When there are more REOs on the market in a particular area than regular sales>>>>>then what is the norm? The REOs. The appraisers are appraising what has been selling and it is the REOs. I see short sales where the contract date is May and June and they STILL are on the market. The REOs move F A S T. What is a "normal" sale now-a-days any way?

Hi lyn,

I am a residential appraiser here in the Philadelphia area. I know in my practice I personally do not use REO sales in my reports unless they are the market driver. We have very few neighborhoods in the area where this is the case but where it is and there are more REO listings/sales as compared to owner occupied listings, we have to take them into consideration (assuming they are in good condition) because they have become the market. You certainly have done your home work here and supplied a lot of good info.  i further agree that the banks are their own worst enemy here and with the HVCC being forced down our throats, I have come across a lot of good appraisers that have bailed from the industry. I personally have mortgage broker friends of mine that constantly complain about the HVCC and the fact that the banks force them to use certain AMC's that end up using appraisers from outside the area.

Lyn:

Great article. This has been hurting our market as well. Since many REO sales need substantial work, buyers need to be made aware that traditional sales are not generally apple to apple comparisons. I am constantly explaining to buyers why they cannot get the "non distressed" home under the same terms as a foreclosure.

REO's and shorts CAN NOT be ignored when analyzing community values, especially if the number of these distressed properties exceed 10% of the homes in the community. In excess of 10% decline hysterisis infects the entire community and absolutely can not be ignored.

Some communities have exhibited greater value resiliance. These are typically age restricted or highly desired, stablized communities within the active market of 150 to 250 price points. Their is some reason to believe these areas may be ambushed by the coming 'ghost' inventory storm.

My appraisal observations suggest the banks influence in the appraising process is creating a 15 to 30% equity to shore up the banks asset position in the home purchase. I've also noticed, in short sale negotions, the bank will compel the buyer to purchase regardless of the appraisal. What's up with that?

I will also agree with Judi Bryan where the mantra of REOs being in a distressed physical condition relates probably to where ones market is. My market is a high end resort town where many times the REO is BRAND NEW and never lived in. The most I have seen is where it is perhaps 90-95% completed and the new owner just figures in his own sweat equity to finish it off or contract it out for his offering price. From what I have read of distressed properties across America>>>>it is NIGHT and DAY differences between different markets.I just sell them,as I try not to get involved in the political ramifications of why it happened. I recieved my license in Oct of 2007 in the midst of the biggest downturn in the real estate market in 70 years.The first thing I noticed was one new construction REO is like a cancer in a neighborhood of non-REO/short sale homes...it just drives the prices down of every home for sale in the neighborhood. Is it my fault? No. Do I feel sympathy for the non REOS/short sales sellers? YES. What is my job? TO BRING A BUYER TO THE BEST DEAL THEY CAN FIND FOR THEIR MONEY.

Lynn, Your blog misses the issue: REO sales comand lower pricing due to marketing while vacant on as-is terms with seller disclaimers, typically with repair issues, NOT because of inadequate market exposure. This distiction should be recognized and adjusted in an appraisal when comparing to an arms-length sale. Many appraisers don't know what they don't know. School them with my article in the Fall 2009 Appraisal Journal, "The REO Supplemental Addendum".     

"The banks are putting the pressure on the appraisers & they are not pushing back."

It used to be that agents and lenders put the pressure on the appraiser to make the value they needed. HVCC was instituted to prevent that practice, or so they thought, but in truth it exacerbated the problem.  The appraisers who have managed to stay afloat now get their business from appraisal management companies. Those companies were formed when HVCC was instituted and usually by an appraiser who wanted to keep doing business with long time clients. So here is the way it works now.  My mortgage company, with 100 loan officers, has one appraisal management company we can use. The orders go straight to the management company and they select who the appraiser will be. Appraisers no longer need to keep me happy as a lender, they want to please the bank, who gives them ALL their business. What do the banks want? Low appraisals to assuage their risk. No matter what the appraisal is, the appraisal company will continue to get business. Why WOULD the appraiser push back on the bank?

Hi Lyn,

The local appraisals here in NYC are telling me that those are the orders from the lenders!.

I'm sure you are aware of HVCC, and the fact that the lenders are now "in control" of the appraisals..... (as oppose to the mortgage broker).

