Are REOs real comparables?

Real Estate Appraiser with Appraisal IQ (Real Estate Appraisal) in Austin Texas

Did the appraiser just use REO comps and killed your deal?

Have you ever wondered why some appraisers have been using totally run down, dilapidated dumps and used them as comparables for your seller's meticulously-maintained home? 

Unfortunately, due to the present state of the National economy, this has become somewhat of a normal every day practice in some, but not all parts of the country.

Regs, Regs, Regs! HVCC., Dodd Frank Bill,... blah, blah, blah... example for reo article on comparables

Are the regs to blame? Or the subprime lending scandal? Or consumers? Agents? Appraisers? Everyone?

The dust hasn't settled yet. Where we're headed nobody knows, and that's one of the main problems.  USPAP states that only arms-length transactions should be included in the appraisal process. Unfortunastely, in some markets, REOs have in fact become arms-length transactions as they're not looked upon as distressed sales. 

Furthermore, there are certain investors/lenders that absolutely want REOs to be used as comparables. This is only in certain submarkets, where REOs have in fact become prevalent.

"PREVALENT" being the keyword here.  If in fact the property in question is located in a declining market where REOs are the majority of the sales taking place, they're actually dictating the direction of the market, and until all these sales are absorbed, there's no other way out. 

However, a good experienced and knowledgable appraiser would consider the resales that are the most similar to the subject, while at the same time even if REOs are used in the appraisal report, they should be given minimal weight and a good explanation of what is actually going on in the market should follow.

So if and when you come across a situation like this, take these three facts in consideration:

  1. Is the home in a declining market?
  2. Are REOs prevalent?
  3. Can you help with better comparables?

If you answered Yes to all of the above, then it might not matter to the lender or the appraiser at all if you think you have better comparables. However, if you answered NO to the first two questions, then you have a better shot at being heard.

Thank you so much fellow Rain Maker Donne Knudsen NMLS#249822, DRE#01364050 Cobalt Financial Corp. (Los Angeles & Ventura Counties in CA)  for posting your question.  I hope you and all other fellow rain makers find this post helpful. 

Good luck selling!

Fellow Rain Makers, if you have any other questions and/or are curious about certain appraisal procedures, I'll be more than happy to help.  Give me your thoughts... 

Comments (19)

Lynn B. Friedman CRS Atlanta, GA 404-939-2727
Atlanta Homes ODAT Realty - Love our Great City - Love our Clients! Buckhead - Midtown - Westside - Atlanta, GA
Concierge Service for Our Atlanta Sellers & Buyers

Dear Orlando -

This is a really big issue for me.  Thanks for exploring it.  I am going to follow your posts to see what else I can learn from you.

Have a happy day -

May 11, 2011 03:03 PM
Janet McCarthy
San Diego Homes Guide - San Diego, CA
Broker Associate

Typically an appraiser throws out the high and the low comps and makes adjustments for other properties that had special circumstances.  

May 11, 2011 03:03 PM
Tom Braatz Waukesha County Real Estate 262-377-1459
Coldwell Banker - Oconomowoc, WI
Waukesha County Realtor Real Estate agent. SOLD!

NO NO NO -- they shouldn't be.  I just don;t care for how comparisions are beng handled

May 11, 2011 03:11 PM
Orlando Masis
Appraisal IQ (Real Estate Appraisal) in Austin Texas - Austin, TX
Austin Appraiser, for Real Estate

Lynn: You're welcome! Feel free to ask questions, as many as you want.  This only helps me write about the concerns that you and fellow realtors want to read about.

Janet: I only wish it were that simple, however, it might go something like that.  It all depends on the market and the circumstances.  Sometimes all you have are REOs; So it does come down to what is really happening in that particular submarket.  Thanks for your comment.

May 11, 2011 03:14 PM
Orlando Masis
Appraisal IQ (Real Estate Appraisal) in Austin Texas - Austin, TX
Austin Appraiser, for Real Estate

Tom, I totally agree with you.  Luckily I've been fortunate enough for working in the areas that I do, don't get me wrong, we do have REOs here, but, thank God not like in other parts of the country where the market tends to be more volatile.

May 11, 2011 03:17 PM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Orlando - Ok, I get a little pissy sometimes, I know, I just don't understand some appraisers sometimes.  For most of my 8.5yr mortgage career, I had access to phenomenal appraisers who enjoyed teaching me why they do the things they do.  I learned so much from them back then.  Nowadays, not only am I not allowed to talk to appraisers, I am forced to work with AMC's and their "review boards" who typically have zero appraisal experience.

Anyways, as you have pointed out, markets saturated with REO's are just doomed.  On another note, Janet brings up a good point.  When an appraiser has more than enough comps, like seven or eight similar props, why do they use the lowest 5-6 props regardless of the fact that some of the higher props are actually better comps?  Better meaning more similar props to the subject prop.


May 11, 2011 06:02 PM
Orlando Masis
Appraisal IQ (Real Estate Appraisal) in Austin Texas - Austin, TX
Austin Appraiser, for Real Estate

Donne: I can totally understand your frustration, AMCs haven't really helped much in some areas.  However, did you know that you really don't have to use them.  You may want to look into the self managed systems like: the Mercury Network by a la mode, or Appraisal Port.  These are two great ways of building your own appraiser panel and you can actually get knowledgeable and experienced appraisers that actually know what they're doing.

Unfortunately some (Not all) of the AMCs are using appraisers based on just "cheap fees and are not always experienced in the areas you speak of".  Good luck Donne, I hope this helps at least a little.

