REO's as comparables to non-REO

[J Grant]

"They may be selling for perhaps 5-10% lower, in some cases, than a seller owned home of similar condition."

Then they would need a 5-10% adjustment

Maybe, maybe not. You could also weight the subject on the higher end of value, or in the middle. I personally often find it hard to extract an exact adjustment for how much lower, if at all, REO or short sales sell for than "regular" sales. In any case, we adjust the comp to the subject, so assuming the square footage, condition, location etc of three comps are exactly the same, and comp 1 sold for 200 k, and comp 2 sold for 210 k, and comp 3, which is an REO sold for 190k. So, why would you adjust the 190 k sale up if you are not adjusting the 210k sale down? Comp prices vary, in this case above I would appraise the subject for 200k and not adjust either the higher sale or the lower sale.

REO comps don't always sell lower, I used the 5-10% figure as an example, that if they are selling for lower than homes similar to the subject, that does nto mean they are selling for "liguidation value", as some appraisers claim. That was the point I was trying to make.

If you feel that after analyzing data that homes in similar condition and amenities to the subject are selling for let's say, 8% less, and you feel that the reason is because the REO 's have a stigma, or the condition of sales differ and you want to adjust 8% up for that, then that is a reason to do so.

However, if non REO sales are also jumping around in value, would you need to start adjusting them too? If such an adjustment for either REO or non REO is reliable, use it, but if it is not reliable, better off just putting the sale prices in, adjusting for living area, condition, time adjustment if needed, but NOT adjusting for condition of sale ( because subject was an REO and the comps were not, ) Instead, if you feel non REO sales are better comps than the REO, weight those sales heavier and explain why.

 

[JSmith43]

Why do you make that assumption? A false assumption, in my case, when the market was "high", I lost a lot of mtg broker clients for "not making value", and in the cases of new construction, I always included outside comps sales and ended up "killing deals" because the new builder comps did not support the sales contract price. Maybe do some research and ask me, before making an assumption like that.

J Grant, I did not contemplate that my post said anything about how you might have treated seller behavior. The example was to illustrate why a situational mind set when it comes to working definitions is not a good idea.

The concept of a living, breathing Constitution was an invention of convenience by those that stood opposed to the original intent. Most people would notice if they had an employment contract, for say, one year, but the employer changed the terms mid year claiming it was a living breathing contract, and the employee would have to make an adjustment so his wife could afford her regular trips to the spa.

 

[residentialguy]

REO comps don't always sell lower, I used the 5-10% figure as an example, that if they are selling for lower than homes similar to the subject, that does nto mean they are selling for "liguidation value", as some appraisers claim. That was the point I was trying to make.
.

If they are selling higher, then I would adjust them down, if it were a market reaction to that type of sale. I'm not trying to get a higher value, I'm trying to find the most probable price of MV as defined.

If you feel that after analyzing data that homes in similar condition and amenities to the subject are selling for let's say, 8% less, and you feel that the reason is because the REO 's have a stigma, or the condition of sales differ and you want to adjust 8% up for that, then that is a reason to do so. .

If such an adjustment for either REO or non REO is reliable, use it, but if it is not reliable, better off just putting the sale prices in, adjusting for living area, condition, time adjustment if needed, but NOT adjusting for condition of sale ( because subject was an REO and the comps were not, ) Instead, if you feel non REO sales are better comps than the REO, weight those sales heavier and explain why.

We're on the same page

 

[J Grant]

If they are selling higher, then I would adjust them down, if it were a market reaction to that type of sale. I'm not trying to get a higher value, I'm trying to find the most probable price of MV as defined.

Finally, we agree on something else!

 

[DMZwerg]

If an appraiser believes a foreclosure sale or a short sale within that area is an appropriate comp, the appraiser cannot assume it is equal to the subject property, Fannie Mae said. Appraisers are required to identify and consider any differences from the subject property, such as the condition of the home and whether any stigma has been associated with it

How is that less stringent than my statement that to use REOs one must analyze, adjust, or comment? In fact it seems to state that to use them the appraiser CAN NOT use them without consideration, MUST analyze, and implies that the appraiser MUST adjust! (the last when taken with the comments in Definition of Market Value)


So now you have your point blank proof and you are still arguing ResGuy and I are incorrect in our interpretations??? m2:

Above, Fannie does not say, "don't use REO's,", they don't say "REO's don't represent market value," and they don't say "you have to make a condition of sale for REO's.

I agree with the part that it does not say "don't use REOs" but dude! What in blazes do you think the words "CAN NOT ASSUME" means if not "REOs don't represent our definition of market value"???

What Fannie is saying, read above again, is that if an appraiser feels an REO is viable comp, the appraiser should CONSIDER any diffrence from the subject such as condtion of the home ( that one is obvious, same as any other comp), and WHETHER any stigma has been associated with it.

