REO's as comparables to non-REO

[J Grant]

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)

RE, on the last point, that Fannie is implying the appraiser must adjust...they are saying an appraiser must identify and consider any differences, nowhere does it say an appraiser must adjust! IF an appraiser finds differences that impact value, such as average vs poor condition, or stigma, then adjust for those differences (same as with any other comp) However if those differences are not present ( as measured in market reaction,) then why would an appraiser adjust? I agree with you to consider, analyze etc.

 

[J Grant]

Who said you pick 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).

Above is what I was referring to, an appraiser doing a study, or relying on an MLS study such as above, and then excluding comps by price, aka, they are above or below a median price ( or some other study an appraiser is using). That is picking, or excluding comps by price.


I don't understand re the MLS data from Kenosha as it was applied in example:

• 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

The first search shows a lower median/avg price for all sales, and second search shows a higher price for sales excluding special financing, so from that you are concluding not to use REO's ( or use them with adjustment for financing) REO'S AND SHORT SALES DO NOT OFFER CREATIVE OR SPECIAL FINANCING.

If you don't believe me, call and speak to a number of agents in the area who handle REO and short sales ( If REO's and short sales DO offer special financing in Kinosha, then you are corrrect. However, I have in general not heard of them offering special or creative financing, and don't see why Kinosha is different?)

Re, look at how most REO and Short sales are purchased. Cash, or FHA, or conv financing. Where is the special financing? The lender is not offering special financing. Sometimes they will take a lower price for a cash offer, because it will close faster. But then often a private seller will take a lower offer for cash. If you feel cash offers are being sold lower, then an adjustment may be warranted, but a buyer closing with cash as opposed to obtaining a mortgage still is not considered special financing.

Re, when searching for median/avg price, appraisers use it to answer the question on front page, what is the average price of homes in the area? I have not seen it used as a basis for picking comps, re, to pick or not pick depending on how far from an average or median a comp is?

The above search reulsts aside, There are also limitations to the data MLS searches provide to an appraiser. Although the data may be useful, it is just one source of information, and may not be as reliable as one might assume.

First off, and I see this problem on the MC market addendum form, is that in order to get enough meaningful data, many times a search parameter has to be broadened. As it gets broader, re, increased geogpraphical area, back in time, bigger variances from living area, for example, the results of the search have less and less relevance to the subject and properties that would be the best competition to the subject. On the other hand, if an appraiser runs a more narrow search using features that closely resemble the subject, often not enough data is present. That is one problem.

The other problem, is that the data agents enter on MLS is often unreliable. Square footage, sometimes they include garages and we don't. What they call special or creative financing we might not consider as such ( plus some of them are so ignorant they mis understand the term and put it when it is not present and vice versa).
I have seen them leave the word REO sale out of a listing, and it turns out it is an REO bank owned house. And the list goes on of their errors that can make a search less than reliable .

Something appraisers need to keep in mind that we overlook since we are using MLS for our own purposes , is that agents describe properties on MLS for the benefit of other agents, aka, they want to get their listings shown. Thus, they may claim special financing when there is none ( or the "special " financing is the seller contributing $500 toward closing, not enough to affect value). They often do not reveal deficiencies, such as a house backs a turnpike and they don't mention it, they exagerate amenities, such as a condo has an ocean view, when it has no view from inside the rooms and only a small oblique view from the balcony. Agents, unfortuntely, are allowed to do this as "puffery", since their listings are written up for the use of other agents. I think that is wrong but that is what we have to deal with in relying on MLS data ( why in individual comps it is good to verify, but how is an appraiser running a data search with 100 comps coming back going to verifiy them? They can't, thus, the search, although it provides certain information, is not fully reliable)

 

[J Grant]

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?

Me again, as I find the subject interesting ( or I have no life, lol) but one more post than will go out for part of day...re above, my thoughts on it...

First of all, I would not divide a market into lakefront and non lakefront, but I would, if my subject is lake front, consider similar homes on lakes, preferably in same or equivalent area, as the best competition for my subject, and use them as comps.

I don't believe it is the same thing to substitute the word REO for lakefront and pick comps or exclude comps on the criteria of being an REO owned home.
Because, lakefront is a physical characteristic of a property, and one that certain buyers want. REO is not a physical characteristic of a property. There is no such thing as an "REO house". A house is a house, the REO is a form of ownership. As soon as the house is sold to a private owner, it is now owned by an owner occupant, the house itself has not changed.

The example of excluding REO properties just because they are REO's, might result in this:

The subject is 1500 sf with a lakefront. The most recent sales in appeal, conditon and size, in subdivision are two 1500 sf homes with lakefronts, that happen to have been REO sales. The appraiser decides not to use them because they are REO's, and goes five miles away to find a 1500 sf home with a lakefront that is not an REO. That far away comp may or may not be a reliable guide to value, because of the subdivision/location influence.

 

[DMZwerg]

RE, on the last point, that Fannie is implying the appraiser must adjust...they are saying an appraiser must identify and consider any differences, nowhere does it say an appraiser must adjust!

