USPAP and Use of REO Sales for Comparables

[ghrousseau]

I need some help trying to locate any type of advisory opinion from the Appraisal Foundation or the ASC or any other appraisal regulatory agency/board which comments on the acceptable use of foreclosure/REO properties as sales for comparison.

The lender I work with has been getting arguments from some secondary market investors about the use of foreclosure sales. As we all know, in many markets, REO sales are the norm, especially when the subject property is an REO property.

I'm just hoping to find some type of opinion. I'm also going to go ahead and call the Appraisal Foundation and speak with someone up there.


Thank you.

 

[stefan olafson]

I really don't think there is any prohibition in the use of market sales in any given market. If the market is forclosed or REO sales, then that is what you use. Define your neighborhood and choose the best sales from within that neighborhood. Don't define your neighborhood then use sales from a different neighborhood just because that neighborhood has not yet been affected by other factors.

I know there is nothing in USPAP, I don't believe I've read anything in all the AI stuff I've read and know there is nothing in ASFMRA literature.

This from Frequently Asked Questions?


131. SUDDEN MARKET CHANGES RELATED TO CATASTROPHIC EVENTS



Question:
I live and work just outside the area that was devastated by Hurricane Katrina. My market area experienced sudden changes in supply and demand, and real estate sales prices climbed rapidly for a period of time following the disaster. Does USPAP provide advice to real estate appraisers on how to handle sudden market changes brought about by such catastrophic events?



Response:
Although USPAP does not directly address the appraisal issues associated with catastrophic events, the following passages may be especially important in appraisals involving properties in markets that are changing rapidly, for any reason.




Standards Rule 1-2(e) requires an appraiser to identify economic attributes relevant to the subject property. Standards Rule 1-3(a) specifically requires analysis of supply and demand.




For Self-Contained and Summary Appraisal Reports, USPAP requires disclosure of “economic property characteristics relevant to the assignment.” Market conditions (including sudden market changes related to catastrophic events) are “economic property characteristics,” and so should be identified in the development of an appraisal and disclosed in the appraisal report.




Standards Rules 2-2(a)(v) and 2-2(b)(v) address the type and definition of value used in an assignment. The Comments to these Standards Rules state, in part:





Stating the definition of value also requires any comments needed to clearly indicate to intended users how the definition is being applied.




In cases of sudden market change, it would be necessary to specifically disclose such things as how the appraisal has addressed the motivation of buyers and sellers, supply and demand, the conditions of the sale (e.g. exposure in a competitive market), etc.




As noted in STANDARD 2, the content of all real property appraisal reports, “…must be consistent with the intended use of the appraisal…” In the case of a rapidly changing market, the report must have enough information to allow intended users to understand the market conditions and to use that information in their decision making.


I would categorize CATASTROPHIC EVENTS to include the demise of the mortgage lending industry and the drastic increase in foreclosures and REO properties.

So, just disclose!

 

[VegasWayne]

There is confusion here caused by the way the county assessor reports sales and foreclosures on their web site. A normal sale is called type "recorded value". A bank or fannie mae foreclosure is reported as type "trustees deed sale" with a reported sales price that may be the amount of unpaid debt and when this foreclosed property is sold on the open market by the bank or fannie mae it is reported as type "foreclosure". The "trustees deed sale" is not an arms-length tansaction and should never be used as a comparable. The "foreclosure" is an arms-length transaction and should be used as comparables when appraising a similar REO property. To not use REO sales would be misleading and would probably give an inflated value.

 

[DWiley]

There is nothing in USPAP specifcially addressing the issue. It is a major topic of discussion in the AI's REO seminar.

DW

 

[The Warrior Monk]

I need some help trying to locate any type of advisory opinion from the Appraisal Foundation or the ASC or any other appraisal regulatory agency/board which comments on the acceptable use of foreclosure/REO properties as sales for comparison.

There is nothing in USPAP that directly addresses this issue. I'm not familiar with all of the Q&As, so I couldn't tell you if it is addressed there.

The lender I work with has been getting arguments from some secondary market investors about the use of foreclosure sales. As we all know, in many markets, REO sales are the norm, especially when the subject property is an REO property.

The important thin to remember with regard to this particular issue is that the analysis and definition of value must match. For instance, using sales between family members to value a property is incompatible with the definition of market value.

REO, short sales, or other similar transfers may or may not be acceptable in determining the market value of a property. The definition of market value assumes certain things...can the typical market participant buy an REO, or are they being purchased directly from the bank by all-cash buyers? Or are the sales of REOs restricted to buyers of certain income levels? All this issues, and more, must be considered before determining whether or not these transfers represent market value.