Yes, it says that, which is what I have been stating about analysis & comment

They DO NOT SAY, divide the market into two markets, a "regular market excluding REO"S " and an REO market.

What if we were talking about lake properties instead of REOs? Replace the terms and think what it means. Would you be here trying to tell me that lakefront properties are the same market as non-lakefront properties? Would you be trying to tell me that one should not consider them separate markets or market segments?

Sheesh!

 

[DMZwerg]

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."

NAME ONE!
(and provide a quote in this thread as proof).

Actually, since you stated "poster(s)" (a plural), name TWO as Terrel may well have said something that could be construed as meaning that (but I know ResGuy and I have not said NOT to consider them, we have stated that one should not USE them without sufficient analysis & comment including appropriate adjustments (which could be zero, as we repeated 5-6 times each on a different thread).

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.

Try making raspberry juice using apple juice some time. Unless you adjust it the juice won't taste like raspberry juice.

Same with doing an appraisal ... if all you are using is Liquidation Sales and you are using them without analysis, adjustment, or at least comment then the only value you have opined is Liquidation Sale Value. I am not saying that value can not be used to opine market value but it needs at least some support (in the way of adjustment or comment, which comes from analysis) to support the use (aka, WHY they seem to be the same, or why Market Value should be close but somewhat more, etc.).

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.

:blink:

Who said you pick based on PRICE???
I know some of the following have been claimed, but nothing about price. Please document your claim with a link please

• REOs are lender owned and thus does not have a typically motivated seller
• REOs have a different pool pool of typical buyers than traditional sales and thus the buyers are not typically motivated (or the buyers of traditional sales are not typically motivated)
• Short sales are either a type of special financing (as applicable to somebody involved in the transaction) ** OR ** may have special financing that is often not revealed in MLS rendering them suspect as regards to special financing
• Short Sales do not have typically motivated sellers, particularly as coverage of the current debt, hardship exception, or a personal note to cover difference may or are involved

Heard all that, but nothing on sorting and choosing by price. Are you making this stuff up to try sidetrack the discussion or something?

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.

I have only heard you mention "30%" on this thread, but if you insist ...

Kenosha, City of - Q4 2010
Data from MLS (total)

• Average (Mean) Sale Price- $128k
• Median Sale Price - $112k

Data from MLS (flipping "toggles" under "Special Financing" to exclude REO Sales and Short Sales)

• Average (Mean) Sale Price - $152k
• Median Sale Price - $135k

You do the math,
but I think that is sufficient to indicate that REOs should NOT be used as comps in Kenosha without sufficient research into what adjustment would be appropriate in the subject NBHD and comment on why if used without adjustment (such as giving little to no weight to them, or using the comps in different NBHDs to support adjustments & opinion of value).

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.

What do you call traditional sales then?
The exceptions are defined in clear, concise, easily understood language, and each type of exception has a special term to differentiate it, so why would the language need to define sales WHEN THE DEFINITION ALREADY EXCLUDES EVERYTHING ELSE?

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.

Are you positive?
Odd how the financial definition of "Liquidation" is different than yours ... and I can even quote a source! (can you?)
"liquidation -- Sale of the assets of a business to pay off debts."


- from Financial Definition Here

Odd, isn't an REO, by definition, a sale of a business asset to clear the debt from the lender's books?
Also odd, isn't that fairly close to what a short sale is as well (aka, the lender selling off the borrower's property to clear the debt from their books?)

Rest was TILDA as it seemed to ramble quite a bit.

 

[DMZwerg]

"They may be selling for perhaps 5-10% lower, in some cases, than a seller owned home of similar condition."

Then they would need a 5-10% adjustment

Maybe, maybe not. You could also weight the subject on the higher end of value, or in the middle. I personally often find it hard to extract an exact adjustment for how much lower, if at all, REO or short sales sell for than "regular" sales.

Actually doing that leg work, every time, is what I would call "analysis".
Stating what you did and your findings is what I would call "with comment".

See, now even YOU are saying you agree with me in part and that the appraiser should be analyzing the comps (aka, you said you "often find it hard to extract an exact adjustment").

In other words, you are stating you rarely use REOs without analysis and trying to extract and adjustment.

So, why do you keep claiming they ARE the market, that the ARE the same thing, and such work is thus unnecessary?

REO comps don't always sell lower, I used the 5-10% figure as an example, that if they are selling for lower than homes similar to the subject, that does nto mean they are selling for "liguidation value", as some appraisers claim. That was the point I was trying to make.

