REO's as comparables to non-REO

[residentialguy]

Once again, comps are not supposed to "fit the definition of market value"

The definition of MV exists to create a theoretical sale ( the most probable price a property would bring..) for the subject. Then the comps are adjusted for condition of sale, special financing etc, up to the theoretical MV condition of sale for the subject.

They don't have to...but it is better to use apples to find the price of apples.

 

[CANative]

The real question is: Does REO status represent an element of comparison? If the appraiser is struggling over the answer then the answer is probably yes. If the answer is "yes" then a transactional adjustment must be developed and applied to any sale used for purposes of comparison.

The best strategy is to avoid using these sales but that's not always possible. The goal is to use sales that need the least adjusting (not for the purpose of meeting "guidelines" but because it makes sense that the fewest adjustments means the most comparability.) But if the property characteristics and/or factors in the market result in a better fit between an REO that only needs a small transaction adjustment as opposed to a less comparable property that needs a lot of adjustments then the REO sale is the most appropriate sale to present.

 

[JSmith43]

The real question is: Does REO status represent an element of comparison? If the appraiser is struggling over the answer then the answer is probably yes. If the answer is "yes" then a transactional adjustment must be developed and applied to any sale used for purposes of comparison.

The best strategy is to avoid using these sales but that's not always possible. The goal is to use sales that need the least adjusting (not for the purpose of meeting "guidelines" but because it makes sense that the fewest adjustments means the most comparability.) But if the property characteristics and/or factors in the market result in a better fit between an REO that only needs a small transaction adjustment as opposed to a less comparable property that needs a lot of adjustments then the REO sale is the most appropriate sale to present.

That is a World Class summation

 

[AngelEyes359]

Once again, comps are not supposed to "fit the definition of market value"

The definition of MV exists to create a theoretical sale ( the most probable price a property would bring..) for the subject. Then the comps are adjusted for condition of sale, special financing etc, up to the theoretical MV condition of sale for the subject.

There was actually an incorrect refernce of comps sales as MV sales by Dennis instructor per Dennis Q/A comments, probably becuase the instructor gave a quick answer and appraisers have become used to saying MV as a shorthand for other terms, but per USPAP, MV exists as a set of assumptions of a theoretical sale of a subject in order to find the most probable price. Would it be prudent to use below I asked the most experienced appraisers on the board to find a link or quote form any credible source, USPAP or Fannie or FHA etc, that sales comps are supposed to meet the defintition of MV, none could provide it because such a guideline was not found anywhere.

J Grant,

I think it can be reasonably infered that when establishing market value using the sales comparsion approach that the ideal comparables sales to use are ones that have sold under fair conditions of sale in alignment with their theoritical MV. We can parse value and price but the inference is still there.

Obviously, the sales comparison approach is one three approaches to value.
If I'm tasked with opining market value for an apartment building using the income approach, is there not an implicit understanding that I am going to use market rents to determine market value as opposed below market rents? Same with the cost approach. Is not there not an implicit understanding that I should use current updated cost figures not out of date ones?

 

[CANative]

Here's a snip of a sales adjustment grid I'm looking at. The analysis was completed by an appraiser with a resume most here can only dream of.

 

[DMZwerg]

Res,

I appreciate your argument but I suspect this guy is spot on in the 90%> greater comment. It's not that the duress has disappeared from the REOs. At this point, the potentially competitive non REO properties have just been overwhelmed and dragged down by the REO onslaught. It is a tough task as a potential seller to command a significant premium when 90% of the competing similar properties are priced significantly cheaper.

I content there is no set number nor is there a set reaction.

I have seen neighborhood with 95%+ REO & short sales yet the traditional sales were selling for about the same they were 12+ months ago, the REOs were selling for what they were selling at 12+ months ago, yet at the 12+ month mark the AVERGE and MEDIAN sales prices for the area inclusive of all sales declined. It was due to the relative ratios of sales (REO to traditional) altering the mix.

On the other hand I have seen neighborhoods with only 50% REO sales show a general decline in traditional sales prices, despite the fact that rehabbing and flipping was still occurring (purchasing REOs to flip as non-REO sales at an increase; rehabbing REOs that were in less than average condition and selling at a profit).

What was the difference between the two neighborhoods? The one with 95%+ non-traditional sales was already a neighborhood dominated by rental properties BEFORE the crash whereas the other was not. The crash and subsequent REO sales led to investors dominating the market (as buyers) and since many were purchasing to rent out properties until the market recovers the ratio of owner occupancy to rental in the latter neighborhood changed, changing the tenor of the neighborhood. Therefore although REO sales were not directly driving either market they did have a negative net affect on the later (previously much more robust) neighborhood.

