Using REO or Bank owned comps for refinance.

[Edwin Farr]

Hello,

I have been a trainee for 4 years and had a questions I wanted to see what everyone thought of. I am doing an refinance appraisal on a 2-story colonial in a development. There are 5 sales in the past year but all are REO or bank owned properties (in similar condition as the subject). There are arms-length-transaction sales but they are in other developments (within 5 miles).

Now for an appraisal for use in a sale between buyers and sellers neither under durress (Arms length) you normally would not use REO or bank owned sales. Right? Becuase they are not comparable sales?m2:

What about a refinance. It is not a sale so does that mean all comps are fair game? In determining the Fair Market Value, in a development with many forclosures and 32 months of housing inventory, you would have to consider using REO or bank owned as they have a significant effect on the market, right?

Any help or comments would be greatly appreciated.

Edwin

 

[Judy Whitehead (Florida)]

I don't know about Pennsylvania, but if we didn't use REO's or short sales we wouild hardly have a comparable sale.....only those sales where people have a substantial equity in their home. Even then, the owner owned/occupied sales are similar to the REO's in most cases.

Many appraisers disagree about this, but they are a huge part of our market. When the homeowner occasionally tries to get me to tell them whether or not I am going to use REO's or short sales, I simply tell them that the real estate agents tell me that almost without exception every buyers asks them to show them "their best deal" and did they have any foreclosures to sell?

The foreclosures in this area are either new, never occupied spec homes, cleaned up and repainted homes and homes that are in average to good condition, as the lenders have learned that in order to get them sold, they have to fix them up. This may differ in other parts of the country but it is the norm here. You could try asking local real estate agents their advice on this issue as well. If all of the sales in your subject neighborhood are bank-owned and they are all selling for about the same thing and are in the same condition as your subject, then who is to say it is not fair market value? Like it or not, they are a huge part of some markets.

 

[cnjourdan]

The assignment type should not affect your comp selection...
"Now for an appraisal for use in a sale between buyers and sellers neither under durress (Arms length) you normally would not use REO or bank owned sales. Right? Becuase they are not comparable sales?"

You should analyze the market and establish if REO's are or are not refelctive of your market.
I normally pull my sales and see how many are REO's, then I look at the active listings and see how many are REO's. If the data indicates that REO's listings and sales are part of the market then they should be included./

You case is a perfect example...
"There are 5 sales in the past year but all are REO or bank owned properties (in similar condition as the subject). There are arms-length-transaction sales but they are in other developments (within 5 miles). "
Only five sales in the S/D and all are REO's...Why??? Is this likely to continue???
How many active listing in the S/D, how many are REO's.
Why would the typical buyer pay more for a similar house, by your own admission are were in similar condition to the subject.

 

[residentialguy]

You can use REO's, but it is absolutely necessary to find out what your subject would sell for in the open market as a straight sale with no undue pressure. REOs are very difficult and sometimes impossible to figure out. It takes a lot of work. You'll need to do some paired analysis.

Couple things I would do.
Find any houses in the subject's neighborhood that sold as a straight sale. Find some similar REOs and adjust for any variances, such as condition,quality,...everything on grid - in fact it is sometimes easiest to throw them on the 1004 grid. Once those adjustments are made, that will leave you with the adjusted market value. If the adjusted values are the same, that helps show that there is no market aversion to REOs. If there is a difference, then you should adjust for the variance.

I would also back this up and select a couple similar straight sales in a nearby similar competing community. If there is a variance there, then there will likely be a variance in your subject.

If you don't have a lakefront property, you can't just chose lake view properties and assume they have the same market demand.

To just base an assumption that since there are only 5 REO sales, then that is what the subject would sell for if they put it on the market is irresponsible. REO are all over the board and as well as each bank's motivation. Just choosing easy REOs is what appraisers do when they're working for 1/2 fee AMCs and can't afford the time to take the extra steps needed to find out the market value as defined at the end of the 1004.

 

[Joyce Potts]

What exactly is a 'straight' sale? That has such a 'gay' connotation. You mean a non-distressed sale? You mean one that when it went on the market at a much higher price and had a Seller and the Buyer community all behaving commensurate with current market conditions, but still sold higher than suitable alternative substitutes?

