REO's as comparables to non-REO

[DMZwerg]

violate close to 6 points in the real estate definition of market value?

What do you mean by "Violate"? That is not a word in USPAP either. Violate what six points in the defintion of market value?

Spell out each six points and how an REO house "violates" them, and I will see if I intrepret it differently.

I guess you missed my earlier post ...

Please, please look up the definition of "creative financing".

If you are using all short sales without adjustment then the value you are determining is the value under creative financing, which is verbotten by the definition of market value.

So, looking at REOs and the definition of market value we have:

1. whether or not it is a "fair sale"
2. whether REO status can be considered "undue stimulus" as the bank HAS to liquidate it off their books within a certain number of years and often has to liquidate a certain number of such properties off the books within the next 30 days or risk getting a bad rating and the bank itself being liquidated
3. whether the motivation of the seller (lender) is typical
4. whether a bank is acting in its own best interests and operating under "a reasonable exposure time" (see #2)
5. normal consideration
6. special financing

So, how many of them does an REO have to violate to have not been a transaction that violates the definition of "market value", and if the sale did not meet market value what adjustment must be considered to use it as a potential comp in determining market value?

I guess at this point it is time to review the definition of market value, and in particular the extra comments on the Fannie Mae form.

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) the buyer and seller are typically motivated; (2) both parties are well informed or well advised, and acting in what they consider their best interests; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.

* Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily idenitifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by third party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of the adjustment should approximate the market's reaction to the financing or concessions based on the appraiser's judgement.

There you go ... opine away!

BTW, short sales ARE special financing.

 

[J Grant]

Res Guy, that post I made the short one you quoted they want hypotheical value was an error on my part, I hit the send button before I finished, please see my longer post a few threads up where I am sorry to say, they are not asking for a hypothetical value.

Market value, aka most probable value, is an assignment SOWs subject so certain conditions, assumptions (the conditions/assumptions is the verbiage in the definition of market value) But it is not the same as a hypothetical value, which in appraisal terms means contrary to known fact.

 

[J Grant]

BTW, short sales ARE special financing.
__________________
No, short sales are not special financing. Short sales are when the seller is upside down on their mortgage, and the bank agrees to take less than the mortgage amount, AFTER the seller has had house on MLS 90 days and can prove no amount at mortgage value or higger was offered . THEN the bank agrees to take less than the mortgage owed, and the realtors put "Short sale" on the listing.

Typically, the lender of the homeowner does not offer any special financing, it is up to the buyer to pay cash or secure their own financing as they would with any other sale.

Will address rest of your post later, gotta go out!

 

[DMZwerg]

Let us suppose there were no sales whatsoever in the last 12 months ... all properties are automatically worthless then, correct?

I don't think no sales in the last 12 months one could automatically say the properties are worthless

Then why would they automatically be worth LESS (aka, REO values) just because there have been no non-distressed sales in a limited period like say, 12 months?

I agree that if there are no sales (or comparable sales or non-distressed/"fair market" sales) then active listings become more important as one of the main indicators of market value, but I say it is wrong to throw the baby out with the bath water and change the definition of market value so you can rely solely on REO sales (aka, a type of distressed sale) to determine "fair" market value without adjustment or comment.

The point is, in res appraising, even if the form looks simple, it is not simple, and an appraiser has to look at listing and sales and talk to realtors and all the rest. Same with whether to use REO comps. There is no one size fits all answer ( at least to me there is not)

I agree with that.

Now, back to the original poster, the broker is correct in one regard ... if you have not examined sufficiently what if going on in the local neighborhood as well as what is going on in proximate competing neighborhoods and determined what adjustment is reasonable for using REO compared to "non-distressed"/"fair market" sales then you probably need to do so to support you lack of adjustments on the REOs.

 

[Verne Hebert]

I just went back to page 8 and worked through the thread. The common element that many seem to be trying to get there arms around is the distressed/non distressed issue. Because it is bank owned it is distressed. Maybe where you are but not here.

In good times, about 85 % of the sellers "have to sell". This can be heard from the mouths of any of the seasoned agents.

I have been selling off my rentals. Last latter August I put one of them on the market. Next door was a fresh REO; poorly priced I might add. I priced the house properly...valued it and discounted it $ 5k to allow for the continued decline in the market over the early part of the exposure period. I had an offer in 20 days and closed in mid October..........the REO is still on the market.

