Supplemental REO Addendum

[Mr Rex]

Where does property sell? In the market. So is the value of a restricted market exposure time not reflective of what the market would pay given the restrictions? So doesn't that mean that it is a form of market value, just not the pre-printed one on the 1004?

 

[J Grant]

Where does property sell? In the market. So is the value of a restricted market exposure time not reflective of what the market would pay given the restrictions? So doesn't that mean that it is a form of market value, just not the pre-printed one on the 1004?

Yes, that is my take on it. MV is a range, as we know, and the range can be high, low, or mid range of MV spectrum, and it is tied in to exposure time.

If typ market exposure for mid range pricing is 4 months, and the high end sales take a year, and lower end of MV is 2 months, and our client imposed MV DOM is 60 days, (2months), then our comps that sold in 60 days indicate the low end of MV and that is what I base on.

 

[residentialguy]

From AI's Res Appraising in a Declining Market

JG - please memorize this:

III. What are Some Alternative Value Definitions?

Some appraisers have expressed difficulties in obtaining clear guidance from their clients or from secondary market participants on the correct meaning of terms and applicability of different value definitions. Some clients ask for “market value” but don’t define or understand the term. Some clients want to adjust the appraisal conclusion by stipulating terms in the analysis, e.g. a sale within 30 days. This usually results in a variance from the commonly-used definitions of value and the appraiser must then define the term within the document to ensure the client and intended users understand what type of value is conveyed in the report.​

Client Expectations – It is important to discuss the type and definition of value with a client to ensure the appraiser is not developing an opinion of value that is different than the client’s expectations and different than the one utilized in the appraisal. This is to avoid any misunderstanding between the client and the appraiser as to the type and definition of value the opinion is based on. Appraisers should match the intended use of the appraisal with the defined value and carefully consider each part of the defined value.

 

[JSmith43]

Lee, when I get REO assignments where the client restrictions are clearly inconsistent with most probable exposure time for MV sales, I present the sales data and analysis that gets them where they want to go & explain that the client specifications for those particular value opinions are most consistent with.....at this point I reference disposition value or liquidation value & give the source of the value definition.

I include the definition & source on an addendum.

Clear explanations and clear labeling. It has resulted in zero client issues to date. Since most appraisers are not doing this correctly, it must be presented well. These type of clients know they are dumping the properties, so their mind set is such that they are not thrown for a loop when given a definition of value that is actually commensurate with what they are doing. They wonder why they don't see it more often in reports.

The regulators are probably cutting appraisers a bit of slack. I'm not sure that there are many CE offerings pointing this stuff out. An AO wold be nice or even an advisory opinion from the new AF committee. They could use the practice

 

[JSmith43]

I see resguy just posted a great reference for appraisers in need of some value definition therapy. That's what I get for not refreshing a page before posting.

 

[J Grant]

good posts guys, and I understand your points, but, does a 60-90 day marketing time imposed by client, equate to a severely restricted marketing time as defined by LV definition? In most markets, that is not a severly restricted marketing time. IT might more fit into dispostion value, but whether or not it can also be mv exposure time depends on market area, customary reasonable marketing times, as well as the client imposed marketing time.

The alt value definitions have some specific verbiage that may not be present in the terms of client needs either.

 

[J Grant]

I don't believe it does Lee. You need to find out from the client which values they're looking for as well as their sources so that you can include it in your report.

Here is how I clarified one report recently.

DISPOSITION VALUE AND LIQUIDATION VALUE
The objective of this appraisal addendum assignment is disposition value and liquidation value rather than market value as defined on the 1004. Per client's clarification, the appraiser instructions are to find the Disposition Value and Liquidation Value, which are client specified exposure times (see stated definition of values). The specified exposure time for Disposition Value is to be 90 days and the specified exposure time for Liquidation Value is to be 30 days, per client instructions
Market Value addresses the question, "What would the property likely sell for on the date of value after a typical exposure period on the open market with typical buyer/seller motivations and no undue stimulus to sell?

