]

Buyer: "Hello. My wife and I were driving around Orange Grove and saw your signs and we know there are some good deals out there. We are intersted in a 3 bedroom home with a pool and would like a good deal, but I don't want a handyman special."

Realtor " I have five 3 bedroom listings in Orange Grove with pools. Three of them are REO's, but I am not going to show them to you, because the seller is a bank with atypical motivation and they don't represent market value"

I don't think realtor end of the conversation goes like that.

You're right. The realtor end of the conversation would go like this:
Realtor: "I have some REOs. They are vacant homes, sold as is, and dealing with the bank can be dicey but the good news is that you can buy them below market value."