Short Sale Appraisal Question

[Lloyd Bonafide]

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.

I don't give a lot of consideration to what the MLS says is the market time for short sales. Sometimes the MLS will indicate that a property has been listed for 6 to 12 months, but it has not really been available for more than a few weeks. A short sale will get listed, then they get a contingent offer within a week, then they wait 4 to 6 months plus for a lender approval, then the buyer bails out and the process repeats.

 

[J Grant]

Res Guy, seems like we might debate this forever...all in good spirits though...

Most probable price of what type of sale?

The definition of MV does not specify a type of sale. Therefore, appraisers should not either.

Your statement is misleading in that it leads to "whatever is predominant"

I never, ever, said in any of my posts that MV should be "whatever is predominant"
However, predominant sales types should be analylized and considered as of course they indicate buyer preference and trends and thus form a guide to arriving at a MVO.

and ignoring the market reaction to a different type of sale.

I never said that either. I have said that I tend to prefer weighting certain sales, or types of sales as you put it, more/ less strongly, rather than adjusting for condition of sale.

MV on the form is a sale without undue stimulus,

This is the crux of the issue...at what point is stimulus "undue", or at what point does it become typical for a market (such as the stimulus behind short and REO sales ) In a down economy and market with many short sales and REO sales, the court cases per recent posts have recognized that the "stimulus" of these sales is no longer "undue". There is also the factor that the private seller becomes subject to equivalent "Undue" stimulus in markets with many short/REO sales.

Seems there are two camps...appraisers who claim that any motivation to sell beyond the "traditional" private seller motivation constitutes undue stimulus, and the other camp appraisers who recognize that "undue stimulus" is relative to market conditions. The latter has been the predominant decision in court cases as well as the fact that Fannie and FHAy stating that REO and short sales can be used as comps...thus recognizing that the stimulus behind these sales are acceptable in the range of developing MV.

If an appraiser sees diff sales types that they feel the market indicates needs adjustments, it is their call whether to apply them ...nobody on a bulletin board can state at what point an appraiser should or should not adjust for conditon of sale .

so that is the value you are looking for, regardless of whether or not that type of sale is predominant.

See above comments.

 

[Mike Garrett RAA]

Simply ask yourself this ...

There are two properties offered for sale. They are in the same neighborhood. They are the exact same model and in very similar condition. One is offered as a traditional sale at, say, $200,000. The other is a short sale and offered at, say, $185,000. Which one would you, as the buyer buy? Now, tell me what is market value?

 

[Ca Ar Independent]

There is a huge risk with 3rd and 4th party approval needed short sales and the market demands compensation if they're going to take that risk. Ask them if they want the most probable price of a short sale or the most probable price of a sale where seller is typically motivated and without undue stimulus to sell.

I agree completely. In my market area there is a large disparity between Short Sales and Traditional sales. Clearly the sales price of the Short Sale is negotiated by the lender based on the amount owed, and more recently these lenders prefer to let the property go into foreclosure. This does not seem to be the same market conditions as a homeowner making the decision to accept/counter an offer. In addition, the opportunity cost of the lengthy negotiation time with Short Sales is discounted (in my area) due to the risk involved with the lender negotiation. It is usually much easier for a buyer to negotiate a Traditional sale than a Short Sale and these sales absolutely do NOT drive the market. They ARE discounted and a paired sales analysis would warrant an adjustment in this area.

I avoid using distressed property sales if possible, however will include them and adjust accordingly if warranted. The only request from UW recently (UAD format) was not to adjust in the "sales concessions" grid, so now there is a line item at the bottom of the grid for "distressed". There are market areas in which all sales types are consistent with each other however it should also be noted that there are market areas that are NOT driven by distressed property.

 

[Ca Ar Independent]

Simply ask yourself this ...

There are two properties offered for sale. They are in the same neighborhood. They are the exact same model and in very similar condition. One is offered as a traditional sale at, say, $200,000. The other is a short sale and offered at, say, $185,000. Which one would you, as the buyer buy? Now, tell me what is market value?

I guess it depends on whether you have 2-10 months to wait and see if your offer is going to be accepted on the Short Sale (even if you offer full list price, which is often a "fishing expedition" thrown out by the realtor and with no guarantee that the lender will approve said price).

