REOs can be comps, too
Letter to the Editor
By Inman News, Thursday, October 8, 2009.Dear Editor:
Re: 'NAR: Appraisal rules undercut tax credit' (Oct. 8)
I have to disagree with the stance that the National Association of Home Builders takes on the appraisal process. Foreclosures and distressed sales are part of the new market we are in and can't be ignored or dismissed.
As appraisers, we DO NOT use homes going into foreclosure as comps UNLESS those are the predominant (comps) of the local market. We will use comps coming out of foreclosure and listed, via the multiple listing systems, on the open market -- like any other home. If it has proper market exposure time, like every other property we are considering using, there's no reason why we can't use it as a comp.
What the NAHB is asking for is wrong on many levels: the main one being that you are "cherry-picking" your comps and ignoring the actual market.
Think about it. If a buyer is looking at two properties side by side, and one is coming out of foreclosure and one isn't -- yet they are both in similar condition, size, age, etc., but were priced differently, an educated buyer would most likely choose the lower-priced home if everything else is equal.
It's how a free market works. We all know how an inflated market works ... just look back in time a few months.
Greg Wilkinson
Worth Every Dollar Appraisals
Atlanta, Ga.
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Submitted by Douglas Quenzer on October 9, 2009 - 4:11am.
Couldn't agree more. There have been many times REO's are essentially the only comparables I have been able to find. That's what is selling and they have to be used since that is the market. Unfortunately REO companies are very poorly managed and often give properties away. I have seen some REO sales that were so low that it wasn't liquidation value but rather "garage-sale" value. Often REO companies simply do not let a home have enough exposure time to the market before they drop the price. I've seen them drop prices on a weekly basis, and then accept an offer 50% of the list price. They aren't doing anyone any favors. Those sales are the REO sales that shouldn't be used. That's why when using REO sales it is important to look at exposure time and how realistic the property has been priced. For example an REO sales in my area was on the market for 200 days at a particular price before the bank received an offer. Can I used that as a comparable? Absolutely.
Submitted by Sandy Robertson on October 9, 2009 - 7:32am.
I couldn't disagree more. As a buyer representative, my clients do NOT regard REOs in the same manner as other homes on the market. Quite the opposite. There are pools of people like investors or small-time home rehabbers who are in the market for bank-owned homes they can buy cheap. But there is a pool of buyers who want to move into a habitable home, which most REOs are not. These houses are in terrible condition, need repairs the bank will not pay for, and would never pass an FHA inspection. Since most mortgages these days are FHA, how can you possibly include REOs as comps? REOs and non-REO properties are two different species, and the key word is supposed to be "comparable".
Submitted by Douglas Quenzer on October 9, 2009 - 12:32pm.
Not necessarily true. I have seen REO's that are in just as good of shape as lived in homes. In fact I have done FHA appraisals on REO homes that pass with flying colors! Some are better than homes that are listed higher! An appraiser must always look at the condition of the home before it is used as a comparable. Again it is exposure, condition, quality of construction. If they are adequate you can use them as a comp. And if buyers didn't like them why are they selling instead of other listings?
Submitted by Greg Wilkinson on October 9, 2009 - 1:20pm.
I wrote the letter to the editor.
An experienced and knowledgeable appraiser will look at all factors involved. Exposure time and condition of the potential comps are two very important pieces. However, just because it is an REO sale or distressed sale does not make it a bad comp. It will come out in our research if it is or not.
These are facts we appraiser can't ignore. In no way are we ever trying to kill a deal or under value a house, so not the case. Experience and knowledge are key in the game these days.
Worth Every Dollar Appraisals
Submitted by Lenn Harley on October 11, 2009 - 3:59am.
The only way to cure this problem is to give more weight in appraisals to condition. If condition were more of a factor in appraisals, new homes would be more fairly compared.
I believe that new homes should not be compared to bank owned homes or short sales without weight in value given to new construction.
It's comparing apples to oranges.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Kaye Thomas on October 11, 2009 - 7:14am.
REO's and short sales do affect the market and are definitely comps. You can't dismiss them out of hand. However I agree with Lenn that more weight should be given to property condition.
Submitted by Greg Wilkinson on October 11, 2009 - 10:17am.
Correct. As I mentioned in my posts, condition is very important. Now it's just getting everyone on the same page and doing what's correct. Sadly, there still are too many bad apples in the bunch to spoil it for everyone. That applies to not only appraisers, but Realtors, brokers, lenders, etc. Until we get rid of the bad apples our business will continue to be challenging.
Worth Every Dollar Appraisals