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What Is Your Opinion on Using Short Sales and REO Comps in A Refinance Appraisal?

  • March 25 2012
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Answers (27)

Profile picture for BobPhillipsRE
Hi David, The appraiser should be aware that there is a substantial difference between an "equity" property, and a neighboring "distress" sale.

I posted a study ( On another real estate web site.) I did, less than a week ago, where I analyzed closed escrows in Coto de Caza, so far this year. ( I live in Coto, and specialize in South Orange County.)  

There had been 18 distressed listings which had closed escrow - remember these are 3 or 4 days ago results - at an average sales price per sq. ft. of $235.18.

Over the same period, there had been 15 closed escrows of non-distressed properties, and those had an average sales price per sq ft of $271.66, which is a difference of $36.48, over 13% higher.

So, if your house is in decent shape and condition, there are probably plenty of nearby "comps" to support a higher evaluation, and the appraiser should be made aware of such differences. If you need help with comps, my contact info is in my profile - just click on my name, or face, above. 

Good luck in getting the valuation you deserve, or need.
  • March 26 2012
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Profile picture for daviddai118
Hi Bob,

Thank you for the cooments.

I applied refi throught my current lender. The appraiser used only one
non-destressed comp in his 5 comps. My house appraised $660k on 629/2011 and on 2/3/2012 he appraised $580k by having used 4 destressed comps without proper adjustment. This is more than 12% drop! I did a rebuttle and pointed out this issue and other issues. He came back without any adjustment and explanation. Now I'm the pingpong ball: The appsaiser and his company will not communicate with me and the lender said they can't contact the appraisal company.

What can I do to have some one look into this?

Best Regards,
David
  • March 26 2012
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Profile picture for Appraisal guy
The appraiser will try to avoid them. But if your entire market is made of short sales, the appraiser may have to use one or two of the six sales and listings just because. If I have to use them, I'll usually give them less emphases because they are short sales, but it just depends. Sometimes, there is no clear difference between the two sales in my area.

Have the LO order another appraisal and see if there is a big difference? Talk to your bank to see what can be done. My understanding is some banks will let you do this, while others will just take the lowest value. No fair, but that's what is happening in my market area.
  • March 26 2012
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when distressed sales are the the market then they are the comps.

the bank is appraising it partially to determine what they'd get for it if you default; well those distressed sales are the indicators of what can be had for the property should a foreclosure be required.
  • March 26 2012
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Profile picture for daviddai118
Mr. Appraisal Guy,
Thank you for the input.
When I did the rebuttle, I came up with my 5 regular sales comps with some slightly bigger house and smaller house to balance the adjustment and pointed out the non-streeesed comps should be used or make some adjustment if he prefers to use his comps. But he won't change a thing. I think what he did is very unprofessional. I'm in Coto area and Bob's 13% difference should apply. I also found an article from CNN which states nationwide there is 14% difference between stressed and regular sales which matches Bob's research in Coto.

Shall I just walk away or there is anything I can do to get someone to review the case?

Sincerely
David
  • March 26 2012
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Profile picture for BobPhillipsRE
Hi again, David, for your privacy, directly email me your address and I would be happy to look into the comps, as I see them.  You might also send me the addresses of the properties used by the appraiser - or the actual appraisal if it's a link you can attach.

I would be happy to try to assist, including suggesting a different lender, or two.
  • March 26 2012
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Profile picture for daviddai118
Mr. Norm D Plume,

Thank you for contributing to the conversation.

Would you plaese advise since when Coto De Caza area and Orange county became "distressed sales are the the market"?

You are saying "the bank is appraising it partially to determine what they'd get for it if you default". Please also advise the name of banks are having such practice so we all can avoid them because they choose not doing business with their current and potential customers by worrying unknown future's foreclosure.

Best Regards,
David
  • March 27 2012
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Profile picture for hpvanc
As Bob pointed out if he was actually close to the correct area, 18 of the last 33 sales were distressed, and it looks like Coto De Caza in general has dropped 9% in the last year.  Is it possible your area has been particularly hard hit?
  • March 27 2012
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Profile picture for BobPhillipsRE
HPVANC, I'm not sure where you got your figure, of a 9% decline in Coto prices last year, but it's not accurate, by my figuring.

