Short Sale Question

[Mike Garrett RAA]

Ok, lets discuss the term..."arm's length". Doesn't it mean that the seller and the buyer have no relationship?

IN MY MARKET, many of the current sales are "short sales". It means the seller must obtain an agreement from the mortgage holder to accept a pay off that is less than what is owed on the property. The seller puts the house on the market (exposes it to the market) A buyer makes an offer on the property. The seller and the buyer agree to a purchase price. What isn't "arm's length" about that?

Is it a distressed sale? Maybe. Should it be used as a comp? Maybe. I prefer to use a mix, if I can find them, of traditional sales, short sales, and even REO's...IF THEY REPRESENT THE PRESENT MARKET.

Who is responsible for the selection of the comparables? The appraiser. Who is responsible for analyzing the market? The appraiser. Who is licensed to do the appraisal? The appraiser.

That huge type sure got my attention.

 

[CBBoston]

Joyce -- By definition an arm’s length transaction assumes neither party is under any undue duress. In sales involving job loss/relocation and medical issues the seller is under undue duress. If those kinds of sales have to be used, it should be discussed in the comp write-up. The seller in a short sale is certainly under duress. At first they don’t want to accept the fact they are upside down (denial 1st stage of grief) but most finally reach acceptance of that fact (acceptance 5th stage). Many have been told by the lender that if an acceptable short sale can’t be completed by a certain date, foreclose will start and that train is almost impossible to stop. The acceptable price may only be known to the lender and maybe not even to them. Keep in mind that lenders may have different motivations than typical homeowners. I’ve seen lenders turn down, or ignore, a short sale offer, foreclose on the property, and then accept a price far lower than the short sale price, netting them even less. In the broader finance markets players are often willing to take a low offer when markets turn south. Their fear is things might get even worse. Herd behavior in the stock market is an example of that and can reinforce the trend up or down. This is what happened in the re price run-up

The inclusion of non-arm’s length transaction in an appraisal isn’t something you want to do as a general rule IF enough ALTs are available. Even if you choose to include non-ALTs, that should be discussed. If the “above market” sale is not in line with other transactions in the market, I wouldn’t put it as number one, if at all. Maybe there was some buyer specific motivation to buy that property. Of course the blow and go appraiser may not have asked the right questions if he/she even bother to confirm the sale. (Note: I’m not throwing stones at you specifically.) Would you use an abutter sale without discussing that the purchaser was an abutter? I hope not. I understand that short and REO sales maybe all that’s in the market and are driving the current price levels and therefore have to be used. But the discussion should contain that information.

 

[Mike Garrett RAA]

And to omit those sales, if they are the market, results in a misleading appraisal report...in my not so humble opinion.

 

[Mztk1]

Joyce -- By definition an arm’s length transaction assumes neither party is under any undue duress. In sales involving job loss/relocation and medical issues the seller is under undue duress. If those kinds of sales have to be used, it should be discussed in the comp write-up. The seller in a short sale is certainly under duress.

There is nothing "undue" about a short sale or foreclosure by definition. Definition of "Undue influence" and "Undue duress" from the legal dictionary:

Virtually any act of persuasion that over-comes the free will and judgment of another, including exhortations, importunings, insinuations, flattery, trickery, and deception, may amount to undue influence. Undue influence differs from duress, which consists of the intentional use of force, or threat of force, to coerce another into a grossly unfair transaction. Blackmail, Extortion, bad faith threats of criminal prosecution, and oppressive Abuse of Process are classic examples of duress.

I understand that short and REO sales maybe all that’s in the market and are driving the current price levels and therefore have to be used. But the discussion should contain that information.

I doubt anyone here (though I may be surprised) would say you should use REO and short sale data without discussing it in the comments.

Fact is, short sales and REO properties in some markets MUST be used here in Florida. We have PUD projects built in emerging markets during the boom that are on the verge of turning into ghost towns because investors were buying 5 to 10 a pop and now can't rent them and can't get someone to buy them without drastically reducing the price.