My listing/sale was no more, or no less distressed that the REO. Both of us wanted to sell. Mine was priced properly and theirs was not and still isn't.

Every listing is a product in the market. The bank is not going to give the property away; they want as much as they can get.

It is all market. If you can find a different range of value for bank owned than free market owned, then their are other inherent adjustments in the sales price...........risk, condition, deferred maintenance.

Short sales are another story. Here they are just plain not getting done very often......so as the buyer you have this huge unknown for 3, 4, 5 months and your hands are tied to make other offers, unless you have a done of dough...........this becomes an opportunity costs......and this is builtin also, if the deal ever consummates.

 

[DMZwerg]

Given that "arms length" sellers are having to compete with REOS and shorts, which is a "undue stimulus", there are no true "arms length" sales in the current market, in some markets.

The short sales and REOs have undue stimulus, not the "non-distressed"/"fair market"/traditional sales.

Why? Because they are the ones under excessive pressure to sell!
http://dictionary.reference.com/browse/stimulus

Estate, RELO, and so forth may (or may not) also be under "undue stimulus".


Would REOs sell for more if the lenders could afford to market them for the same length of time as "non-distressed"/"fair market"/traditional sales and not have to worry about the EXTRA expenses taken to keep them free from excessive deterioration and vandalism? It has also been pointed out that lenders are often COMPELLED to get certain properties off the books because of banking regulations/regulators, which is why such sales are definitely under undue stimulus. The final question about undue stimulus is whether or not there is an extra REO stigma on the market. the undue stimulus makes the sales prices questionable as one can not be certain of the motivation or the seller (lender) and whether or not they were acting in their own best interests at the time of sale or not. Just getting something off the books so your entire bank does not get a warning, fine or actually liquidated by banking regulators may be in the "best interest" of the bank from the standpoint of its continued existence, but is not in terms of "its best interest" as to selling price of a particular property. I can't say how many times I have heard Terrel state this point now (well over a dozen IIRC that banks are under pressure to liquidate REOs) yet very few of us seem to grasp what that means in regards to using REOs as comps.

 

[DMZwerg]

The "go back in time" approach is far less relavant in changing market conditions, the farther back in time one has to go to find a traditional sale.

Adjustments are done, in general, because the properties are not equivalent, market conditions are different, terms of sale are different, etc. The larger the adjustment and the number of adjustments demonstrate the lack of similarity as well as the lack of an accurate value judgement.

I disagree.

Going further out and further back can yield data points from which trends can be established.

Think of it this way:
Appraisers who use REOs have put forth a theory that they ARE the local NBHD market, and thus are reasonable substitutions for "non-distressed"/"fair market"/"traditional" sales, yet have provided no PROOF that they accurately represent what a "non-distressed"/"fair market"/"traditional" sale would sell for in the local NBHD market. So, how would you go about proving this theory to be true?

Let us say we have 4 neighborhoods called A, B, C & D and our subject (with all REO sales is in NBHD C). Start at a point where the NBHDs all had fair market sales and trend them forwards. Now look at the REO trends in A, B & D in comparison to the "non-distressed"/"fair market"/"traditional" sales. This could well give an indication of whether or not the theory is true, particularly if any of the neighborhoods seem to be experiencing a similar trend of large numbers of REO sales like C but still have some "non-distressed"/"fair market"/"traditional" sales. It can yield some guidelines as to how comparable the NBHDs were then, how comparable now, and what adjustments seem to be supportable, as well as whether or not the REOs are in deed representative of the NBHD C market. Note that in many cases average/median (or even Q1 & Q3) sales prices may not be entirely indicative as random chance can vary these month to month, but price/sf, price/bath and price/bedroom tend to be more consistent indicators and tracking these can yield smoother results.

Still think I am a quack in suggesting researching sales "further out and further back"?

 

[DMZwerg]

nice to see one sane voice among the madness...yes yes yes

Are you saying I am not sane??? :blink:

Well, I am a mathematician :wacko: so I guess that answers that. :happy:

 

[DMZwerg]

FNMA Market value is a static, never changing hypothetical value.