Do you have a guarantee that interest rates will remain absolutely STABLE during this potential waiting period and that your lender will hold your "rate lock" during this process if you choose the $185,000.00 home?

How many other offers are there that have been submitted and are waiting for approval?

 

[Mike Garrett RAA]

My bass fishing partner owns a brokerage here in Colo Spgs. He is considered an "expert" in short sale negotiation and has a 90% approval rating. His typical transaction contract to closing time is less than 45 days. Granted, this is somewhat longer than a traditional transaction; however, since half or more of all transactions IN MY MARKET are now short sale or REO, the buyers are comfortable with that length of time.

We spend hours traveling to and from tournaments. Usually on the ride out we talk real estate and on the ride back the fishing. He says he has learned much about appraisal from me and I certainly have learned a lot about short sales from him.

I will repeat what I have been saying on this forum for many years..."the market is the market". Yours might not be the same as mine and it is our job to report the market. We are finding the banks are doing a much better job of making a decision in a more timely manner these days. We also see another round of foreclosures looming on the horizon. The nice thing about our profession...we can get work regardless of the market. Sales, re-fi's, and liquidation. I find my business is pretty much equally divided in those three areas at this time.

 

[residentialguy]

Simply ask yourself this ...

There are two properties offered for sale. They are in the same neighborhood. They are the exact same model and in very similar condition. One is offered as a traditional sale at, say, $200,000. The other is a short sale and offered at, say, $185,000. Which one would you, as the buyer buy? Now, tell me what is market value?

There is a reason one type of sale is selling at 200k and one selling at 185k - there is something making them unequal. The one at 185k is has baggage that needs to be adjusted. Once adjusted, they both are selling at 200k. I like to pick the sales that don't need as much adjustment as well as the sales where there is more clarity on the motivations.

 

[residentialguy]

Res Guy, seems like we might debate this forever...all in good spirits though...

Most probable price of what type of sale?

The definition of MV does not specify a type of sale. Therefore, appraisers should not either.

Sure it does. I thought you read it - apparently not. It says (among other things) that it is a sale where buyers and sellers are typically motivated and there is no undue stimulus to sell. That is the type of presumed sale you are to find out the most probable price of.

This is the crux of the issue...at what point is stimulus "undue", or at what point does it become typical for a market (such as the stimulus behind short and REO sales ) In a down economy and market with many short sales and REO sales, the court cases per recent posts have recognized that the "stimulus" of these sales is no longer "undue". There is also the factor that the private seller becomes subject to equivalent "Undue" stimulus in markets with many short/REO sales.

Oh yeah...the if it's predominant, than it's no longer excessive argument.

I drink 1 pint of whiskey a day. It is obviously excessive...unless over 50% of the people drink that much, then it's no longer excessive...then the people who don't drink that much have a problem.

Spare me.

 

[Mike Garrett RAA]

The difference, as I see it, is the bank not wanting to go to foreclosure on the property and the related expense. There was a report a while back that said the average cost to the mortgage holder for a foreclosure was something like $20,000 in addition to a time of from 6 months to a year...thus, the bank is willing to discount the mortgage by, say, $15,000.

 

[J Grant]

Oh yeah...the if it's predominant, than it's no longer excessive argument.
I drink 1 pint of whiskey a day. It is obviously excessive...unless over 50% of the people drink that much, then it's no longer excessive...then the people who don't drink that much have a problem.

Whether it is healthy or problematic to drink a pint of whisky a day is not the issue.

For the appraiser, the analogy is this. If a client engaged you to find out the amount of whisky most typically consumed in town X, for example, and you did your studies and collected your data and you found that the typical rate of consumption among people in town X is a pint of whisky a day, then this is the result you report to your client.

Maybe your client wants to open a bar to supply the whisky in town X, or maybe they want to open a rehab center to discourage drinking...but whatever their use of the report, you were enagaged to give them the truest and most accurate report of how much whisky people are typically drinking in town X.

If the next day the same client engaged you to do a report on typical whisky consumption in town A, and people there typically only drank 1 pint of whisky a month, then in town A, drinking a pint of whisky a day is excessive, and a pint a month is typical. Drinking a pint of whisky a day is not excessive in town X, it is typical.