 

[Vivian Bachner]

I totally disagree. Often it's the so called 'short sales' that have tested and tested and tested and tested (you get the picture) at higher prices, that have been consistently reduced over a more than adequate market exposure time that illustrates just where the pricing has to be before someone makes an offer.

To my knowledge, there aren't too many properties out there that don't have some kind of third-party financing on them. What makes a short seller any more or less motivated than a typical seller that's being relocated, or lost their job, or is undergoing health issues, etc? In fact, I've encountered many short sellers that simply refused to take offers they felt were extremely low.

For all who agree with the original poster, I'd like the term 'market value' explained to me. Why is it when something sells below someone's or 'typical' market expectations, it's automatically look upon as 'distressed' and should be elminated from the data pool?

Yet when something sells above typical market levels, it's Comp #1!

If you have a market full of 'distressed' , typical properties, too many properties, I would argue that they are having a significant impact on property values and can NOT be ignored.

Joyce:
I agree with you. Some seem to be eliminating "distressed" sales from their data pool because their mind set IMHO describes a buyer's market with erroneous assumptions that prices will continue to climb and that is "typical". In my market, the over supply, the upside down seller, etc. is driving prices downwards and the REO, foreclosure, short sale is simply THE MARKET.

 

[Joyce Potts]

Joyce -- By definition an arm’s length transaction assumes neither party is under any undue duress. In sales involving job loss/relocation and medical issues the seller is under undue duress. If those kinds of sales have to be used, it should be discussed in the comp write-up. The seller in a short sale is certainly under duress. At first they don’t want to accept the fact they are upside down (denial 1st stage of grief) but most finally reach acceptance of that fact (acceptance 5th stage). Many have been told by the lender that if an acceptable short sale can’t be completed by a certain date, foreclose will start and that train is almost impossible to stop. The acceptable price may only be known to the lender and maybe not even to them. Keep in mind that lenders may have different motivations than typical homeowners. I’ve seen lenders turn down, or ignore, a short sale offer, foreclose on the property, and then accept a price far lower than the short sale price, netting them even less. In the broader finance markets players are often willing to take a low offer when markets turn south. Their fear is things might get even worse. Herd behavior in the stock market is an example of that and can reinforce the trend up or down. This is what happened in the re price run-up

The inclusion of non-arm’s length transaction in an appraisal isn’t something you want to do as a general rule IF enough ALTs are available. Even if you choose to include non-ALTs, that should be discussed. If the “above market” sale is not in line with other transactions in the market, I wouldn’t put it as number one, if at all. Maybe there was some buyer specific motivation to buy that property. Of course the blow and go appraiser may not have asked the right questions if he/she even bother to confirm the sale. (Note: I’m not throwing stones at you specifically.) Would you use an abutter sale without discussing that the purchaser was an abutter? I hope not. I understand that short and REO sales maybe all that’s in the market and are driving the current price levels and therefore have to be used. But the discussion should contain that information.

Really? What independent, third-party verification source do you invoke when establishing whether either the buyer or seller was under any 'undue duress'? The commissioned based Realtor or the ticked off neighbor who's angry and the lower selling prices?

This is NOT about a single sale or listing. Death, divorce, tax liens happen. But when you have mutlple offerings, pendings and sales of more than one, I would argue that the duress part has now become a major player in the marketplace for whatever reason. Either take the distressed price, or it's simply not going to sell given the current lower priced competition.

Based on your assumptions the only valid sales would be those where the seller didn't have to sell, but could live there forever.

And of course all the assumptions and market data should be thoroughly discussed in the report. No ever suggested otherwise.

Who moved my spell checker?

 

[Mztk1]

Based on your assumptions the only valid sales would be those where the seller didn't have to sell, but could live there forever.