 

[Bob Ipock]

Go to your definition of value. If you use the Fannie Mae definition and if foreclosures are a significant part of the market I use them. Principle of substitution says the typical buyer will by the cheapest substitute.

If a foreclosure has been exposed to the open market, it was available for anyone to buy at, below or above the list price. Are the buyer and seller typically motivated? The seller wants the highest price and the buyer wants the lowest price and often both want it done as quickly as possible.

Does the foreclosure meet Certification # 7? If so, it could be an issue to NOT use them.

As Tom Hilderbrant used to say..."It depends".

 

[ghrousseau]

There is nothing in USPAP that directly addresses this issue. I'm not familiar with all of the Q&As, so I couldn't tell you if it is addressed there.



The important thin to remember with regard to this particular issue is that the analysis and definition of value must match. For instance, using sales between family members to value a property is incompatible with the definition of market value.

REO, short sales, or other similar transfers may or may not be acceptable in determining the market value of a property. The definition of market value assumes certain things...can the typical market participant buy an REO, or are they being purchased directly from the bank by all-cash buyers? Or are the sales of REOs restricted to buyers of certain income levels? All this issues, and more, must be considered before determining whether or not these transfers represent market value.

David,

The specifics we tend to deal with are REO properties that are marketed on the MLS and sold by local real estate agents where typically, the seller (bank) also pays the normal seller concessions/closing costs that would be present for other non-bank owned properties and the marketing time is typical. Often, our subject property for the new purchase loan we are financing is a bank owned property. It is not uncommon for me to see a total of six comparables used in some areas with 3 or 4 being REO and the remainder being "normal" resales. I know the definition of market value and Standards Rule 1-2e address it somewhat, but I was trying to get more of an "advisory opinion" type answer. So far the only thing specific I found was from an article by George Vann in his LSI newsletter.

Thank you.

The Appraisal Foundation just emailed my back:

"No, there are no Advisory Opinions or other guidance from the Appraisal Standards Board on this topic. This is because this involves questions of appraisal methodology and technique, which are not addressed in USPAP. As you know, USPAP simply requires appraisers to be aware of, understand, and correctly employ those recognized methods and techniques necessary to produce credible assignment results. But USPAP does not specify what those are."

So, I think Stefan was on the write track with this.

Thanks to all who posted

 

[Mike Garrett RAA]

We had an interesting discussion at our local appraisers group the other night...more than 100 appraisers in attendance. The guest speaker was discussing market analysis and made the comment she excludes all REO, short sale, and foreclosed properties from her analysis of the market. In do so she concludes there is no decline in the market. My thought....totally misleading!

The market is the market and is composed of different segments which includes all sales. The appraiser has the flexibility to decide which properties are considered comparable and to use those properties for comparison. That; however, does not change the market....and I say..."the market is the market, we just report it".

The simple solution to the problem is to make yourself a buyer. If there were two identical homes, side by side and one was an REO the other offered for sale by the owner occupant. Which one would you buy and why? I contend you would buy the one that represents the best purchase for you. Most likely that would evolve around price. If all things were equal except for the price...wouldn't you purchase the lowest priced home? REO's, in my market, are typically priced below those offered for sale by the owner/occupant. Additionally, they have caused the median price to decline.

My opinion... we, as appraisers, are in a whole new ball game and need to re-consider how we view the market, definition of market value, and how we analyze the data. Actually, it's more like being in the 4th quarter of a game with the score tied. What do we do...go for the touch down, kick a field goal, or punt?

 

[CANative]

I think I've been reading USPAP too much. It's only what? about a dozen pages at the front and a couple of dozen for Stds. 1 and 2. A few more if we want to do reviews. I don't even have to know what someone is talking about to say "That's not in USPAP." There is nothing in USPAP specifically related to any given assignment, property characteristic, development methodology or any other "how to" instructions.

Just ask yourself what the subject property would have to compete with if someone needed to sell it.

 

[Mike Garrett RAA]

Too many people mix supplemental standards with USPAP. Actually, the document is pretty simple...especially if you focus on the things that most of us do as residential appraisers.

At the beginning of each class, I like to determine who the audience is. If it is mostly residential appraisers doing mortgage lending work then I focus on definitions, the rules, and standards 1, 2, and 3.

It comes down to what an appraiser should and should not do and why. Support for that also comes from the statements and advisory opinions. In addition, an appraiser needs to understand the certifications they are signing and comply with them. The rest is just fluff!