In 2009 there were 181 sales in Coto, and they averaged $274.02 sales price per sq. ft..

In 2010 there were 199 sales in Coto, and they averaged $274.39 sales price per sq. ft..  ( Hmm, actually a slight increase.)

In 2011 there were 208 sales in Coto, and they averaged $260.69 sales price per sq. ft..  ( That's a drop of $13.70 per sq. ft. which is a shade over 5% )
  • March 27 2012
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ok, I'm game.....

Orange County isn't relevant. the appraisal is done to neighborhood characteristics, not county characteristics.

One of the unnaceptable practices in doing an appraisal is failure to comment on negative characteristics of the neighborhood; any bank sales cannot be ignored.

Fannie Mae defines market value as the most probable price that a property should bring in an open and competitive market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the sale is not affected by undue stimulus.

Fannie Mae goes on to say it makes no distinction in the  seller whether they be an builder, bank, developer or an individual, etc

It is assumed that the buyer and the seller are each acting in his/her own best interest.
  • March 27 2012
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Profile picture for hpvanc
Luckily I provided the link from my source in the original post.  Price per square foot of solds is not necessarily a snapshot of market value, one shouldn't look at one measure in isolation.  Hopefully appraisers and the underwriters have learned that lesson, since I'm willing to bet this loan has at least an implicit federal guarantee.
  • March 27 2012
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Profile picture for Connie Klemme

ignore my comment.  I misread a few things.
can't delete but can edit.

  • March 27 2012
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It seems as if the entire point of an appraisal is the implicit idea that banks don't want to lend more than the collateral is worth IN CASE they have to sell the collateral to regain their investment.

The fact that banks have had so many buyers walk away, NOT because they couldn't pay, but because the house wasn't worth what they owe, speaks volumes.

If it could be taken for granted that people would pay their bills, an appraisal would not be needed, at all. So in my opinion, all arms length sales should be used. Of course, not everyone bows to my opinion...
  • March 27 2012
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Profile picture for BobPhillipsRE
HPVANC, I didn't think to look at your link when I responded to your comment - that Coto prices had dropped 9% "IN THE LAST YEAR".  I took your comment to be referring to THE year of 2011, and that is how I responded.

YOUR Zillow link covers the period from 1/31/11, through 1/31/12, and MAY be correct, but has since gone up.  Plus, I'll remind you, that NO appraiser in his right mind would rely on Zillow's numbers.
  • March 27 2012
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Profile picture for hpvanc
You are correct that the appraiser draws their own opinion, and the difference in the appraisals, indicate that the most recent appraiser determined that the market in the OP's had dropped 12% in the just over 7 months prior to 2/3. 

Were the appraisals accurate?  Both appraisals had a margin of error.  The drop doesn't seem inconsistent with either Zillows trend for the area or your optimistically selected stat, if you take into account the margin of error.  Based on your 1st post it sounds like distressed sales make up more than half of the recent transactions  The OP does not indicate whether the appraiser made an adjustment for the distressed status, just that they were used as comparables.  If they, notionally per your own post, make up more than half of the market, should they be excluded or used with compensating adjustments?

Here is a link to an article that talks about the discrepancy in the perception of real estate values.
  • March 27 2012
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Profile picture for BobPhillipsRE
If I represent a buyer who is buying an REO ( Bank owned property.) or a short sale, I would make SURE that the houses the appraiser was considering, were ALL similarly distressed properties, just like the subject, BECAUSE I wouldn't want the appraiser adding turnkey properties that were WORTH 13% more, making the resulting appraisal higher than it should be.

There ARE buyers who PREFER to pay the difference for a turnkey equity property, partially because they know that most distressed properties are going to take a LOT of extra money to bring up to the standards of the equity property.

My point is, that there are TWO distinctly different tiers of pricing - at least in MY neighborhood, and I'm pretty sure the same conditions exist in MOST neighborhoods, not just in Coto de Caza, Orange County, or even California.

