Many of our readers ask us if appraisers use distressed properties (short sales and foreclosures) as comparables when doing an appraisal on non-distressed properties. We have posted on this issue on several occasions (examples: here and here). Last month, the Appraisal Institute issued a paperon the subject. In the paper, the Institute explained that:

“Foreclosures and short sales can provide important information for appraisers, who develop valuations based on market data and market forces.”

On whether an appraiser should use distressed properties as comparables, the Institute was very direct (all items in bold were shown as bold in the original paper):

“An appraiser should not ignore foreclosure sales and short sales if consideration of such sales is necessary to develop a credible value opinion.”

And they explained the possible differences between short sales and foreclosures:

“A short sale … might have involved atypical seller motivations and so might not be an ideal comp…

A sale of a bank-owned property might have involved typical motivations, so the fact that it was a foreclosed property would not render it ineligible as a comp.”

Bottom Line

Some will argue that distressed properties should not be used when appraising non-distressed properties. However, there is no longer any doubt that they will be.

At a campaign stop in Nevada on Monday, President Obama announced an expansion of the HARP (Home Affordable Refinance Program) which would eliminate the current maximum LTV of 125%. The initiative is being looked at as a way to reward those homeowners who have been good payers of their mortgages but, because of declining home values, they could not take advantage of today’s lower interest rates.

While the actual details on the program will not be released until next month, here’s the buzz:

 

• It will only pertain to loans currently being serviced by Fannie Mae or Freddie Mac
• Because of the removal of the LTV cap, appraisals may not be required
• With the only qualifying criteria announced being that the last six payments be on time, it is possible that income documentation may be streamlined and credit scores might be more forgiving
• Fees allegedly will be reduced
• Incentives may be offered to people who shorten their repayment time
• It also sounds that the banks may be given some incentive by not holding them liable for the underwater portion of the new loan (a major incentive for sure).

The government is on the hook for these loans already. By lowering the payments (by offering lower rates), they will likely help these loans to continue to perform and make it less likely for the underwater homeowner to walk away.

The original HARP was expected to help 5 million families.  After two years, it has yet to reach 900,000; therefore, estimates ranging from 800,000 to 1.6 million borrowers who may benefit need to be taken with a grain of salt.

Whether the Administration is looking for purely political rhetoric points or not, my advice to underwater homeowners is too keep an eye out for the final guidelines because you just might be able to lower your payments.

Short sale success does not stop at educating the seller as to their loss of mitigation options and then successfully negotiating with the seller’s bank to accept a short payoff. Today’s complex real estate market warrants more.  Having negotiated over 1000 successful short sales, we have found one aspect of the short sale process that needs serious attention: Educating the buyer regarding the proper short sale procedures.

Educating the buyer and setting the correct expectations is imperative to a successful short sale transaction. Nothing is more discouraging than successfully negotiating a short sale only to have the buyers walk from or not be able to close the transaction. The following are some precautionary and educational items to consider which would avoid such buyer fallout.

Patience is a Virtue

Not every buyer is a short sale buyer.  However, one important characteristic a short sale buyer must have is patience. Setting the proper expectations regarding the time frame of a short sale plays a key role in bringing the short sale to the closing table.  If a buyer is not willing to stay in the transaction for at least 90 days, they are not a short sale buyer. Of course we cannot speak for every circumstance. But, in most cases, the short sale process takes 60-90 days to complete.  For their patience, the buyer will likely earn instant equity. The average short sale, according to the Realty Trac report dated 5/21/11, sells for 79 percent of market value. To that end, a buyer will earn “patience equity” (a term coined by Steve Harney).

Work with a Lender that Understands the Short Sale Process

The pre-approval process should be the same whether the buyer is being pre- approved to buy a short sale or pre-approved to buy a non-distressed property. This seems like simple advice doesn’t it?  However, from our vast experience negotiating short sales, we have found that 35% of successfully negotiated short sales do not reach the closing table because the buyers financing falls through. We must educate buyers to work with the proper lender who will not only walk them through the mortgage process, but also understands the short sale process. Too many mortgage applications start at the time of short sale approval. Some short sale approvals expire in 10- 15 days from date of issue. In many cases, that is not enough time for a lender to underwrite the file, order title, order appraisal and fund the loan.