Definition of Market Value, subtext on Special Financing MUST be adjusted.

Reread the definition of market value on the FNMA form, especially Condition 5 and the text after the (*)

 

[DMZwerg]

If you don't believe me, call and speak to a number of agents in the area who handle REO and short sales ( If REO's and short sales DO offer special financing in Kinosha, then you are corrrect. However, I have in general not heard of them offering special or creative financing, and don't see why Kinosha is different?)

Talk to Metro MLS as they put REO & Short Sales under types of special financing.

 

[J Grant]

Talk to Metro MLS as they put REO & Short Sales under types of special financing

I would bet that your local MLS is just puttingREO's and short sales in the special finacing type, as a way to organize them, re a means for agents to search for them.

Each MLS lists things differently. Some list them as "other". Some MLS list REO and short sale as Other", Some, like my MLS, list them the same as all the rest of the listings, but the agents make notes in comments, or check a box for short sale .

If I were you, I'd ask some of the realtors listing the REO's and short sales if they are offering special finacing. That way you will know if that is the case, or if your board just puts them tehre as a means for agents to search for them. (one of the unreliable issues when using MLS data )

Post back here after you check with some agents or you can PM me ( as I have not heard of lenders offering special financing on REO's or short sales. That an MLS service organizes them in that category does not mean in fact that the REO's or short sales offer special financing, one of the unreliable parts of MLS that affect searches )

 

[J Grant]

Definition of Market Value, subtext on Special Financing MUST be adjusted

Again, short sales and REO's typically don't offer special financing ( seee above post referring to your MLS labelling them that for agent convenience in searches ). If you speak to agents and your particular area that the lenders are offering special financing, then you would be right in adjusting. I have not heard of lenders doing that...verify with realtors if your MLS service may be placing REO and short listings in the special financing category for search engine purposes.

 

[residentialguy]

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).

Worth repeating...again

 

[DMZwerg]

If I were you, I'd ask some of the realtors listing the REO's and short sales if they are offering special finacing. That way you will know if that is the case, or if your board just puts them tehre as a means for agents to search for them. (one of the unreliable issues when using MLS data )

Post back here after you check with some agents

I have already for a number of short sales.
When verifying short sales with REAgents I have heard of the owner having to take on a personal loan and such on more than one occasion. In other cases the lender was selling at a loss due to hardship on the owner's part. The Definition does not limit special financing to the purchaser as far as I can tell, but rather seems to indicate it on the part of anyone involved.

For both short sales & REOs the seller is not typically motivated in this area.

REOs I look at undue stimulus as well (aka, excessive pressure) on the part of the lenders, and can see the trend in previous transfers.

 

[J Grant]

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

When verifying short sales with REAgents I have heard of the owner having to take on a personal loan and such on more than one occasion. In other cases the lender was selling at a loss due to hardship on the owner's part
What does an owner (did you mean buyer?) taking on a personal loan have to do with special financing?

The lender selling at a loss due to hardship on owner's part is the definition of a short sale, the lender is willing to take less than the mtge amount to sell the house (because the owner can't pay mortgage), in every case I have heard of, the lender only agrees to take less than the mtge amount AFTER THE PROPERTY HAS BEEN LISTED FOR 90 DAYS NOT AS A SHORT SALE. THEN THE LENDER MAY AGREE TO TAKE LESS THAN THE MORTGAGE AMOUNT.

In other cases the lender was selling at a loss due to hardship on the owner's part
The above sentence relates to seller movitivation, not special financing . ( Examples of special financing would include, owner private mortgages, seller financing to a buyer at interest rate way below prevaling rates, seller paying closing costs or offering cash back at closng, the special financing can come from anyone associated with the sale, but in reality, it is usually the seller, who else would have an incentive to offer special terms/financing to a buyer? If it is a builder, they may have their own inhouse lender, but then the lender is assocaited with the sale through their affiliation with the builder, (often owned by the same company) .


If a buyer takes a personal loan from his brother , the brother is not associated with the sale, unless his name goes on the deed. And buyers take out personal loans on regular sales as well as short sales if they lack enough cash for a downpayment .

RE, if you feel you need to exclude or adjust REO's/short sales due to seller motivation, or buyers paying cash with short marketing times, that kind of adjustment may be provable in your area, but from what the examples you gave, it does not look like special/creative financing is being offered in your area on REO's and short sales. It sounds like that is the category your MLS put them under to make them searchable for realtors.

As appraisers, we have to keep in mind that MLS is organized and written for realtors. They establish categories for their own convenience (that may violate appraisal standards, but we are guests, it's their party) The categories are made so they can find listings in search engines, and the listing agents use language and "puffery", in order to get other agents to show their listings. Thus, realtor and MLS terminology and use of verbiage may differ a lot from ours, or the definition of the same words as they relate to appraisal standards. For example, in our MLS I routinely see realtors list condos under the category "Townhome", because the extetior is a two story townhome. (DOH) Thus, when I do my search, because I know the market and I know the mistaken categories of MLS, I include TH in the serach to bring up the condos misidentified by realtors as townhomes becase of appearance.