Who ever said Liquidation Value had to always be lower?
I have seen cases where an REO or Short Sale took months upon months to close after the price was agreed upon (pending date) and thus on the closing date the sale price was actually HIGHER than other sales that appeared to be traditional sales on the surface that closed within a month of the pending date. Of course that was a market that was primarily a 2nd home market and during the main crash period thus most of those "apparent" traditional sales actually had VERY motivated sellers and thus were also priced for liquidation so I guess it may not be the best example overall, but it does bring up a point to consider ... aka, pending date.

If you feel that after analyzing data that homes in similar condition and amenities to the subject

There is that "analysis" again ... I thought you said it wasn't necessary, or at least implied that it wasn't when you argued that I wasn't comprehending the Def of MV on the FNMA forms correctly

 

[J Grant]

hi DMZ,
I won't address all latest points as I already posted at length about many of them, I do respect your views so want to reply to a few points as I see the issues facing us appraisers trying to do a good job.

I am on the same page with you about applying the same standard of care/analysis when choosing or not choosing to use certain REO comps. I never said otherwise in my posts! (if that was implied, that's not what I meant)

Re, the Fannie most recent guidelines, includes the verbiage, " selecting comps subject to same influeces as the subject, and then goes on to talk about REO's. Clearly, they expect appraisers to consider and use comps subject so same influences as subject, whether that be positive or negative. They go on immediatly to discuss use of REO comps, which looks to identifiying whether REO comps are part of the influences on a subject appraisers ought to consder.

"What does CAN NOT ASSUME" means if not "REOs don't represent our definition of market value"???

Again, the defnition of "market value", in res appraising regards to the scope of work deciding how to arrive at a value for the SUBJECT, not as a standard for picking comps! I think that migth be the basis of a lot of confusion in this post.

Beginning a res appraisal is the purpose of assignment, find market value for the subject, and then the defiintion of market value as (The most probable price, not subject to undue stimulus etc FOR THE SUBJECT...that is the SOW of work.)

Nowhere does it say, "choose comps that sold for market value", And nowhere in either Fannie or USPAP or any other recognized appraisal guides to choosing res comps ( that I am aware of ) does it ever say, choose comps that sold for market value. The guidelines state things such as , "choose comps that are arms length transactions, with similar physical characteristics of the subject, sold for cash or equivalent , not subject to unde stimulus etc" . Now, people here have rightfully debated whether or not undue stimulus or being an arms length transaction qulifies or disqualifes REO's as comps, which is correct to look at that, but it is incorrect to judge an REO as a potential comp because it "did not sell for market value"

 

[J Grant]

So, why do you keep claiming they ARE the market, that the ARE the same thing, and such work is thus unnecessary?

I never said that, I know the posts are long, but if you re read mine, I said in many cases, where there is a predominance, or strong ongoing REO activity, they are part of the market and should be considered etc.

 

[J Grant]

"liquidation -- Sale of the assets of a business to pay off debts."

The definition I found was in a RE dictionary of term, your is from a business source of finance, which may differ from the definition as it applies to real estate. My definition was copied from Wikpedia definition of real estate terms.
In any case, you did not copy and paste the full definition from the finance term, after I clicked on your link (thank you for providing it,). I saw the full defintion, below:

liquidation -- the process of terminating a business including selling assets to obtain cash and using the cash to discharge liabilities.

After the banks sell the REO"s, the bank is not terminated, it stays in business as a bank. In fact, if banks wanted to rent the REO's out and collect rent, they could do so (that idea was floated in congress as a way of mitigating the impact on housing markets). They don't have to sell the REO's to liquidate the bank, they do strongly want to sell them to free up cash and get rid of what they consider a non performing asset ( since they choose not to rent them), and free up the cash for the purposes of investing and making loans etc.

Re, you are claiming REO's are selling for liquidation value, or represent liquidation value, I don't think that is true for many of them.

Fannie did not say, don't use REO's because they represent liquidation value. Also, many private owners needing to sell to pay off their mortgage or other debts are selling for similar motivation.

At heart though,it is not the motivation of the seller, be that lookiing to sell of assets of a bank or the motivation of a private owner facing divorce or whatever, it is the activity of the properities themselves once they hit the market they we are supposed to analyize, as to how it impacts subject value, and whether or not to use them as comps. Re, what is the activity of the REO once it hits the market. Though the seller might be a financial instutition, the activity of the property itself, once it is listed for sale may be in competition to the subject. That is, it is placed on MLS, offered at similar terms, and buyers see it as competition to subject if it has similar characteristics/location.
Fannie clearly spells out in latest update that appraisers are to consider comps subject to same influences as the subject, and if REO sales are pesent, they are one of those influences that need to be considered.

Re, this debate could go on forever, hopefully it is not a case of proving one or the other right your'e wrong, there are many issues to consider and we are exploring them.