An appraiser who is oblivious to these differences, will get "IT" wrong, kind of like a Zillow "Guestimate" will.
  • March 27 2012
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Shall I just walk away or there is anything I can do to get someone to review the case?
What are you walking away from exactly? Maybe I missed that. Have the terms of your refi changed along with the lower appraised value? Or is this a matter of principle?

I have seen more strange appraisal stuff than ever over the past 12 months; particularly with refis. Some come in high, some come in low, some match zillow $ for $ (aka complacent appraiser). Most of the time a rebuttal yields minimal results unless you learn of another helpful comp that has closed in recent days that was missed, or if the AMC zombie happened to make a blatant mistake in the measurements etc. you might get an adjustment.

Coto is an awesome place to live...enjoy! 


PS - Thumbs up Bob
  • March 27 2012
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Profile picture for Connie Klemme
I would tend to agree that if the market is dominated by REOs and short sales then they should be used and ajustments for condition be included.
if the local market is NOT dominated by them but there were a few "good ones" close by- it's not appropriate for them to be used just because they are a good match- unless of course the condition of the occupied home is much like a distressed home.

you could argue that using REOs and short sales as comps when they DON't dominate contributes to market problems. It artifically lowers the value of a good house as much as NOT using them when they do dominate and extending boundaries (distance, sqft, age etc) to hand select the rare 3 non REOs might articially inflate a value.

  • March 27 2012
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Profile picture for daviddai118
Paul,
What I meant to walk away is that I just drop this refi altogether after spent appraisal fees some $500+ and all the time I spent on this. Now I feel it's more of a matter of principle than just refi. I think it's obvious what he did is improper and there is no vehical I can use to have my voice being heard other than this chat. It's soooo wrong! What is going on with our system? I don't think I'm the first and the last one. When this will end?

David
  • March 28 2012
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Profile picture for BobPhillipsRE
David, I feel bad for you, and your plight.  My two offers are still available.

First, to find you some appropriate comps for your property - if they exist, which is probably the case. ( Assuming your lender is open to disputing their appraiser's valuation.)

Second, to recommend either of two lenders that I presently work with, and have for a long time, because they always treat my clients fairly, and honestly.  

My contact info is in my profile, if you'd care to use it.  Good luck to you.
  • March 28 2012
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Profile picture for daviddai118
I was trying to post a comment last night close to midnight. It did not go through and I lost the draft.

Bob, Thank you for your expertise and offer.
Cindy, I bow to your opinion: all arms length sales should be used. 
This is the line. The appraiser's company has the guideline on their website: "A comparable sale is a home that is similar to the home that is being financed, in terms of location within the defined neighborhood, recent sold in an arms length transaction, age, condition, square footage (GLA-gross living area) and amenities. Selecting appropriate comparable sales in most residential appraisals is the single most important factor in establishing value. It is the appraiser's responsibility to fully research and analyze the local real estate market and determine which comparable sales best represent the value characteristics of the home that is being financed." The appraiser violated his company guideline and he refused to corrected after he got my rebuttal which all 5 of them are non-destressed properties and within 1 mile. I don't know any rational of it at all.

Mr. Norm D Plume, The appraiser used 4 destressed comps in 5 comps. When you said "any bank sales cannot be ignored," I say the arms length sales had need ignored on this turnkey property.

I just checked Zillow now. It's $816,000 and the range is $595,000 to $995,000. Zillow is trying hard to be at ballpark. It give this property a $400,000 range and Zillow still can not get it right per this appraiser who dropped 12% value of house in less than 6 months. The thing is no one will look into it and he is keeping doing this to other people.

Thank you everyone participating and look forward to more.