A proper pre-approved short sale buyer would be one who is brought through a complete underwriting analysis prior to the short sale offer. This includes full income analysis, full asset analysis and full credit analysis. The ideal lender is one who completes the underwriting procedure and has a credit decision pending clear title and appraisal. The lender should also help in keeping the buyer engaged throughout the process. In a lengthy short sale negotiation, the lender should be proactive in keeping the loan file up to date with recent paystubs, asset documentation etc.  This will ensure the transaction closes on time and without extensions.

Complete Inspections Prior to the Short Sale Approval

This is a confrontational subject but each buyer should be educated to understand that in most cases any major deficiency regarding the condition of the property will not be cured prior to closing. However, in many instances, if the deficiencies are known prior to the start of the short sale negotiation, the short selling bank will be more willing to except a sale price that is discounted deeper to the current market value. It is a challenging task to go back to the bank and ask for a lower sales price when a home inspection that was done after short sale approval showed major deficiencies.

In addition to the home inspection, the lender appraisal can be done prior to the short sale approval.  In most circumstances where the short selling bank’s broker price opinion shows a property value that is much higher than the buyer offer, the lender appraisal can be used to negotiate the value.

We should educate buyers as to the pros and cons of completing the inspections prior to short sale approval.  We understand there is a monetary commitment that would have to be made. Having said that, having the inspections done can save allot of aggravation to the seller and buyer later in the process.

In closing, the above are just a few items to consider when educating the buyer regarding the proper short sale procedures. If we remember to keep the buyer engaged and walk them through the process every step of the way, we will ensure the buyer earns their “patience equity” and the short sale transaction closes.

Today, we are again honored to have Ken H. Johnson, Ph.D. — Florida International University (FIU) and Editor of the Journal of Housing Research as our guest blogger. To view other research from FIU, visit http://realestate.fiu.edu/.

Dr. Johnson will also be speaking at NAR’s Conference and Expo in Anaheim. For more information click here. - The KCM Crew

The Research

The resale of existing homes fell 3 percent in September according to the National Association of Realtors.[i]  A new wave of foreclosures is scheduled to hit the U.S. housing markets.[ii]   Homeownership levels experienced their largest decline since the Great Depression.[iii]  Is there any good news about housing?  Are there any signs of life in the U.S. property markets?

In fact, there are significant signs that favor a recovery in many markets around the country.  Beracha et al. (2011)[iv] reports that housing affordability is at record levels in most of the country.  

The study examines housing affordability from a number of different vantage points.  The first investigation by the researchers is into the relationship between property prices and average income on a state-by-state basis and the country as a whole.  In general, lower ratios (Price/Income) indicate better property affordability.  For example, the average affordability score for Florida over the last 30 years is 4.51.  In other words, a typical home in Florida has sold for 4.51 times the average annual per capita income in the state over the last 30 years.  Today, the property price-to-per capita income ratio in Florida is 3.66, which is a 30-year low.  Thus, housing today is more affordable in Florida based on income than at any time in the last 30 years.

This is not just happening in Florida.  In fact, 26 states and the country as a whole stand at record levels of property affordability based on this ratio.  The 30-year average property price-to-per capita income in the U.S. is 4.45; however, the present measure stands at only 3.94, meaning that, on average, Americans presently purchase homes for roughly four times their annual income.  Thus, on the whole and based on income, housing is more affordable today than at any time in the last 30 years.

Implications

The ratio of property price-to-per capita income is a traditional measure of housing affordability.  There are issues with the measure.  For example, property may not be becoming more affordable, as Americans might be buying lesser quality homes, which would cause the ratio to drop for reasons other than affordability.  Historically, however, this has not been the case.  Thus, the measure is a proxy for the health of the market place.

As a proxy for market health, these numbers are very encouraging.  Clearly, property prices are falling far faster than income (in fact, income has remained relatively stable over the period), making housing more affordable than in recent memory. 

Will these record levels of affordability based on income be the engine to reignite housing markets around the country? Only time will tell.  Regardless, there do appear to be signs of life in the U.S. housing markets.

Endnotes

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