They are ordering the appraisals to consider low comps from R.E.O and auction sales.....and the appraisals have to comply in order to still be in business and get work orders from the lenders......

Prices will continue to go down for a while and the reason is simple - the banks are trying to dictate a more conservative lending environment, but in order for people to still qualify the prices will have to be lower.....

Since when is 120 days the normal marketing time. Real Estate 101 says that the best chance of getting the most money for a property is the first 30 days. In my area (Washington DC and surrounding suburbs) average homes ($500K or less) that are priced right for the market will get offers within 30 days, 60 days max. If you don't the price is too high. There is no getting around it.

And the best way to get the most $$$ is to price the property a little under whatever you really think it's worth. That way you get multiple offers that will rise to the true value. Pricing high and attempting to negotiate down "with a good buyer" is a guaranteed failure.

Lyn,  you make some very valid points.  I am a real estate appraiser in the Virginia Beach area.  Although we are very fortunate here due to the military bases, our markets have not seen the decline nor the amount of foreclosures that many areas have seen but we do have our fair share.  However we have numerous waterfront neighbrohoods that have seen a large decline in values.  I have not found a neighborhood yet that had only foreclosed sales.  You are right in the fact that REO properties are not arm's length transactions and should not be used as a comparable sale for a non-distressed property.  If a neighborhood and the surrounding competing neighborhoods have only distressed sales, then that is the market and they should be used.  I find it hard to believe that is the case in other areas in the US.  Markets have declined but that is not a reason to use foreclosed sales as comparables for a "typical" property.

Oh what a problem this is becoming....I just had a recent experience with this exact same thing....SO very frustrating for a buyer who has been trying to find a home since June...3 short sales experiences that went bad later and we found the perfect home for him....now I will concede that the house was priced at the very top of its market.    But in our defense of making the offer we knew it was very small, but had a decent sized lot.  The home was in pristine shape so this disabled vet wouldn't have to sink any money into it to make it liveable...Finding a VA eligible home in the under 50k price range is very hard in our area.  Well we made a full price offer and it came in $15k low.    The only comps available were much lower.  The appraiser had the audacity to tell me that it hadn't been on the market long enough to justify the higher price....and that because the house was only 650 sq ft that to remodel it with the new paint and carpet would only cost "a few hundred dollars"   so here we sit...an equity seller who can't sell his home in this market to a buyer who is ready to buy because to sell at this price he would have to do a short sale....he was willing to come into the transaction with a couple of thousand dollars to pay my buyers closing costs...but not nearly $20k on a $50 k house....how low will the prices fall??   Used to be you couldn't even get a manufactured home in a park for under $40k....now stick built homes are in the same price range???    Someone needs to get real...and in our case being that it is a VA loan we have no other choices for an apprasal review.  Chances are we would get the same appraiser.   Other agents in my office have had the same nightmare!!!  All I can say is a great big loud "aaarrrrgggghhhh"  LOL 

You are the typical Realtor.  I hold both an appraisal and brokers license and appraisals are my main business.  Until a Realtor has experience the life in an appraisers shoes they have no right to tell us how to do our jobs.  The problem you are complaining about is not a new one, I cannot count how many times I have gone to a home and the Realtor meets me there with the "comps".  These include sales from several years ago, expired and withdrawn listings.  Contrary to what you are saying the only objective voice in the entire transaction is the appraiser because he gets paid (a small amount) whether the deal closes or not.  The Realtor, broker and loan officer all get paid based on the selling price and the loan amounts.  I have seem many Realtors over sell houses in both good times and bad.  REO homes are a factor in most markets now a days.  If an appraiser does their job correctly then the REO sales will be analyzed and adjusted accordingly.  In my opinion if a Realtor did their job properly they would be advising their buyers of what the home is really worth with no emotion involved.  If you have any questions have the buyer purchase an appraisal before writing the purchase agreement the small investment of the cost of an appraisal can save the buyer thousands and make the closing go smoothly.  Keep in mind if two independent appraisers appraise the same house their values should be within 5% one each other if they are doing their job correctly, and the assignments are the same.  Furthermore if your seller has any questions they can also have their house appraised before listing and the appraisal should indicated the most probable marketing time for a value.  If a seller is willing to sit on a house for a long period then the appraised value may be higher.

I would suggest all Realtors take appraisal 1 and appraisal 2 classes before talking bad about appraisers.