That is why I do not lend any credence to claims that some target number triggers a change, but rather that each market needs to be analyzed every time to determine what exactly is going on. If REOs are 100% of a local market this may be a bit more difficult, but so to would it be if there were not sales in the neighborhood whatsoever. It still does not make them the market nor mean that are driving the market (although they may well be influencing it, as indicated in my second example).

Bottom line:
There is no set break point so do the work yourself and don't rely on some "rule of thumb" to determine what affect REO sales are having on your local markets.

 

[CANative]

Bottom line:
There is no set break point so do the work yourself and don't rely on some "rule of thumb" to determine what affect REO sales are having on your local markets.

Ta Daaaa! woohoo

 

[residentialguy]

Bottom line:
There is no set break point so do the work yourself and don't rely on some "rule of thumb" to determine what affect REO sales are having on your local markets.

 

[DMZwerg]

Sounds like a nice neighborhood to work in. Suspect is a starting point. Adjusting or not adjusting should be born out by data from the market place. At 90% you still have data to prove your case. At 100% REO sales, something which is very unlikely to occur in the real world because some owner occupant is going to eventually need to sell, could not one look backwards to when the make up was less than 100% for clues? Question Mark?

For the grace of exactly ONE non-REO sale a 100% REO market is EXACTLY what I am looking at in one Kenosha neighborhood. In this case the "typically motivated buyer" situation is muddled even more since it is a two-family market and thus the "typical buyer" has always been a mix of owner-occupants and investors. Searching adjacent competing neighborhoods just yielded more (higher priced) REOs. Lots of them. IIRC at last could it was only the 1 non-REO out of over 40 properties examined, which is well over that "90% point", yet since that one was a flip (and very few months between to boot) it is OBVIOUS there is a difference between REO and non-REO sales in that market.
Is that market REO dominated? You betcha!
REO driven? Almost certainly.
Are REOs "THE Market"? Definitely not.

Even if it were 100% I would be doing the same research to determine how close the market was selling to REO prices.

Same market is a completely different story when dealing with 4-family properties. Values there have not dropped significantly and there is a wide range of strata in the market both for REOs and traditional sales based on condition (from "gutted" to "borderline inhabitable" to "inhabitable, but rough" to "move in" and finally "premier properties" (tending yo be in at least "good" condition, superior location, and so forth).

Two markets, both in the 2-4 small income property range, but both total different in what has happened to them since the bust. One prices dropped like a stone (below half of pre-bust), and the other relatively unscathed. Big difference? The buyer ratios changed significantly for one and remained unchanged for the other.


So, when trying to figure out whether or not REOs can represent the market you may want to start looking at who currently tends to be the typical buyer for such properties and who used to be, has it changed, and if so what difference did that make? The differences between fair market value and what REOs are selling at may well be who, traditionally, was the typical buyer for the REO and non-REO properties and whether or not that changed.

 

[DMZwerg]

Originally Posted by DMZwerg
Bottom line:
There is no set break point so do the work yourself and don't rely on some "rule of thumb" to determine what affect REO sales are having on your local markets.

Ta Daaaa! woohoo

Yet my statement is NOT in contrast with my first post on this thread, nor does it conflict with my opinion, which has not changed one iota this entire time. The difference is that it is something you think you can agree with.

Nope. You may use them to help develop an opinion of market value but they are NOT normally comps as they are not normally comparable to the value an appraiser is opining.
<snip>
How is an REO similar to a non-REO?
They are often purchased for cash rather than financed, often have different typical buyers, and the sellers have completely different motivations and thus are not comparable. An appraiser may be able to quantify the similarities and differences, and in some limited cases they may be virtually identical, but appraisers need to comprehend the inherent differences and due sufficient research to support any adjustments.

<snip>
Even if REOs are 100% of all sales in the last year in a 1.5 mile radius in a urban area that does not make them "the market" for determining market value when the value desired is not distressed sale value (aka, value determined is "fair" market value).

Nor is it in conflict with what Terrel stated:

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.

My opinion was, and remains, that appraisers using REO sales as comparables for "fair" market value need to examine the market in detail, adjust the REO appropriately, and comment as to why the REO was used and what weight it was given (if any) as well as what and why of the market.

Nothing has changed, except I was able to finally sum up the bottom line with adequate brevity.