Short/Foreclosure Is The Market

[EVAUSA]

When applicable, I use this comment, "The subject's market is REO driven. REO's and Short Sales are priced in line with NON REO's, they are not priced as "distressed" sales. Banks have not drastically reduced prices to attract investors. REO resale's and Short Sale listings utilized for comparison are competing properties in the market area, having typical exposure time, and are considered arms length transactions. Comparables utilized are considered the best available, reflective of current marketing conditions."

 

[Mike Garrett RAA]

Ask yourself this question...

Would a typically motivated buyer purchase a bank owned property (REO)?

Do such sales influence sellers when pricing their properties for sale?

I prefer to include all types of sales, in a given market, so that my analysis is "not misleading". IN MY MARKET, REOs represent a substantial segment of the inventory. Typically, those sales will show the lower end of the value range.

 

[Ross (CO)]

....and the aesthetics and appeal of the granite countertops in the kitchen of an REO property are probably just the same as the granite c/tops in the model-match property on the adjacent lot which is also listed now for-sale. Yet, this property next-door is not an REO. The REO is being offered for $25,000 less.

Other than for the color of the exterior paint....both houses are the same. So much for granite countertops !

 

[Alison Swain]

Ask yourself this question...

Would a typically motivated buyer purchase a bank owned property (REO)?

Do such sales influence sellers when pricing their properties for sale?

I prefer to include all types of sales, in a given market, so that my analysis is "not misleading". IN MY MARKET, REOs represent a substantial segment of the inventory. Typically, those sales will show the lower end of the value range.

There is a reason RE agents here put in their listings of non-REOs "NOT a short sale!"


They want buyers of "turn-key" homes to know that the home has been well maintained and closing of the sale won't be held up for weeks while the lender messes around deciding whether they'll accept the offer.
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So no, a short sale or REO is not "typically motivated" marketing.

 

[Howard Klahr]

Why not?

The stimulus of the bank to sell in these markets is not any more "undue" than the any of the "regular folks" sellers (in fact you could argue that the bank's pressure to sell is less acute than an individual feels).

It is clear by this comment that you do not understand the issues that influence the actions of lenders/servicers/institutions in dealing with REO assets. Having worked for several through numerous economic cycles, the sellers of REO properties are not "Typically Motivated" nor is the transction free of "Undue Influence".

 

[Metamorphic]

It is clear by this comment that you do not understand the issues that influence the actions of lenders/servicers/institutions in dealing with REO assets. Having worked for several through numerous economic cycles, the sellers of REO properties are not "Typically Motivated" nor is the transction free of "Undue Influence".

typ·i·cal

–adjective 1.of the nature of or serving as a type or representative specimen. 2.conforming to a particular type. 3.Biology. exemplifying most nearly the essential characteristics of a higher group in natural history, and forming the type: the typical genus of a family. 4.characteristic or distinctive: He has the mannerisms typical of his class. 5.pertaining to, of the nature of, or serving as a type or emblem; symbolic.


If three quarters or more of the sales that are closing are REOs why are REO transactions not typical? Sure maybe 18 out of 20 years they're non typical, but in many markets right now they're as typical as can be and by extension what's normally an undue motivation is perfectly normal motivation.


And just because REO's are sometimes not turnkey does not mean that there is not a market for them. Some people want and are willing to pay a premium for turn-key, but the first time buyer/sweat equity/fix-er upper crowd is alive and well. That's no different that normal markets.

There's also the proof in the pudding. When I mix REOs into the comp grid in rough proportion to their share of the market they balance right out and converge just like any other sale. The fact that you can toss them in and not have them sitting 20% out of the range of the rest of the comps strongly suggests they're normal enough for appraisal purposes.

 

[CANative]

Howard,

Would it be accurate to say that, although the REO sales may not represent a market transaction and therefore are not direct indicators of market value, their influence in that market has adversely impacted market transactions to the point where a prudent buyer would not pay more for non-REO offering than they would for an REO offering?