Good Post Lynn,

I know that appraiser are using comps from REO's and short sales to under appraise seller owned properties and they are doing so under the direction of the lenders who are hiring them to appraise these homes.  However I had an appraiser appraise a listing of mine $50K below the sales price.  This was in a higher end community and there were no REO's or short sales that had sold in the past 6 months so the appraiser used comps that were not comparable in the community and incorrectly reported the wrong sq ft, they had missed some rooms???  Further the appraiser wrote on the appraisal that this home was overpriced due to the fact that the sellers had paid too much for it the year before.  Now they had purchased this home in June, 2008, before the mortgage meltdown really hit and had placed it on the market for quite a bit lower than their purchase price.  When I protested and had the builder supply the blueprints to establish the correct sq ft, the lender finally ordered another appraisal.  That appraiser contacted me to discuss the comps that I had and I supplied my comps with surveys and additional data that I had acquired on each property plus my sellers blueprints.  That appraiser only made the adjustments to the appraised value based on the sq ft and not the comps.  It was still $30K below sales price. Basically the good ol' boy covering for the first appraiser or simply following the lenders instructions of low balling anything that they sent their way.  Can't really blame them if their jobs rely on the lenders awarding them their business or not.  Of course they are going to follow their "employer's instructions" and not the guidelines of HVCC.  The sad fact is that in addition to the REO's and short sales, under valuing seller owned properties to protect the lenders (in case of foreclosure) is only going to drive prices down further.  Where it will all end, who knows. 

Hi Lyn. I adjust my strategy it seems every 6 months or sooner. When there are 319 real estate agents in a town of 2200>>>one must be changing with the flow or be buried. The majority of sales here are shorts or REOs. I've NEVER sold a home from someone who lives here as they are out of state or the larger city "down the hill." The REOs ARE the driver here for sure and most of my sales have been second homes for the original buyers. In a resort town....when the major Western cities have huge foreclosure rates,the second homes in resort areas become MEAT! The seller "circles the wagons" around their primary residence and let these go into foreclosure. It's a different world!!  The long time residents here seem to be "ok" as they did not become involved in the craze between 2003-2006 and many were purchased to "flip" or a second home with the feeling that this resort property would increase substantially every year. Isn't it just amazing what the common feeling was just a few years ago on buying and holding? I know this is a different topic,but in my opinion,the availability of CHEAP MONEY and LOTS OF IT along with lax lending standards caused this debacle in the first place.

Hi Lyn,

I was recently in a class with a teacher who was a leading contributor to the MC form in which he apologized for what he now calls the "Mass Confusion form". The main problem that I see with the form is that it is to generic and with any statistics reporting the true results can be misleading. I have seen where some appraisers will list every sale in that market to determine results even if they are not comparable. ex $100000 to $2000000. If you are an appraiser and you believe that the buyer looking in the 100k range is also looking in the $2000000 range, you my friend should hang up your license. The MC form is supposed to be for your "comparable homes" and not the market.  I have reviewed reports where in some appraisers have listed the market as declining b/c the 0-3 month period only had 1 sale that was a few dollars lower then the average of the 4-6 month period. I believe that you can not build credible results from 1 sale.

With the HVCC the realtors are allowed to talk to the appraiser and so are the lenders, as long as the person from the lender is not directly compensated from the loan closing.

Tom Waite makes sense when he says that a major part of the entire problem is Big Government interference with the real estate market.  More rules, more regulations, more subsidies, more tax credits, equals more problems.

Every time a government (federal, state, local) passes a law to help a particular group or gives a subsidy, it harms other groups.  The unintended and intended consequenses always increase problems, not solve them.

We never learn.  We keep asking the government for help.  We trade freedom for security, but security doesn't increase as freedom decreases. 

If we could possibly leave the housing market to supply and demand it would recover with less chaos.

Lyn,

Great post. Here in Denver we are dealing with this issue constantly and I think that the thing everyone should know is that under the HVCC these appraisers are being thrown into areas that they know little to nothing about and are forced to learn a market quickly for less than they used to make per appraisal in most cases.

This is an opportunity for each of us as the Real Estate Professionalto take a proactive approach and not only speak with the appraisers but offer to provide comps and meet them at the property to help educate them as to why you feel the price you are contracted at is the right price. Take the time to provide good comps and if there are REOs & short sales that come in to play be prepared to explain those prices related to condition, time on market, or if the price was dropped the week before a sale date saving it from foreclosure.

