The original poster asked,
"I am wondering what opinions are about using REO properties when appraising a non-REO property for a refinance"
First of all, they are igonrant about an appraising an "REO", an REO appraisal asks for market value and both REO and non REO comps can be used.
Back to the original question though, they are asking about comp selection, and some posters are saying, "no, don't consider REO comps because they don't represent market value."
Market value is A CONDITION OF ASSIGNMENT OF THE APPRAISAL, THE SOW FOR ARRIVING AT VALUE FOR THE SUBJECT, NOT THE STANDARD FOR CHOOSING COMPS. In other words the SOW describing the definition of probable value, buyer and seller informed with no unude stimulus, acting prudently etc, as it pertains to the CONDITION OF ASSIGNMENT, not to comp selection.
There are guidelines to comp selection, location, financing, condition of sale, physical characteristics , distance from subject, that it be arms length etc. NO APPRAISAL GUDILELINES that I have ever read says appraisers are supposed to pick or exclude comparables based on price. Yet some appraisers are running data that spits out that REO's sell for 30% lower, for example, than "traditional sales", so they are not using them based on price.
We should not be separating "tradtiional" sales anyway. Where does the word "traditional sale" appear in a USPAP or FANNIE guidline to picking comps? Some of you are substituting the word "traditional" for typical, well, per Fannie and USPAP, they are not not identified or defined as the same .
There are, of course, valid reasons to consdier excluding REO's from use as comparables.
1) condition, obvioulsy, if it is that different from the subject in condition, don't use it ( or make a condition adjustment)
2) arms length transaction: That is where it gets more complex. Some appraisers feel that REO's are not arms length because they reprsent a sale sold with undue stimulus. I, and many others ( and the fact that Fannie guidelines include REO's for consideration), don't automatically feel the REO sale is subject to "undue stimulus" An REO lender wants as an addendum to the appraisal a value as if sold in 60-90 days, THAT DOES NOT MEAN THEY HAVE TO SELL IT IN 60-90 DAYS.
The lenders often keeps an REO on the books a year or more. A private owner, on the other hand, esp these days, is often subject to more undue stimuls, esp if they are behind on their mortgage, losing their job etc, and they may have to sell in 60 days. So the assumption that an REO is subject to "undue stimulus" in today's market, if you want to make that assumption, go ahead, but FAnnie is not telling appraisers not to use REO's because they are subject to undue stimulus.
2) price of comps affected by creative or special financing: REO"s and short sales the lender is not offering any special financing. The buyers have to get a mortgage or pay cash.
3) Condition of sale: most REO's are put on MLS and have similar condition of sale to non REO's. But if you feel the condition of sale needs an adjustment, make it.
4) REO's represent liquidation value: In most cases, they do not. They may be selling for perhaps 5-10% lower, in some cases, than a seller owned home of similar condition. That is not liquidation value. Liquidation value is fire sale value, selling far below other sales in an area. I don't use the few REO comps that sell at such low prices ( unless my subject is a wreck and those are the appropriate comps) . I looked up the definition of liquidation sale, and it was an asset that has to be sold in a severely limited time frame. That means, since marketing times in RE are usually 30-120 days, that a home would have to be sold in 5 or 10 days, for example.
THOUGH AN REO MAY BE SOLD IN 10 DAYS, IT DOES NOT "HAVE TO BE SOLD " IN 10 DAYS. Most banks would like to sell them in 60-90 days, which represents average marketing time in many areas, or a discounted marketing time. If the homes does nto sell in 90 days, the bank may reduce the price, but it doesn't panic and sell it at all costs in 5 days after that. Most private sellers, when they get serious about selling, reduce their prices and THEN their home typically sells in 60-90 days.
OVERALL, THE ASSIGNMENT IS TO FIND THE MOST PROBABLE PRICE FOR THE SUBJECT, BASED ON TYPICAL MARKET VALUE DEFINITION AS IT APPLIES TO THE SOW FOR THE APPRAISAL. Do the appraisers elimanting all REO's , even when they make up 40% of the market of homes similar to the subject, really believe they are providing a probable value?
How many times have I seen on MLS, "Subject price reduced to under appraised value". Most of those appraised values are WRONG, they do no represent the most probable price, because in reasonable marketing time and exposure, the subject did not sell for the "appraised value"
I have looked at listings, for example, of homes let's say 2000 sf with a pool, where I just appraised a model match , a 2000 sf home with pool, same conditin, same street. a week ago for 190k. Not the listing on the 240k appraised value home is reduced from 240 k to 210k, and the listing agent has a comment such as "price reduced to below appraised value of 240k").
Like how did an appraiser come out with a value so far from the probable price, to appraise a house for 240k, when I just did a similar assignment, asked to provide a probable price ( market value), for a model match on same street and the opinion of value I came up with was 190k?
Did the other appraiser decide to eliminate competitive comp sales according to price? Maybe they ran around 2 miles away to get comps rather than use comps a few blocks away because they were REO sales? Whatever the reason, the appraiser failed to fulfil the assignment, which was to provide a probable price, as made obvious by the fact that their appraised value of 240 k was on the market and got no offers, and when the agent reduces it in price to "below appraised value", it ends up selling for 190k or close to 190k, which is what I appraised the model match for.