Says you!! Where does it say that, anywhere, in USPAP or any appraisal guidelines, that the value is "static"? Show me one instance.

You, and some others on the board are intrepreting it that way, which is fine, but say, "MY interpretation of market value is that it is static, never changing hypothetical value"

The whole point of the term MARKET VALUE is that the value reflects forces of the MARKET, otherwise, the definition of an appraisal assignement would be, "establish a HYPOTHETICAL VALUE for the subject".

Says you!! Where does it state that, anywhere in USPAP or any appraisal guidelines, that "typically motivated" actually means "typically motivated in the local market"?



"Luckily" for us who hold the opinion that "REO comps should not be used without comment, adjustment and analysis" there are other factors in the definition of market value other than "typically motivated", namely as "undue stimulus" (which most comprehend REOs are under), "special financing" (there go the short sales), "own best interests" (problem for REOs & short sales again), "well informed as advised" (dare I even mention "flopping"?), "reasonable time is allowed for exposure" (oh, my REOs again and "pricing for liquidation" and "pricing for quick sale") ... do I really need to go on?

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?

Re, the stimulus they are asking about, is not whether there is undue stimulus on Joe's the owner of the sujbect!

We are supposed to analyize undue stimulus if it affects value of the COMPS, the competing sales, not the owner of the subject!!

Exactly. That is why any undue stimulus (aka, excessive pressure) existed to sell the comparable that it must be addressed in the SCA or the potential comparable should not be used.

my assignment was to provide market value for his house, not adjust market value for his personal stimulus or non stimulus, or the bank's stimulus or non stimuls.

Wait a sec ... the BANK's undue stimulus in regards to the comps needs to be addressed. Just clarifying

If I got assigned two appraisal orders, both for market value of 7 Cherry Lane on the same day, and one assignment was from a lender taking it back as an REO and one assignment was from a line of credit the owner had applied for, both appraisals would have the same comps and the same market value, the only difference would be the appraisal ordered by the REO department of a bank would have an REO addendum asking for listings, and asking to provide an opinion for a POSSIBLE discount to market value , if the subject were to sell within 60-90 days.

Selling in 60-90 days is LIQUIDATION VALUE if I recall correctly.
The client, in ordering an REO addendum, is asking for multiple values. The first is the main 1004 (etc) value that is, by the form, "fair" market value for the local market, likely used as a baseline from which they can consider and apply their standards when setting liquidation price. So the four values are "as is" fair market value, "as is" liquidation value, "as repaired" fair market value, and "as repaired" liquidation value. This gives them sufficient information to determine how to proceed and indications of where they should set liquidation price.

 

[Randolph Kinney]

I disagree.

Going further out and further back can yield data points from which trends can be established.

We have heard the above before. You and RedGuy have this in common as you apply it to finding traditional sales.

Think of it this way:
Appraisers who use REOs have put forth a theory that they ARE the local NBHD market, and thus are reasonable substitutions for "non-distressed"/"fair market"/"traditional" sales, yet have provided no PROOF that they accurately represent what a "non-distressed"/"fair market"/"traditional" sale would sell for in the local NBHD market. So, how would you go about proving this theory to be true?

If you cannot isolate a variable for its contribution, among the many variables that make up the neighborhood or competing neighborhoods, then the value difference (if any) cannot be supported. Intuitively, you argue there must be a difference, therefore continue going back in time and farther out until you can show a difference. Having a difference and the magnitude of adjustment, after finding such difference, may not be rational or reasonable. Implicit in your technique is that all other variables are equally represented and null themselves out as for contribution.

Sort like the published report of contribution of solar panels to resale value being 17% of the resale value, even over time, all other variables like pools were implicitly assumed to be equally represented in both groups. Imagine that; 17% of a $! million sale being the value of solar panels that can be bought for $20,000 and installed. :icon_idea:

Still think I am a quack in suggesting researching sales "further out and further back"?

You are the person who espouses that technique or method for adjusting REO sales in close proximity to the subject. From my experience, I use traditional sales when I have them. I don't manufacture traditional sales out of REO sales by finding a traditional sale that loses its relevancy by going farther away from the subject into dubious competing neighborhoods or farther back in time so as to make enormous adjustments to account for market condition differences. It cracks me up that you think you can have an accurate value judgement using those methods.