David

 
  • March 28 2012
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DD, I get the residual respect shrapnel here, trust me. It is a catch 22 when us LO's have to take a clients credit card info to pay for an appraisal and then can not logically interact in the process that our trusting client pays for. I might as well be a checker at Circle K...which might not be bad.  Anyway, what really needs to be considered is if nothing has changed with your rate and fees and you close on time, the heck with the opinion that was cast... I kid with them for being leashed... but kind of feel bad for modern day RE appraisers..they have collectlivly had their pants pulled down before the rest of the industry...In what other trade has this happened?  Tell all the auto mechanics they are partially responsible for years of scandle, and make them ultra-regulated,  cut their pay in half and ask them to work the same hours or more. bs. Their would be a whole lot of broken down cars as a result... it is human nature to put out what you get back... as it appears from this corner of the universe REO, Foreclosures and the likes are subject to their reduced attention span and numbed discression.
 You seem like a nice chap... I hope you find peace.
*Take a hike up to Holy Jim, that could do it.
  • March 28 2012
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Profile picture for Appraisal guy
Regardless of what the appraisal states, the bank holds the key to your loan. I just appraised a home when a piece of the siding was falling off of the garage. The cost to cure was estimated at $200 or less. It was new construction. I did not call to fix this because it was so minor. The bank called it out and I'm going back tomorrow. I had to call the bank to figure out what they wanted me to do.

As the old saying goes, the banks will give you an umbrella when the sun is shining and take it away when it rains.  This is one reason why appraisers should get paid on an hourly rate so that they are more inclined to take a bit more time when issues arise.

  • March 28 2012
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Profile picture for daviddai118

Hi Connie,

You sound more like a professor with would, could, should and might in all kinds of possible scenarios.The chilling fact is that the Coto area dropped 5% in a year and my property dropped 12% in less than 6 months by this appraisaer and there is nothing anyone can do about it.

There is 13% difference between non-stressed and stressed property per Bob's data on Coto area. This also matches CNN's report. Here is the direct quote:"In December, foreclosed properties sold for an average of 22% less than conventional sales, while the discount for short sales was only 14%, according to the National Association of Realtors."

It's shocking someone will do this even the job does not pay well but this is not the reason to do the job in a such improfessional way. That is avergae Joe's financial life. It is more appalling that there is no mechanism in our system to handle this. Why this is happening and how and when can it be fixed?

David
P.S. Thank you Appraisal Guy!
  • March 29 2012
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Profile picture for daviddai118
Has our appraisal system broken and can the appraiser do whatever he
or she wants without consequences?  How can we as consumers have our voice heard? Is there a appraiser governing body in California?

David
  • April 03 2012
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Appraisers who are considering using REO or Short Sales as comparables better be able to justify the "required" adjustment if they are truly the only available comparables. The definition of Market Value as stated on the two main major forms (1004 and 1073) state: "The most probable price which a property should bring in a competitive and open market under all conditionsrequisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus."

Any lender mitigated sales are representations of "Liquidation Value" not "Market Value". Understanding the assignment is crucial. If appraising a owner occupied or a Bank Owned property for purchase by a traditional buyer, the reconciled value should represent "Market Value" not "Liquidation Value". i.e. Bank selling with PA for $200,000 and all comparables properly selected, traditional sales with physical condition adjusted for if needed, have adjusted SP's around 290,000 the reconciled value should be around 290K. The appraiser should NOT select REO and Short sales to justify the purchase contract as that would yield the "Liquidation Value". Understanding the assignment is the basis for understanding this issue. It is my experience through thousands of reports is that the necessary line adjustment when using REO/Short Sales for "Stigma" is typically greater that 10% which would exceed the recommended line adjustment in most cases, therefore should not be used unless there are literally no other properties available as good representations of the subject.

-Curtis Hansen

  • January 21 2013
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Profile picture for ABR CRS CNE
Short Sales and Reo Sales are (for the most part) distressed proprties and will have a lower Sold Price per square foot because both Sellers are trying to unload them from their inventory which would dirve down the value of your Refinanced property.  For mortgages on new purchases of existing homes/condos or refinancing of any Non-Distressed Property should be compared to the Solds of similar Non-Distressed Property which should give you a higher value of your home or condo than if Short Sales and Reo Sales are included in the lenders comparable valuation.
  • January 21 2013
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