Short sale comparables?

[rnappi]

I have not done a short sale appraisal and was hoping for a little help with comparables. Do we use the same guidelines as a regular appraisal or can we use other short sales? Please help.

 

[EVAUSA]

If using a Fannie Mae form, use Fair Market Value. In some areas, the market may be Short Sale and REO driven and both may be priced in line with non Short/REO sales. In other markets, Short Sales may be priced out of line with the rest of the market. They can sale LOW if the bank 1099'd the difference to the owner. In my market, Short Sales are listed unrealistically HIGH, and end up foreclosing. REO's usually sale low because of CONDITION, not because they are REO. Pick your comps by comparability to the subject, not terms of sale. Describe the market, is it REO driven? Save yourself conditions and ask the client for some parameters. If you can't meet them, let them know ahead of time criteria will have to be expanded due to a lack of sales.

 

[rnappi]

Thank you for the quick reply. Do the comparables have to be arms-length traansactions?

 

[Mztk1]

I view bank influenced, i.e., short sale or REO, as an economic stigma attached to the subject where the market reaction for it must be measured using market sales of the same ilk. I will typically try to use two non-Bank influenced sales and two bank influenced sales. I will adjust for the bank influence if measurement (the bank sales have to have sold in the open market as arms length transaction showing typical marketing time).

In my comments I will provide the market value of the subject "as if" not influenced by bank ownership but my final value on a short sale or an REO will be as a house that is so influenced.

But I am in an area with a lot of REOs and bank influenced sales. If a bank sells a house with regular marketing time for $135,000, it is because the buyers for it refused to pay anymore, even when non-bank influenced sales are selling for $150,000.

 

[Mike Garrett RAA]

Short sale and REOs represent nearly half the sales IN MY MARKET in many areas; therefore, they are the market.

 

[Doug Wegener]

Reos

Short sale and REOs represent nearly half the sales IN MY MARKET in many areas; therefore, they are the market.

They are 100% of the market in some neighborhods here.

 

[EVAUSA]

Thank you for the quick reply. Do the comparables have to be arms-length transactions?

I only only use comparables that were publicly listed in MSL to insure they are arms length. It can be argued that a Short Sale, marketed in MLS that sold below market because the bank 1099'd the owner, is NOT arms length and is duresses. But if I can find out the terms on Short, an adjustment can be applied. Transfers from a bank to a person, marketed in MLS IS an arms length transaction. A foreclosure transfer TO the bank IS NOT arms length.

 

[Mike Garrett RAA]

The REALTORS® immediately jumped on the opportunity to create a new continuing education class...How to Market Short Sales. I think it would be good for appraisers to take it just to understand what is happening.

 

[moh malekpour]

I view bank influenced, i.e., short sale or REO, as an economic stigma attached to the subject where the market reaction for it must be measured using market sales of the same ilk. I will typically try to use two non-Bank influenced sales and two bank influenced sales. I will adjust for the bank influence if measurement (the bank sales have to have sold in the open market as arms length transaction showing typical marketing time).

In my comments I will provide the market value of the subject "as if" not influenced by bank ownership but my final value on a short sale or an REO will be as a house that is so influenced.

But I am in an area with a lot of REOs and bank influenced sales. If a bank sells a house with regular marketing time for $135,000, it is because the buyers for it refused to pay anymore, even when non-bank influenced sales are selling for $150,000.

Jim,

How non-bank influenced homes compete with bank influenced homes if everything else is equal except one is bank-influenced and the other is not and how buyers are willing to pay 10% more for non-bank influenced if they can buy 10% less for the same home which is bank-influenced?
When there are many short sales and REO in a market, why bank influenced sales will create a stigma on properties if they are the same as non-bank influenced properties except one is bank influenced and the other is not?

Do you think a typical buyer is willing to pay 10% more for non-bank influenced home because the bank influenced home is going to curse his family, or the home is going to be hunted and the ghost of previous homeowner is going to remain in the property and will bother his family or the previous homeowner may come back and burn down the home or hurt his family because he is mad that the bank sold his home or neighborhood are going to point finger at his home because he bought it from the bank or the owner who was late on the mortgage payments?

You are calling the short sale a bank influenced sale, which attaches stigma to the property. How the willingness of the bank to take the loss and let the owner to sell the home in or order to prevent more loss is going to create stigma on the sale?

To me, stigma is a physical, social, environmental or psychological scar on the property such as:
Murder, crime, death in the property
Crack home or home that used for illegal prostitution
A run down and boarded up home for a long time
A well know gathering of gangs at the front or close by.

