REO's as comparables to non-REO

[Mike Garrett RAA]

For the most part, the market doesn't care that it is a short sale with one exception. If a quick purchase is needed then the short sale might not work. What the market is telling me...a buyer will buy what represents the best deal for them. That could be price, it could be features or condition, and it could be how quickly they can occupy.

I am very fortunate to have as a fishing partner one of the best short sale negotiators in the community. He really understands how to put short sales together. Unfortunately, many real estate agents have no clue what needs to be done and the deals either drag on and on or just crash.

We spend hours and hours traveling together and the conversation always revolves around the real estate market. In addition, my brother's wife is a top producer with RE/MAX. Both my brother and I have been REALTORS® for more than 35 years IN THIS MARKET.
I taught real estate sales in 5 states for a number of years, brokered an office with more than 20 sales associates, and owned a master franchise with ERA with 117 offices in 5 states. I say all that to say....I think I understand real estate markets.

Most appraisers have never gone through what we have seen in the last 5 years. In fact, a huge percentage of appraisers have less than 8 years experience with entry into the business during the boom years preceding the crash of the real estate market. My brother and I have been through this on three different occasions.

Experience counts and in this type of market it really counts. For an appraiser to say REOs and short sales are not the market is just silly. The market is what the market is. Our job is to report the market. Cherry picking transactions only inflates the value...part of the reason the real estate market crashed to begin with.

Social engineering on the part of the federal government is another reason. HUDs policy of making home ownership the right of everyone is also to blame. Re-instate down payment requirements of at least 5% with the exception of VA guaranteed loans for veterans. Stop making loans to people who have no way to repay them. Stop using AVMs and other programs that don't provide credible results. Those things would go a long way to fixing things.

 

[Lloyd Bonafide]

But (and I'll probably get jumped)....I make no adjustment to the REO or SS comps for the 'type' of sale they are vs traditional A.L. sales.

I agree with you - you can't always make an adjustment to an REO sale because REOs tend to sell lower, because sometimes they don't sell lower. It depends. (But condition adjustments are almost always warranted.) Sometimes REO sales sell above market. I've appraised several REO sales in the past year that could not appraise for their contract price, but they still sold at higher than the appraised value.

Right now, on my cul-de-sac there are 3 properties offered for sale. Two are identical models, one is a short sale and the other is a traditional sale. The short sale is priced at $190,000 and the traditional sale priced at $225,000. If you were in the market which one would you buy and why?

It depends, doesn't it? Maybe the market value is $220,000, and the short sale listing is priced way below market. Maybe the lender has not approved the short sale, and may never approve a short sale for less than $220,000, and this listing will eventually end up in foreclosure. Maybe nobody can buy it for $190,000 or $200,000, no matter how good the agent is at negotiating with the lender. Now if the $190,000 short sale listing has already been approved by the lender at that price, it's a different story. But I've seen many buyers pass on low-priced short sale listings to buy a higher-priced REO or traditional resale, because they can be purchased in a reasonable time period.

 

[The Warrior Monk]

So long as I am able to differentiate the prices paid for REOs and non-REO sales, I will adjust the REO up if I might feel obliged to use the REO. But the notion that an REO and the almost certitude that it sold "AS IS" or the sale was pushed for quick disposal will sell for the exact amount a non-REO would is absurd in my world.

All the REO is going to do is push the price down. And again, my question is if you have 2 REOs and one traditional sale, what are you going to do? Adjust the traditional sale DOWN!!!! Yep, yer honor, it sold arm's length and we can't have none of that no matter what fannie mae's defintion sez... everybody knows you have to sell like it is distressed...

Fannie mae didn't anticipate the time when the whole marketplace went down. Their definition of MV may be completely out of sycn with the real world, but if we are going to use REOs as a substitute for arms length sales, then we need to just let the BPOs set the price...they'd be more accurate.

Ditto Terrel.

The definition of "market value" is not "the value based on the predominant type of sales activity." If this particular definition is what lenders intended and want, the solution is simple...have them change the definition.

 

[JSmith43]

The definition of "market value" is not "the value based on the predominant type of sales activity."

Triple ditto.

Plus, there are survey results on this forum that showed virtually 100% agreement that a well informed and/or well advised buyer would pay more for an otherwise identical non-REO.

It was not discussed, how much more, but there are a silent majority of appraisers that know REO sales are at best, proxies for MV sales.

Tree rings were used as proxies for climate change temperature data, one of the things that got those East Anglia PHDs discredited.

 

[Mike Garrett RAA]

Show me the data from MY MARKET and I will concede. I can also show you several cases where the state has investigated appraisers who are not giving consideration to REO and short sales when those sales are prevalent in the market. Cherry pick all you want...I prefer to present the sales IN MY MARKET and opine a value accordingly.

 

[Terraform]

Sounds like your neighborhood is REO driven. Explain to your client that this is a REO driven neighborhood and communicate with supportive data if the REO market indicates declining value trends, stable trends, or increasing trends. They should be satisfied with that.

 

[Bandie]

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.

In most cases that I see, REOs have few differences in physical condition as opposed to non-REO sales. So right there, I do not discount reviewing the REO sales.

See if the broker can prove his case for the market considering REO v non-REO properties as different and into a dollar or percentage figure. If he can't, I'm not sure why he is making a fuss.

I don't like that you are asked to go into different neighborhoods. That is scary to me. That is a very difficult adjustment to come by, in my opinion, and from what I have read is one of the main techniques utilized in fraudulent appraisals. If I had my way, and I do not know your market, I'd much rather go back in time and make a market adjustment.

On a few occasions I've been able to show that the REO/s sold at the typical SP/LP ratio from its/their previous sale/s...and many have recent sales which means the market is not discounting them extra any notable amount.

I'm not sure any of this helped but good luck. I find it so very interesting how so many non-licensed appraisers feel the need to tell us appraiser what is proper in an appraisal report be it a lender, AMC, trainee performing reviews, an agent and the rest of the world.

 

[Elliott]

The other day I counted up the number of assignments I'd done so far this year
and noticed that 33% were REO/Short Appraisals (about 1/2 of them were BofA).

When foreclosures were 1/4 of 1% of the market sales, they weren't significant.
When REO are about 33% of the market, they influence the market and are a
significant part of the market. I don't know how they can be included in some
assignments and ignored in other assignments; its not like the definition of
market value changes.

 

[Howard Bouchard]

What is the inventory of REO's in subject neighborhood. Have they been all worked through? What comparable and competing property listings or pending sales did you find in immediate proximity to subject? The LO is giving you sales only, which shows their limit of understanding. Besides you should know that if REOs are the market, which is how you explained this scenario, then you would use those sales regardless of what Resin Guy says. No need to go farther afield for anchor comparables.

 

[kansaskowboy]

kansaskowboy

I'm late to the party on this one. There have been a lot of good comments. Only thing I would add is make sure that you verify the impact by numbers regarding REO's, short sales, and standard sales. The area I appraise in we have been averaging between 55 to 70% of the sales in tract areas are either REO or Short Sales. I make sure that I point the reader to that information. They usually stop complaining (sometimes). The key for me is verify, as one person stated, what impact if any does the REO have on price in the neighborhood. After that I will usually place slightly more weight on the non REO sales if I have 3 or more of them. That way the underwriter can see the market and understand what is impacting value.