Again, there is nothing wrong with speaking to the appraiser or helping to educate them. Most of the appraisers i have worked with are not only very accepting but in many cases greatful for the help from the experts.

Thanks again for the great post!

I noticed the market behavior of REO's and Short Sales almost immediately. I noticed how the properties were being marketed not only 'as-is' but significantly below prevailing market pricing. I knew that USPAP in Standard One defined "Condition of Sale" as being of first importance. Thus, for an appraisal of an REO Property where the client wanted a value estimate so that the property could be listed and sold within 90 days on an "as-is" basis, I used REO SAles and Listings with maybe one or two Regular Sales included so as to provide the client a reference. For appraisals of standard transactions, open market purchase, refinance etc., I made use of, when I could find them, of standard sales. In the course of my appraisal work I discovered that the adjustment for REO/Standard Sale was between 5% and 10% with 7.5% being both the median and the mode. I did an appraisal for Citi that was for a refinance. I was stuck including an REO Sale and and REO Pending Sale. I adjusted both at 5% for condition of sale. Citi responded by demanding I remove the adjustment. I replied by reminding them of USPAP and also included the MLS Report of hte properties in the appraisal. Thankfully, somebody at Citi 'got it' and that was the last I heard. In another local market a PUD has seen a great number of foreclosures as the homes were oversold during the last boom. The lenders would list their REO's at 5% under the market adn then sell them at 5-10% over the market. Some of the sales were financed using FHA mortgage assistance and I would like to know how they closed the deal. Anyway, for this purchase, which was a standard sale, I was required to include two pending sales. I did, and adjusted them with a 7.5% POSITIVE adjustment as that was the market behavior. Because I knew no one would believe me, I cluded the MLS reports for all the comparable properties. There was nary a peep from the underwriter. Cool, Huh? It seems as though someone in loan risk management has finally gotten around to reading the rule book, USPAP. steven

Thank you Lyn,

On my street, a couple and their Realtor, threw a house up for Short Sale, without trying to sell it first at all.  They moved out and it went Short immediately.  Looking at what they owed on it, they could have sold it pretty quickly, had they priced it to just cover everything, instead it's been in and out of contingency several times, because the bank is being wonky.  Considering our area had an 82% rise in pendings over last November, it would have been sold by now had they used a traditional method. And the house is in beautiful condition, recently redone kitchen, etc.  And they listed it for $100k less than the current market value based on recent comps.   Now that my house is going up for sale next month, guess that's going to hurt me now.  There are some Realtors around here who have been pitching and pushing Short Sales on clients, and it isn't all it's cracked up to be.  Oh, and in this very, very, nice neighborhood, he NAILED the sign up on the house, not bothering to pay for a sign post.  Talk about messing up the values for everyone else, it looks like one of those foreclosure-devastated areas, yet it's the only house for sale in the neighborhood.  I wonder how this fiasco will affect our appraisal?  

Gary/April: How DO assessors in your area come up with comps then? Just arbitrarily pull them out of a hat? Make them up to finance the budgets no matter if 3/4 of the sales have resulted in 20-25% drop in value of said homes? Interesting.

Carl said:

"The intent of HVCC is to stop loan originators, and mortgage brokers and real estate agents and other parties who make money on commissions from inflating appraisals in order to churn more profits. I don't believe it was intended to stop actual lenders from setting their requirements as they see fit."

Sorry Carl.  HVCC was a result of a lawsuit filed by the Attorney General Cuomo in New York against Washington Mutual. His theory was Wa Mu forced appraisers to inflate the value of the properties so more of the mortgages they funded would fit their guidelines. Because of the shear power Wa Mu had over the appraisers due to their size, Cuomo claimed they could influence the market unfairly. They settled, putting in place the agreement that ultimately became HVCC.  It was the changes the Senate Finance Committe (Barney Franks) made that put the blame squarely on the lenders and off the banks.  Remember, loan originators don't approve loans, it's the bank's underwriters that have the power to say yes or no.

Lyn,

Great post. In the greater Phoenix, AZ area, I have experienced exactly what you are talking about.