I don’t know how the bank can attach so many stigmas on properties if there is no physical, social, environment or psychological scars on those homes.
What is the difference if the owner of non-bank influenced has paid the mortgage and now wants to sell that home with the owner of bank influenced who has not paid the mortgage and now the bank wants to take the loss and sell that home?
Why should buyer cares who is the seller when that buyer can buy the same at 10% less?

I am appraising a home right now for a homeowner who just wants to know what is the market value of her home. This is not for refinancing and it is not for short sale. She just wants to get an honest to goodness market value of her home.

The property is located in a prestigious area , very desirable and close to ocean and parks. It is a semi detached single family home built in 2005 in a gated subdivision with 102 similar homes. The house was purchased at $1000,000 from the builder in 2005, was refinanced at $1,300,000 in 2006 and she wants to know what is its current market value

My data shows that there has been one closed sale of non-bank influenced 5 months ago for $840,000 in the subdivision and two bank- influenced sales in last 2 weeks for $750,000 to $800,000. I am waiting for their recorded data.

There are currently 9 listings in the subdivision of which one is REO and the rest are all short sales, owner occupied homes with the listing prices of $775,000 to $799,000 and days on market between 1 to 145 days.

My question is that if my subject is listed today as a non-bank influenced for 10% above those 9 bank influenced homes and a buyer is looking to buy one of those listed homes including my subject which are all similar but one is non-bank influenced (my subject) and the rest are short sales and REO, is that buyer going to buy my subject with 10% higher listing price because its owner has been able to pay her mortgage on time and others were not?

Frankly, if I were a buyer, I would be more than happy to buy the one with the lowest asking price if everything else was equal no matter if the seller was the bank or non-bank.
That is the market competition and the principle of substitution not stigma.

 

[Mztk1]

To me, stigma is a physical, social, environmental or psychological scar

There is a common mistake in classical economics that has been rooted out and no longer is considered to be true. That is, people will always act in their own best economic interest. That just isn't the case.

Unless you are an investor, or are putting your investment interest first, a real estate home purchase is a very emotional decision.

Having been a REALTOR before being an appraiser I've realized quickly that selling an emotional picture (Night swims with the whole family would just be perfect in that pool), worked a heck of a lot better than selling the monetary gain to the typical, would-be owner occupant.

Emotional purchases, because they tend to be based on "wants" instead of "needs" or "returns", will tend to be a bit more irrational. That's a major reason why real estate is not a perfect market.

When a couple goes to a house for purchase that was lived in happily and they are making that purchase as a would be owner occupant, they can easily transfer that happiness onto themselves and the positive feelings reinforce their emotional desire for the property. But when there is a foreclosure, the feedback from the house (unless you are an investor who is looking for gains from the house) is negative and it conflicts with the positive emotional response a REALTOR feeds on to make the sale. You might think that sounds hokey, and as a philosophical lover of reason I might roll my eyes at people who think so superstitiously, but that is the real mindset of the typical person. People do by and large believe in miracles, accept the idea of karma or something similar to it, and make gut decisions based on emotion. What you end up with is a market for the house that shrinks in terms of emotional buyers but increases in investment buyers. The former will base value on their desires and, therefore, are often willing to pay more, the latter base it on a nickle and dime approach and therefore pay less. The end result is a psycholigically caused stigma which is often measurable in the market.

That is for the REO properties. Short sales have a similar psychological effect, but getting to meet the owners and having a feeling you are helping them can offset it a little bit. However, short sales are bank influenced in that the bank must approve the transaction. As you know, especially if there is a secondary lien holder, but even when there is not, the approval process can take months. This potential holding period is NOT good for the typical buyer. The serious minded, owner occupied buyer, might be looking for a house in the spring to move in after school ends, let's say. Or at the beginning of the summer to move in before it starts. But if the deal depends on a bank approval that can go into into the middle of September and then fall apart, the typical owner-occupant is not going to be interested. You are left with those who can wait, and are looking to discount the price based on the time involved and the opportunity costs lost in not buying a property where the purchase can be completed more quickly.

In your situation, if you can expand your search into the competitive projects to look at non-bank influenced sales from October in those projects and how they compare to the last market sale you have in your development, and then find the non-bank influenced that are current in those same competing projects, you can determine a market rate of change and apply that to your in-project comp using the more recent out of project comps as a base.

I do have markets where REOs and short sales set the market. But it is obvious that they do. I will have non-bank influenced sales that sold for around $150,000 and similar houses that are bank owned selling for the same amount. But I show this on the grid. Like I said, I try to get 2 of each, and then I include two pendings and/or best priced market listings based on what is available. When a stigma adjustment is measurable (which often it is) I make it.