Or something to that effect. I'm making this up as I go.

 

[J in Florida]

I'm thinking this may be a situation where our limiting conditions are getting in the way of reporting accurate values. If we take a hard stand of not using bank owned and/or foreclosure sales as comparables, even when those sales are driving and defining the market, the final estimate may not be the most probable sale price. It may be accurate, subject to the definition of market value as defined in the report, but that may be misleading to the user/reader who skips (pun intended) right past that definition.

This is a great discussion.

 

[CANative]

even when those sales are driving and defining the market

I don't think they are "driving or defining" the market. I think they are causing an airstream as they blow through town and the few actual market transactions that occur are being sucked along behind them.

 

[Howard Klahr]

If three quarters or more of the sales that are closing are REOs why are REO transactions not typical? Sure maybe 18 out of 20 years they're non typical, but in many markets right now they're as typical as can be and by extension what's normally an undue motivation is perfectly normal motivation.

This is a simplistic analysis of an issue with many complex influences. By definition REO transactions are not typical. This is not to say that the data is not to be considered, analyzed and reported, nor does it imply that REO transactions are not valid comparables. However, there are potential conditions of sale that need to be evaluated beyond what most would consider typical course of business. Some issues of consideration are:

1) Who owns the loan ... is it a bank in their portfolio, a securitized loan, an investment group that acquired a portfolio of distressed/non-performing debt, etc.

2) Is the loan insured, if so for how much?
3) What is the true condition of the property, not just currently, but did the lender/investor advance funds to prepare the home for sale
4) What was the outstanding balance of the loan when the property was obtained, inclusive of legal costs, penalties, etc?

Why are these issues important? Because who owns the loan will influence the decision process on the sale. Regulated financial institutions such as banks, S&Ls, credit unions have reserve requirements that are based on the composition of their portfolio and the status of those investments. Reserve requirements for performing loans are lower than non-performing loans and REO represents even high reserve requirements. These increased reserve requirements are very expensive and will impact decisions on what the institution will do in regard to disposition of an individual asset and how it impacts their overall portfolio.

In the event the REO is owned through a securitized portfolio, the special servicer is limited in their actions based on the pooling and servicing agreement the terms of which do vary from securitization to securitization.

If there is PMI insurance, the owner of the REO may not maximize the sale of the asset but rather sell sooner at a lower price since a portion or all of the "loss" may be insured resulting in minimal or no loss to the holder of the REO. A property in which funds were advanced for repairs/upgrades, etc will often be market longer to maximize the sale price rather than for a quick sale. These decisions are based on the outstanding balance/investment amount of the asset. If the property is part of a portfolio that was sold to an investment group, you have no idea what their basis is in that property or the overall portfolio.

Despite your perceived notions of a "typical transaction" when it comes to REO properties you really don't know what "Typical Motivations" are with out significant further research if you can even get sufficient information to properly evaluate the true conditions of sale. The true "decision maker" is often not the party listed on the deed. More often than not the party listed on the deed will be the servicer, but there can and usually will be several levels of decision makers involved in the process.

Would it be accurate to say that, although the REO sales may not represent a market transaction and therefore are not direct indicators of market value, their influence in that market has adversely impacted market transactions to the point where a prudent buyer would not pay more for non-REO offering than they would for an REO offering?

I am not saying that REO transactions are not part of the analysis, but just like a homeowner going through a Refi is not necessarily looking to sell, not all buyers want to deal with the many issues involved in purchasing REOs, even at a lower price. REO transaction are often made without any reps or warrantees, no seller disclosures, and sometimes long transaction timelines and delay from contract to close.

There are just more influences affecting REO transactions than most residential appraisers realize. What I am advocating is for those choosing to perform valuation assignments in markets where REO properties are predominant, is to gain a greater understanding of the transactions they choose to rely upon.

As noted by the OP, in their market, the REO transactions sold for cash or sold much quicker than the typical 3-6 months. These reflect condition of sale issues that will need to be accounted for in the analysis.