The best I can tell you is that DO NOT go through one of the major banks for a loan. Their completely disconnected appraisal process has cost me 3 deals this year. Uneducated appraisers from outside areas come in with no contact with the any of the parties or the bank. If that appraiser wants to remain on their "wheel" rotation system, they know to low ball every job they get. The damage from a to low FHA appraisal can be devastating to not only the parties involved, but it stigmatizes the property for 6 months. That FHA case number is attached to that apppraisal for 6 months! Don't let the banks suck your client in with the promse of little or no fees. Who cares about the fees if the deal is going to get killed by an appraisal that is 10-15% to low. 

If you can, inform your buyers to go with a mortgage broker. They might have to pay a few bucks more in fees, but the loan and appraisal has a far greater chance of going through. Their guidelines are completely different. In many cases, including FHA, they can pick their appraiser.

Thanks for the sounding board!

Linn

As a FL appraiser i would love to comment on your post.  I sympathize with your situation but all appraisers have not "Caved In" to banks and pressures. Theoretically the HVCC was supposed to eliminate that (though i highly disagree with its application). We all know there's a difference between REO sales and "Regular" arms length sales but what amount should the appraiser make for the adjustment?  Are these REOs typical of that neighborhood or micromarket?  If they are we as appraisers are required to utilize or comment on their impact on value if any. An appraiser would be remiss not to consider REOs resales in markets where they are pervasive. That would be turning a "Blind Eye" to a legitimate market trend and be misleading to the reader (typically the lender / bank). We are engaged to be impartial and exercise due diligence.

 When the glut of REO and short sale inventory is re-absorbed and they again are peppered in areas versus common then we as appraisers can again relegate them to their rightful place in determining market value or in other words not give them so much weight. But they truly are an impacting force as can be witnessed by your other "Posters." Not that there arent bad appraisals going on like crazy but just wanted to put in a word from what we as appraisers are supposed to consider.

Short sale and REO's are still part of the market and appraisers are not suppose to exclude them from the comparables. Regular sellers can either wait until the issues cool off and sell to get the most or accept the fact that we are in this kind of market right now.

In Georgia the lenders are not allowed to speak with the appraiser or influence the appraiser in any way.  My business partner & myself are both realtor/appraisers & we specialize in REO sales. The comps we use for appraisals & BPO's are based on what is available & best fits subject. Thats all. No more, no less. The problem is the REO volume.

I am not sure I agree... completely... Short sales and foreclosures definitely brought values for the entire market down. But now it is the old law of supply and demand. Although I have seen my share of foreclosures and short sales that need a lot of work, I have also seen a lot of immaculate short sales and foreclosures. On the flip side, I have seen homes that are sold as "traditional" sales that need a lot of work. There is such a huge demand for housing under $250,000 in this area that prices are getting driven up by multiple offers... first on foreclosures and traditional sales, and now on short sales. Buyers are willing to pay well above full price and wait the 3 months for short sale approval because there is nothing else to buy. The key to value is condition. A home that is great condition will sell at the same price regardless of whether it is a short sale, foreclosure or traditional sale. If you look at homes much above $250,000 to $300,000 in this area, it is an entirely different story. It is true that a seller selling a home as a traditional sale won't get as much as he or she would have gotten for it several years ago, but he or she will get current market value for it.

Hi Lyn,

This is a very frustating aspect of our business right now. I'm puzzled by home pricing.... the price of a home is what someone is willing to pay for it...... and the new twist adds what a bank is willing to loan on it. I understand an appraiser's caution.  They don't want to get left holding the bag. When the market was white hot, and prices were being driven upward by demand and specualtion without reason. The fall out is that banks are now in the real estate business. I see your point about the position that non-bank and non-short sale sellers are in.... however the market is the market and buyers want the best homes at the best prices and you can't blame them for trying.

Best of luck to all of us!

Sandra DeAmicis

Regarding Charita's reply to Cecilia. I own a house that is worth about $125,000 less than what I own on it and I represnt sellers in the same situation. I accept the fact that the value of my house has gone down and have to wait for values to go up before I can sell it. I bet very few of us own cars that are worth as much as we paid for them, but I don't hear anyone complaining about the value of our car going down. No one ever promised any of us that our home's value would increase, or even stay the same!

Lyn,

An appraisal is an estimate of fair market value and is affected by the laws of supply and demand as is any other type of market.  Buyers determine value.