DISPOSITION VALUE
Disposition value answers the question, "What will the property likely sell for after a limited exposure of 90 days on the market given the sell is compelled to sell as a REO sale?

This is where I have an issue with Res Guy...using disposition and lv as defined is fine, but then you modify the definitions and indicate the LV or DV is for the subject as an REO SALE.

In the normal dispostion value definition the subject is referred to as a "property", not as an REO SALE. This is consistent with your views of REO's in general, as a kind of pariah property apart from the market. I doubt your clients even pick up on the implication of the meaning of your inserting the word REO SALE into a value definition

The definition of Disposition Value* for the purposes of this appraisal is:



The most probable price that a specified interest in real property should bring under the following conditions:

1. Consummation of a sale will occur within a limited future marketing period specified by the client
2. The actual market conditions currently prevailing are those to which the appraised property interest is subject.
3. The buyer and seller is each acting prudently and knowledgeably.
4. The seller is under compulsion to sell.
5. The buyer is typically motivated.
6. Both parties are acting in what they consider their best interests.
7. An adequate marketing effort will be made in the limited time allowed for the completion of a sale.
8. Payment will be made in cash in U.S. dollars or in terms of financial arrangements comparable thereto.
9. The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

*Source for definition of Disposition Value: The Dictionary of Real Estate Appraisal, Fourth Edition by the Appraisal Institute (2002)

LIQUIDATION VALUE
Liquidation value answers the question, "What will the property likely sell for after a severely limited exposure (30 days) on the market given the seller is extremely compelled to sell as a REO sale?"

Same problem again, and hopefully no reviewer will have time to read this, or no client will grasp the implication of specifying the subject as an REO SALE.

The definition of Liquidation Value* for the purposes of this appraisal is:



The most probable price that a specified interest in real property should bring under the following conditions:

1. Consummation of a sale will occur within a severely limited future marketing period specified by the client.
2. The actual market conditions currently prevailing are those to which the appraised property interest is subject.
3. The buyer and seller is each acting prudently and knowledgeably.
4. The seller is under extreme compulsion to sell.
5. The buyer is typically motivated.
6. The buyer is acting in what he or she considers his or her best interest.
7. A limited marketing effort and time will be allowed for the completion of a sale.
8. Payment will be made in cash in U.S. dollars or in terms of financial arrangements comparable thereto.
9. The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

*Source for definition of Liquidation Value: The Dictionary of Real Estate Appraisal, Fourth Edition by the Appraisal Institute (2002)

The appraiser’s analysis must be consistent with the type of value being sought. Just as it would be misleading to use sales that occurred under distress conditions, fail to adjust them (when necessary) for the conditions of the market value definition that were not met, and refer to the resulting value as market value, it would be just as misleading to use sales that occurred under non-distress conditions, fail to adjust them (when necessary) for the conditions of the Liquidation or Disposition value definition that were not met.

In the subject's market, a "two-market" (bifurcated) phenomenon can be observed, whereby there is a measurable difference between properties selling under non-distress conditions and virtually identical properties selling under distressed conditions (e.g. REOs and Short Sales). This phenomenon tends to become more prevalent as market conditions begin to improve.

see above...my take on this anyway, otherwise the information is valuable to be posted and read!

 

[residentialguy]

The purpose of the appraisal was to find out the most probable price of the subject as as REO sale with 30 day and 90 day exposure. It was a bank wanting to list it - how much will it most likely sell for as an REO? Whether you like it or not, a REO is a distressed sale and there is typically a 5-35% variance from a non-distressed traditional sale. I didn't change the definition. These were lender defined and a REO fits the definition as they are under compulsion to sell and have to in a limited time frame.

 

[J Grant]

res guy, I disagree with you on this point but we've been down that road before...maybe others will offer opinions? ):

 

[residentialguy]

what part do you disagree on?