How about that same STRAIGHT property that then BECAME a short sale or bank owned after it tested the open market over an EXTENDED period of time, in great condition, but failed to attain a higher price?

I think you're probably misunderstanding the current market forces in play--at least in my market. We're seeing what you're referring to as a STRAIGHT SALE as one that generally sells higher than many of the others. In many cases, I still can't figure out why when so many totally defy the principle of substitution. So here's what I've come up with based on my research taken from one of my recent appraisals:

Comp selection emphasized the most recent sales of similar 'bungalow' properties in the subject's immediate downtown Orlando (Lake Como) area. The market data in this area ranges dramatically and is primarily attributable to 'soft' market conditions as a result of a vast oversupply of competitive listings. Bank owned and short sales are having a direct impact on overall property values with non-distressed properties often having to lower their asking prices in an effort to compete for a limited number of qualified buyers. As a result, the market data often demonstrates multi-tiered factions and sub-markets with extremely similar properties selling for drastically different prices. Investors paying cash vs. family oriented buyers with the intent to occupy has resulted in a phenomenon arely seen to such a large extent within Central Florida. While extended marketing times are often indicative of properties attaining higher prices, further analysis shows this is not always the case, with many higher priced listings testing the market over an extended period of time and despite periodic price reductions, are still failing to sell.

In addition to the three sales, three competitive listings are also provided and much like the closed sales, support a wider than desirable range after reasonable adjustments, with the final value opinion additionally supported by the statistical data provided by the local MLS. See Additional Market Data Addendum.

Not all adjustments in the Sales Comparison Approach can be extracted or supported by the available market data with a high degree of accuracy. Some adjustments have an element of subjectivity and professional judgement which the appraiser has applied based on prior observations of the reactions of typical/knowledgeable buyers' and sellers' in the marketplace.

All interested parties are encouraged to have a thorough understanding of complexities and challenges of this assignment, continued declining market trends and the extreme lack of consistency within the available market data with which to draw better support for both individual adjustments and overall value conclusions.

 

[Joyce Potts]

One last comment - go read the definition of Market Value in the FNMA 1004 form and tell me how or why an open marketed bank owned or short sale doesn't surrmount to reliable data, all other things essentially equal?

 

[residentialguy]

I think you're probably misunderstanding the current market forces in play--at least in my market. We're seeing what you're referring to as a STRAIGHT SALE as one that generally sells higher than many of the others.

I'll ignore your gay comments.

Straight sale...meaning, not lender owned, shorts, etc...just Joe the plumber selling his home on the open market. I am not targeting higher values. What ever the most probable price that Joe or Jane could sell there home for is the value I'm looking for...as a non-distressed sale.

And yes, I know the definition on the 1004 well. Each bank's motivation is different and there is an undue pressure/stimulus to sell.

 

[Joyce Potts]

Does the typical, knowledgeable buyer give a damn who the seller is? I'm finding the Realtors are more of a problem for UNAPPROVED short sales because of the time involved in getting them approved and closed.

Overwhelmingly, the short sales and bank owned properties in my market started out as non-distressed properties, but became one only after failing to achieve a higher selling price. In most cases - - a buyer AT ALL.

These days you have to take each comp and qualify them on a case by case basis, but to eliminate them because they're not 'straight' is profiling, and profiling IS WRONG!

All puns intended.

 

[Joyce Potts]

This negative and across the board definition of distressed sales and bank seller motivations has been to used and abused to generally disqualify a sale BECAUSE IT'S LOW - most of the time.

Pick the comps based on their locational and physical similarties, then narrow down those comps and qualify them based on their condition, market exposure time, etc., and chances are....you have a true open market tester, regardless of the legal owner.

 

[residentialguy]

Does the typical, knowledgeable buyer give a damn who the seller is?

Pair em up and find out.

Overwhelmingly, the short sales and bank owned properties in my market started out as non-distressed properties, but became one only after failing to achieve a higher selling price.

If they have good market exposure and didn't sell...it was priced too high.

These days you have to take each comp and qualify them on a case by case basis, but to eliminate them because they're not 'straight' is profiling, and profiling IS WRONG!

You must be talking to someone else I'm the one saying to make sure the are good comps before you use them.