And based on the markets we appraise in such people are not moving now any way. You really have to be strongly motivated to sell in this market. Even if you are selling while you still can because you fear of becoming upside down.

 

[Bama Bayou]

Joyce -- By definition an arm’s length transaction assumes neither party is under any undue duress. In sales involving job loss/relocation and medical issues the seller is under undue duress. If those kinds of sales have to be used, it should be discussed in the comp write-up. The seller in a short sale is certainly under duress. At first they don’t want to accept the fact they are upside down (denial 1st stage of grief) but most finally reach acceptance of that fact (acceptance 5th stage). Many have been told by the lender that if an acceptable short sale can’t be completed by a certain date, foreclose will start and that train is almost impossible to stop. The acceptable price may only be known to the lender and maybe not even to them. Keep in mind that lenders may have different motivations than typical homeowners. I’ve seen lenders turn down, or ignore, a short sale offer, foreclose on the property, and then accept a price far lower than the short sale price, netting them even less. In the broader finance markets players are often willing to take a low offer when markets turn south. Their fear is things might get even worse. Herd behavior in the stock market is an example of that and can reinforce the trend up or down. This is what happened in the re price run-up

The inclusion of non-arm’s length transaction in an appraisal isn’t something you want to do as a general rule IF enough ALTs are available. Even if you choose to include non-ALTs, that should be discussed. If the “above market” sale is not in line with other transactions in the market, I wouldn’t put it as number one, if at all. Maybe there was some buyer specific motivation to buy that property. Of course the blow and go appraiser may not have asked the right questions if he/she even bother to confirm the sale. (Note: I’m not throwing stones at you specifically.) Would you use an abutter sale without discussing that the purchaser was an abutter? I hope not. I understand that short and REO sales maybe all that’s in the market and are driving the current price levels and therefore have to be used. But the discussion should contain that information.

My bold. This is a bunch of psychobabble which has nothing to do with real estate valuation. Not true about medical/relo/job loss. In 2005 in Florida you could have medical problems, considering relocation, losing your job, or all three. List your house or condo and you would have had ten fools lined up to buy it, quite often for more than list price.

If a market is driven by short sales and foreclosures, that is typical as of the date of the appraisal report. What was typical buyer/seller motivation in 2005 is no longer typical in 2008, at least in most parts of Florida.

 

[David Sawyer]

I have been reading some excellant comments in this threat by everybody and it is perhaps one of the most informative forums that I have read in "Wayne's World" a quite a while.

Are there two markets? The REO/bank owned property & "short sale" vs. the sale from Mr. & Mrs. Smith to Mr. & Mrs. Jones that is a negotiated arms-length transaction. Ask the prospective buyer! Or better yet, be the buyer!

I recently did a ERC appraisal in one of my areas worst sub markets (highest foreclosure rate). I maintained the REO/ bank sale was the market. That was the current trend and the foreclosures were increasing each month with my projections the REO/bank sale was becoming more and more dominate each month.

In my verbal discussions after submission of my report with the consultant, it was revealed that there was a 36% spread between the two appraisals with mind the lower and she was ordering a 3rd report. She also stated that never had she experienced such a wide spread. I requested the comps from the other appraisal. They were all non-REO sales and mind were all REO/bank sales with one non- REO sale of the 6 comps. The REO/bank owned sales were 80% of the comps for that particular sub market. I never did a follow up on the 3rd report and the subject is still listed by the realtard that had the current listing at the time of my inspection and has not reduced the asking price.

 

[Mztk1]

There could be two separate markets. Or it could be the short sales and REOs set the lower end of the value because they attract one type of buyer (those who look for deals) and discourage another type of buyer (those looking for their dream home). It could of course also be that the REO and short sales are the market. Every market is different and has to be read accordingly.

If you had non-REO properties and non-Short sales that were legitimate market sales and were as recent or more recent than the REO sales which were selling considerably higher than the REO properties, there is reason to believe you had one of the first two situations above.