Foreclosures, REO Properties, & Appraising
When appraising Real Estate Owned (REO) properties, it's crucial to consider their unique characteristics. These properties are acquired by lending institutions through foreclosure or as investments. The term "Other Real Estate Owned (OREO)" is commonly used by commercial banks to differentiate foreclosed properties from corporate real estate assets. Understanding these distinctions is necessary for accurate REO property appraisals.
Appraisers take into account the historical and current market conditions when evaluating these assets to provide reliable insights and assessments. By following industry standards and guidelines, appraisers can ensure a thorough and precise valuation of Real Estate Owned properties. Foreclosures happen, and IVG’s Chief Appraiser Barry Locke is here to deliver some insights on how today’s appraisers can best tackle these assignments and reports.
Types of Value
“AS-IS” opinion of Market Value based on a reasonable (but limited in some markets) market exposure time of a predetermined client imposed number of days usually not to exceed 120 days. (Typically 30 days)
“AS-REPAIRED” opinion of Market Value based on a reasonable (but limited in some markets) market exposure time of a predetermined client imposed number of days usually not to exceed 120 days.
In many cases, when discussing REO properties, the real estate industry is referring to foreclosed properties that are listed on lenders' books. When requesting an appraisal on an OREO property, the lender is seeking not only the typical opinions of market value but is also seeking additional valuation information that will allow them to make decisions regarding the asset in question. Typically, REO appraisals will seek the following opinions of value on the property in question:
The As-Is Market Value is subject to change based on current market conditions and may vary depending on factors such as economic trends, supply and demand dynamics, and specific property characteristics. It is important to note that Market Value is not a static figure but rather a reflection of the property's worth at a specific point in time. Therefore, it is recommended to regularly reassess and update this opinion to ensure its accuracy and relevance. In doing so, lenders can make informed decisions regarding the property investments and maximize their returns in the ever-evolving real estate market.
When determining the As-Repaired opinion of Market Value, appraisers consider a reasonable market exposure time which can vary in different markets. Typically, this timeframe is set by the client and should not exceed 120 days. This allows for a comprehensive assessment of the property's value under conditions that reflect a realistic selling period. By adhering to these guidelines, a more accurate and reliable evaluation of the property's worth can be achieved. Sometimes the lender requests additional information to aid their decision-making process regarding the management of REO properties. Lenders often adhere to specific regulatory requirements that determine how these properties are dealt with. Typically, the lender requires a detailed breakdown of necessary repairs, estimated repair costs, an in-depth analysis of the usual market exposure time, and, in certain cases, a client-imposed shorter exposure time for efficient liquidation marketing.
Should an appraiser use Foreclosures and REO sales as comps?
In the wake of the 2008 financial crisis, home sale activity plunged and foreclosures increased dramatically. As a result, the pool of recent sales appraisers could use as comparable sales shrank. At the same time, REO sales (“Real Estate Owned” by banks) became an increasing percentage of sales.
In many cases, appraisers used REO sales in their appraisals – with complaints subsequently levied by brokers and buyers who argued that the use of REO sales resulted in appraisals that understated market value. So what exactly is an appraiser supposed to do in such a situation, and is the use of foreclosure or REO sales an acceptable practice?
For appraisers to uphold professional standards and ethics in their practice, prioritizing accuracy and fairness in their assessments is key. Collaborating with real estate agents and staying informed about market trends can also help in overcoming the limitations posed by an increase in foreclosures and REO sales. By approaching each appraisal with diligence and transparency, appraisers can strive to provide reliable valuations that reflect the true market value of properties.
The appraiser determines the "market value," which is the most likely price a property would sell for between a willing buyer and seller, without pressure, under normal market conditions for a specific time period.
First, it is crucial to grasp that an appraiser is typically hired to furnish an opinion of the "market value," a key metric that aids both buyers and sellers in making well-informed decisions. Drawing on their expertise, appraisers meticulously scrutinize factors such as the property's location, size, condition, and the recent sales of comparable properties in the vicinity to arrive at a precise market value.
This value stands as an equitable and impartial assessment, laying a sturdy groundwork for negotiations and real estate transactions. By comprehending the market value, individuals can ensure that they are engaging in prudent investments and clinching deals that harmonize with prevailing market trends.
Beyond ascertaining a property's market value, an appraiser's role encompasses furnishing contextualization for the value determination. For instance, an appraiser might find that a house could sell for $300,000 if it's on the market for about 90 days. On the other hand, a bank could hire someone to assess a property using a short 30-day sale period or an auction. The values they get could be very different depending on the local market conditions.
Foreclosures
Foreclosure happens when the lender seizes a property due to the borrower defaulting on the mortgage. This transfer is forced and does not represent a market transaction that can be used to assess market value. Sometimes, the recorded sale price simply equals the remaining mortgage amount.
REO Sales
On the contrary, an REO sale involves a bank selling a property after foreclosure. These properties can be auctioned or sold through a broker, and they signify transactions between a "willing seller" and a "willing buyer." Thus, the fact that a bank sells a foreclosed property does not negate its potential as a market value indicator. However, for accurate assessment, the appraiser must take into account certain additional factors.
In such instances, the appraiser needs to carefully consider various factors that influence the sale of comparable properties. One crucial aspect to evaluate is the "marketing time" of the comparable sale. This involves analyzing how long the property was on the market before it was sold and the marketing techniques that were utilized during that period.
It's important to note that different situations may arise, such as when a bank is eager to quickly offload a property and is willing to accept a lower price for a prompt transaction. Auctions often prove to be the speediest method of selling a property under such circumstances. If the appraiser decides to use an auction as the selling method, adjustments might need to be made to the sale price to accurately reflect market value. However, there are scenarios where the bank chooses to list the property for a standard duration, usually through a broker, allowing it to be exposed to the market over a typical period. In this scenario, there may not be a need to apply a discount for short marketing time, as the sale price could serve as a reliable indicator of the property's market value without requiring any adjustments.
Bank-owned properties are commonly sold in an "as-is" condition, often presenting poor upkeep, though exceptions exist. An appraiser must consider any variances in condition between the property being appraised and the comparable sale. This principle applies not only to real estate owned properties but to any comparable sale as well.
When considering REO sales as comparable properties, it is crucial to take into account the level of foreclosure activity in the area. Homes for sale face competition from other listings in the neighborhood. In neighborhoods heavily affected by foreclosures, where REO sales made up a significant portion of transactions during the housing crisis, a home's sale price may be influenced by the abundance of these competitive properties on the market. Ignoring these sales would be a mistake for an appraiser in such areas. On the other hand, in neighborhoods with minimal foreclosure activity, an REO sale with a quick sale time might be an outlier and should carry little weight in the appraisal process.
In essence, the appraiser's decision to incorporate Real Estate Owned (REO) sales into their assessment hinges on the prevailing conditions of the local real estate market at the time of appraisal. In areas characterized by a notable presence of REO properties, the value of a home may be adversely affected, necessitating the appraiser to carefully evaluate the influence of such sales on market dynamics. Nonetheless, it is imperative for the appraiser to meticulously consider the marketing strategies employed and the overall condition of any comparable REO sales utilized in the appraisal process. Provided that the report includes comprehensive commentary elucidating the importance of utilizing an REO comparable, and the appraiser has furnished ample information, REOs can serve as acceptable comparables when warranted by the market conditions.
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