For example, a retailer markets a shirt, or any other product at $100.00 because that is a normal price.  No one buys.  He reduces the price to $75.00.  No one buys.  He reduces the price to $50.00 and people start buying on a regular basis.  We have a regular sale.  The $100.00 shirt was not a $100.00 shirt because the market said it was a $50.00 shirt.

Back in the day, when the appraisal guidelines were written, a foreclosure or forced sale was not a norm, so the small percentage did not effect market value.

That day is gone.  Real estate is local in nature and value is determined by what buyers in local areas are willing to pay.  If the area has not been as hard hit and buyers pay a "regular price", then we could have what you call a "regular sale."

If the property is in area were 6 valid comps are happen to be short sales and the price reflects it, that is an indication of what buyers are willing to pay and the value of the property.  A new value is establised, even if the seller paid more 5 years ago.  An appraisal evaluates the current value of the property.

The real estate market is a market like any other market and something is worth what a buyer will pay.  If a stock sells for $100.00 today, it is worth $100.00 today.  If buyers are not willing to pay $100.00 the value goes down.  If buyers are willing to pay more than $100.00, the value goes up.

Think about it?  What is an overpriced listing and why doesn't it sell.  Because a buyer will not pay the price in the market and a commodity is only worth what a buyer is willing to pay. 

"Again my point, why does a lender manipulate an appraisal or intimate to the appraiser they want it low?"

Here is the answer to your question in its simplist form.

Because the lender has to sell that loan to a secondary bank, and soon after the closing. The lender's underwriters are critically aware of what the secondary bank will buy and what they will not. They are also keenly aware of loans they have underwritten and approved that the secondary market has rejected and they are stuck servicing the loan. Most rejections are appraisal driven. Appraisers are not told by lenders to "bring it in low" but after their appraisals are rejected over a period of time, they begin to see what the banks limits are ... and adjust. 

I was recently contacted by a firm in CA who wanted to hire me. They are group of litigators who are hired by secondary banks to go through defaulted loan files to find errors that would allow them to shove the instrument back down on the lenders so the bank doesn't take the loss.  Although a little sinister, all perfectly legal.  Where do they most often find leverage? Appraisals, because they are so subjective.  Next come sales contracts and finally, income and asset documentation.

Oh, I didn't take the job.

I was recently thinking the same thing!!

In the world of INVESTORS (who seem to be our best buyers these days), there is such a thing as ARV considered when valuing a home.  ARV is AFTER REPAIRED VALUE.  Remember that from real estate school?  That is the value of the property IN A CURRENTLY DISTRESSED STATUS (ie; Lender Owned, Shortsale, Pre-Foreclosure, etc...) PLUS the cost to bring it to MARKETABLE CONDITION.  That means bringing up to compete with a SHOW READY Owner/Occupied property. Remember those???  The ones who made repairs and staged their home for optimum value, Offered Disclosures and CLUE, Warranted equipment performance and actually has appliances?!?  Maybe no one ever told the APPRAISERS about this???  There is a financial adjustment that is needed when comparing a DISTRESSED property to a SHOW READY property, and yet appraisals do not reflect the difference.

As an appraiser, I have never felt intimitated to put a certain price on a property.  I call it as I see it.  I think you overestimate any pressure felt by appraisers.  In addition, all sales have to be considered.  And I have seen many foreclosure that DO compete with traditional sales.

Hi all - Great post. This appraisal issue has been driving me crazy. I've had one deal killed b/c the only "comparable" homes were short sales and REOs, and the next time the home sold, it almost fell through again. 

Appraisers are being SO careful to look at homes that have the same square footage, property and neighborhood. The condition of the home, or the fact that it may be a distressed sale, isn't factoring into the equation at all.

I agree with what Terry Driscoll said, among other things -- isn't the market value of the home set by the buyer and seller agreeing to a sale price? If the buyer can prove to the bank that they are able to afford the home (which hadn't always been done in the past!), why wouldn't the bank finance the loan, despite the appraisal coming in lower, being affected by comps that may be short sales or REOs? How else are we going to get this market back on track, home values up, and the economy healthier overall??

So true, forclosures even in high end neighborhoods are effecting prices, there needs to be more control of appraisal rules.

Eva Gotlib

www.TheDreamHomeExperts