Short Sale Appraisal Question

[Blueprint]

When I perform an appraisal on a property which is currently listed on MLS as a short sale, and the appraisal requested by the client will be used to evaluate a short sale transaction (ie that is the intended use provided by the client), what should I be looking to use for comps (Other Short Sales, REOs or Arms Length)?

From the end user standpoint, I assume that short sales and maybe REO sales should be used primarily as comps. Using arms length transactions would ultimately not help the end user determine an effective list price for the short sale property in question (assuming short sales & REOs typically sell below fair market in the subject neighborhood).

It is probably perceived as a dumb question, though I don't have much Short Sale experience. Please don't bag me too harshly. I just want to make sure that I am doing my job correctly. Any advise on selecting the best comps would be sincerely appreciated.

 

[realbiz]

Appraise the property for what it is worth, it is up the lender to decide what they will take in a short payoff. Part of the current market problem is that some lenders are accepting short sales for less then what the market value is (often based on BPO's). I have seen investors buy short sales, and then turn around and sell them at market value. People often confuse what a short sale is (lender accepting a payoff less then what the borrower owes). What the borrower owes has nothing to do with what the current value is. You will hear many different opinions, but this is mine based on my experiences. Your market will determine the type of sales used, but I would not just look for a certain type of sale. Good luck!

 

[Nevermind 3]

This is not a dumb question.
Depends on the market and the value the Lender is looking for. Typically, they are asking for a market value, as opposed to a liquidation value, etc. If the local market is not significantly made up of distressed sales, then I would do my bet to use non-distressed/standard sales as comps and put most weight on those. If the distressed sales are making up a majority of the market, I would use those also, because at some point and in some markets, those distressed sales become the market. Hope this helps.

 

[SutnNC]

I'm safely assuming that you have the answer in you; what "type" of value opinion are they looking for? Is it market value, liquidation value, based on xx- limited marketing period, etc. The listing status as a short sale is one thing to consider and report on but likely not the objective or OV goal (unless specified in the engagement which would need to be very specific, like what's their desired marketing period for example).

IF it's for a short sale transaction and they are asking you to provide your opinion of MV, you will be working as you often would for any other user asking for your professional OMV.

I am often asked to provide an REO addendum for short sale negotiations (i.e, the property is listed as a short sale and in pending, due diligence or contingent status; there is an offer on the table). It's a good way (IMO) for the client to obtain a better perspective/range and meet their goal (whatever that may be). They now know about where they can likely dump it as is/as repaired (limited) or where they should be if they want to try and compete in range of actual market value as is/as repaired.

This isn't to say that you exclude shorts/REOs as they may be a factor in xyz market. It is to say that you need to be knowledgeable of what kind of opinion of value they are requesting of you. I believe you are thinking too hard on this one and know this answer.

Don't sell 'em short!

 

[Blueprint]

Thank guys for the input. It is not located in a SS/REO driven market. Most are traditional and the demand is good in the subject's neighborhood. Based on what you guys are advising, I should use the best comparable arms length transactions I can find.

Honestly, it frustrates me because I will likely end up with a value equal to or higher than what the property has been listed for (350K) for 6 months in a neighborhood where these traditionally listed properties are typically selling in less than 90 days. Subject has been listed for 180 days. The very few Short Sales/REOs over the past 12 months are clearly selling well below market value. The knowledge I have to gain is immense.

 

[VolcanoLvr]

The other posters have said it well. But I'll add this:

As an appraiser using the typical 'forms', we are asked to appraise to Market Value as defined on the form. To appraise to market value, we should be appraising the characteristics of the property, not the 'price' of it, or the comps, in the defined subject neighborhood.

Once you determine the primary characteristics, look for applicable comps. The resulting adjusted sale prices will reveal the value of the property. Whether those are REO, S.S. or arms length makes no real difference....the market, and thus the value, is what it is.

As a side note, you may be interested to know that typically Short Sales sell for MORE than REO's. I conducted my own statistical research on this in my area after I saw an article and chart about this in Live Valuation magazine. Hope they will continue, despite the shuttering of AppraiserLoft....same owner.

 

[HF Mudd]

Thank guys for the input. It is not located in a SS/REO driven market. Most are traditional and the demand is good in the subject's neighborhood. Based on what you guys are advising, I should use the best comparable arms length transactions I can find.

Honestly, it frustrates me because I will likely end up with a value equal to or higher than what the property has been listed for (350K) for 6 months in a neighborhood where these traditionally listed properties are typically selling in less than 90 days. Subject has been listed for 180 days. The very few Short Sales/REOs over the past 12 months are clearly selling well below market value. The knowledge I have to gain is immense.

In many of the markets that I cover, buyers of short sale properties expect a discount to market price for several reasons, such as the longer sales cycle of short sale properties, the difficulty of obtaining financing for short sale properties, and the general hassle of dealing with multiple parties involved in negotiating an agreement. This has been determined by talking to market participants - you may want to talk to some local RE agents and investors to get their input.

 

[J Grant]

If the form says market value, A 1004 or 1073 form, then that is what you are appraising...Market value , whether the subject is lender owned or listed as a short sale etc. There is no "type of value" the client is looking for in a MV order. (If the client wanted liquidation value, then you would use a diff form, or a general form and state at the top, "Purpose of the appraisal, to arrive at an opinion of liquidation value"

What comps should you use? The same comps as if the subject were not a short sale, whatever comps are the most competitive and best substitutes for the subject. If you are in an area where a number of those comps are short sales or REO sales, then most likely you would consider using them, or use them. Nobody can tell you that as we are not in the area and privy to the comps.

Pay special attention to listings and pendings.

Give your client the MV they asked for. If they decide to sell at a discount from MV, that should be their decision...don't make the decision for them by discounting the subject because it is a short sale, or picking only short sale comps etc. (again, if short sales are your best comps, by all means use them. Just don't pick them because they are short sales and your subject is a short sale)

 

[J Grant]

Blueprint, if your value is higher than what it is listed for, so be it. But if it has been listed awhile and has no offer and your value is higher, than your value may be off. In a down market, imo short or REO sales should not be adjusted "up", and see where the listings and pendings are as well, and if time adjustments are in order.

Ask the realtor why it has not been selling...are the lenders not taking offers? Is it difficult to show? Have the other short sales that sold also had much longer marketing times than non short sales? If they do, then yes, buyers are asking for a discount due to difficulty in dealing with bank. This is not true in all market areas, but may be true in yours.

 

[Lee Lansford]

When I perform an appraisal on a property which is currently listed on MLS as a short sale, and the appraisal requested by the client will be used to evaluate a short sale transaction (ie that is the intended use provided by the client), what should I be looking to use for comps (Other Short Sales, REOs or Arms Length)?

From the end user standpoint, I assume that short sales and maybe REO sales should be used primarily as comps. Using arms length transactions would ultimately not help the end user determine an effective list price for the short sale property in question (assuming short sales & REOs typically sell below fair market in the subject neighborhood).

It is probably perceived as a dumb question, though I don't have much Short Sale experience. Please don't bag me too harshly. I just want to make sure that I am doing my job correctly. Any advise on selecting the best comps would be sincerely appreciated.

You're offering an opinion of MARKET VALUE, correct?

If YES, go about your work as usual and don't concern yourself with the subject's current loan or ownership status affecting your thinking.