Is there a price difference between REO properties, short sales, and arms-length transactions?

What sort of a price difference is there between bank-owned properties (REO), short sales, and arms-length transactions in the market? For an example, let’s take a look at a trend graph of all sales in Rancho Cordova below, where blue dots are REO sales, green dots are Short Sales and red dots are typical arms-length sales (per Sacramento MLS).

Rancho Cordova Sales REO Short Sale Typical Trend Graph by Lundquist Appraisal November 2009

Each neighborhood, niche, and location will differ in results, but generally speaking, like the data above seems to show for Rancho Cordova sales over the past 2 years, buyers tend to pay more for houses that are non-distressed transactions (notice how the red dots on the graph above tend to be located toward the top and NOT the bottom). When it comes to REO properties, it looks like the price level is a bit higher overall than short sales, though there are quite a few short sales on the upper-end of the market too. In fact, both Rancho Cordova and Sacramento County saw a 7% increase in short sales last year in comparison to the year before, so clearly there is a greater acceptance for short sales in the marketplace.

fixer-property-lundquist-appraisalOne important observation is that most of the sales at the bottom of the market are bank-owned. Why is that? Investors typically gobble up the lowest end of the market with all-cash offers because fixer-type properties at the lowest level will not qualify for conventional or government financing. This means first-time buyers utilizing conventional or FHA financing will usually need to look to a price level above the “all cash” market. In light of this segmentation, imagine scraping off the bottom layer of all-cash foreclosures. What would you find? You’d still see many REO properties, but you’d certainly see a good amount of Short Sales too. 

Overall, in my experience as a Sacramento-area real estate appraiser it seems the market price tier goes: 1) Arms-length sale; 2) REO; 3) Short Sale. This is common sense really, but it’s another thing to prove that by crunching numbers, making trend graphs, and observing data in the marketplace. But there are certainly cases and stories and sub-markets that might show a different order for whatever reason – especially depending on the supply of housing inventory and particulars of a given property. Interestingly enough, sometimes there is little to no difference between non-distressed sales and REO sales. For example, what does it do to pricing differences when 90% of all sales in a market are either bank-owned or short sales? In a case like this, since the market is clearly saturated with distressed sales, it’s probably a safe bet to assume foreclosure-pricing is indeed the market and will set the pace for what buyers expect to pay for properties (see a previous post on Patterson having 96.5% of all sales as distressed). In a case like this, there may be no verifiable difference between REO and non-distressed sales.

Let me know if you have questions or insight. Comments are welcome. Is there a price difference between REO properties, short sales, and arms-length transactions?


  1. Mark says

    Great post!
    It is nice to see a CA appraiser with this mindset. I have heard from so many appraisers in CA saying things like “REOs are the Market”. They may be about the only thing selling at the moment, but they are a sub-market, if you will, not the market you are appraising for a refi or sale. Market Value is not based upon what ever is selling the most that day. One needs to be very careful and not assume that the foreclosure market is the same market value as a traditional type arm’s length sale that is not in distress, regardless of how saturated the market is with REOs & Shorts. They may be, but have due diligence is making sure. I think appraisers who assume this are coming up with many of these deal killing appraisals that are below contract price. They don’t listen to the market. You need to always check to see if there is a market aversion toward the bank induced sale. They are a higher risk sale. Kind of like a box of chocolates – you never know what your going to get.

    • says

      Thanks Mark. I appreciate the kudos. I think you are definitely right. It’s not always easy to gauge the market. I have one client, as asset manager for REO inventory, that requires no more than one REO comp in the report. However, one of the problems is that in some markets that leaves mostly short sales, which are even worse than REOs. Nice Forrest Gump quote at the end. 🙂

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