May 12, 2011 02:05 AM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Orlando - Just out of curiosity, have you ever had one of your appraisal appealed?  I ask because in the two years since HVCC, I have appealed more appraisals than I did in the 6.5yrs prior to HVCC.  And to answer your question, when there are more like comps that are similar to the meticulously maintained equity sale property, NO, I do not think that run-down, dilapidated, dumpy REO's are appropriate comps.  JMHO

May 12, 2011 11:07 AM
Orlando Masis
Appraisal IQ (Real Estate Appraisal) in Austin Texas - Austin, TX
Austin Appraiser, for Real Estate

Donne -  Honestly, in the last 5 years, I can only recall two times., however, these were completely different situations (Not because of REOs).  Here in our market we've been very lucky.  I would definitely have to agree with you, REOs in bad condition are not comparable to well taken care of and updated properties.  God! I hope things do get better!

May 12, 2011 11:27 AM
Ken Barker Realtor® GRI, E-Pro Certified
Dilbeck Real Estate - Burbank, CA

Orlando - There are so many factors that you all use. If the market is prevalent with REO's then they have to be used. But that is what adjustments are for, correct?

HVCC hit us hard when it came out but now I don't feel as affected by them. But we all, and you all, have to answer for our actions.

May 15, 2011 04:41 PM
Maya Swamy
Funds Available - Long Beach, CA
Ph.D. Long Beach, CA -

We recently had an appraisal done in which the appraiser considered a home with a car port and street parking as comparable with one with a two car garage - by which I mean no adjustments were made. He also used 2 bedroom homes as the equivalent of a 3 bedroom one 300 sq fet larger without adjustments. All this happened through an AMC. The guy didin't even get the contract price right. Unfortunaely when we appealed they just sent it back to the same appraiser instead of a new one. No change in the results.

May 15, 2011 07:51 PM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Orlando - Both Ken & Maya are in the Los Angeles county market and their comments are just classic examples of the crap that we have to deal with out here, especially Maya's.  While I am sure that you are a wonderful appraiser, unfortunately, there are so many other appraisers out there that are just horrible and yet we (Realtors/MLO/buyers/sellers) are often the victims of their incompetence. 

I could go on and on (I too have my own horror stories of sloppy appraisals) but your blog is not the time and place.  Thx for the great post though.  Have a good day Orlando.  :) 

May 16, 2011 04:38 AM
Russell Lewis
Realty Austin, Austin Texas Real Estate - Austin, TX

Orlando, I thoroughly enjoyed this post as well as the comments adding to the discussion. I can understand the frustration experienced by realtors, lenders and appraisers these days. As you said earlier  "AMCs haven't really helped much in some areas." 

Thanks for a level headed view of the subjects!

May 18, 2011 02:14 AM
Steve Matsumoto
Winderemere Homes & Estates: waterfront condos, second homes - Oceanside, CA
First Time Home Buyers - Oceanside, CA

Great point, Orlando.  I have buyer closing next week on a flipped home.  The flipped homes in the neighborhood are selling for 30 - 40% mor than the foreclosures in the neighborhood, both are which are prevalent.  In preparing the buyer's CMA it was easy to find 3 flipped houses that had been sold in the bast 3 months.  It also would have been easy to find 3 recent foreclosures that sold for a lot less.  Luckily the appraiser found the value in this home.


May 18, 2011 07:41 AM
Richard Glesser
North Country Appraisal Services - Gaylord, MI

AMCs are a result of an abusive system which created problems.  The abusive system was mortgage originators and lenders holding future work as a threat to the livelihood of the appraisers.  If values were not met, they would send future work elsewhere.  The result was HVCC which mandated distance between the lender and the appraiser.  Specifically, it required that appraisals be ordered and processed by someone who's paycheck was not directly affected by the result of the appraisal.  AMCs peddled fear of violations and non-compliance to market their industry.  Some major lenders saw opportunity to fatten their bottom lines by forming their own AMC which skimmed additional fees off the consumers.  The astute and more ethical lenders, realized that compliance could easily be met by designating a staff to order and process appraisals, apart from the originators.  This saved the consumer hundreds of dollars by not lining the pockets of the AMCs and lender-owned AMCs.  By doing so, they are able to assure quality appraisal professionals meeting high quality standards while the AMCs profit by using the cheapest available appraiser, qualified or not.

Orlando, this would be a great post in the Realtor and the Appraisers groups.  I spent quite some time searching for it after becoming aware of its existence through ICAP.

May 26, 2011 06:46 AM

I have been appraising for over 20 years and it is true that we are all in uncharted territory given the current market.  I just want to put all minds at ease and know that as an appraiser, our firm will look at all sales available in an area and will always use those which are the most comparable to the subject. We try to avoid foreclosures and short sales but as stated, in some areas, that is not a possibility. That said, when "stress" type sales are utilized, we will contact realtors and find out all we can on the comparable so as to be better informed when making adjustments. 

Here is hoping that we can all soon get back to somewhat of a normal business.

Tony Sherman


May 26, 2011 08:19 AM

In markets where there are a high volume of REO and Short sale type properties, oftentimes, they're the only type of sales available in a particular market area; however, according to Fannie Mae guidelines, it's also not appropriate to make adjustments specifically for being such types of sales, which is frustrating when having to compare them to well kept properties. All I can do is explain why such sales were used, and what emphasis had been given them in an appraisal report. I agree with Tony's comments, as regards such issues, and would add that appraisers must keep each type of sale in its appropriate context, offering explanations as needed.

May 26, 2011 11:27 PM
Robin Scott
Robin Scott, REALTOR® - Austin, TX
Broker, REALTOR® - Austin Texas

The problem I've run into is with properties where there aren't comparables and your listing doesn't fit the the guidelines box.

Jun 21, 2011 03:13 AM
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Orlando, thanks for writing this. It isn't such a problem today in our area, but for awhile, the short sales and foreclosures were dominant in some neighborhoods.

Jul 25, 2013 12:54 PM