Would you support a bill in congress that outlawed appraisers from using distressed sales as comps? On paper this might sound appealing because there is often a difference between market value and distressed sales, and if the wrong comps are used there could be a negative impact to value. But in reality, sometimes there are nothing but distressed sales for the appraiser to use.
There have been quite a few bills over the past few years proposing appraisers not be allowed to use distressed sales in their apprisal reports. As an example, H.R. 1755 was introduced in the House of Representatives on May 5, 2011 and says:
ARMS LENGTH TRANSACTIONS: The appropriate Federal banking agency shall require that entities used by financial institutions to assess or review underwriting standards and collateral values for real estate loans made by such institutions after the date of the enactment of this Act use comparable sales involving arms length transactions to make such an assessment or review.
(A) IN GENERAL- The term `arms length transaction’ means a negotiated real estate transaction between a buyer and seller in which such buyer and seller act independently of each other.
(B) TRANSACTIONS EXCLUDED- Such term shall not include any transaction involving a short sale or foreclosed property or any other distressed real property.
Can Congress Provide me Comps? I’m finishing up an appraisal on my desk right now in the Wild Wings neighborhood in Woodland. This neighborhood is unique and there are literally no other subdivisions in Woodland that compare to this secluded golf course community. Therefore the most adequate and competitive sales come from within the neighborhood (that makes sense, right?). The only problem is that 75% of all sales over the past 12 months were distressed (only 32 sales by the way). Moreover, I’m doing an appraisal of a 2,500 square foot house and 8 of 8 sales between 2300-2800 squafe feet over the past year were either REOs or Short Sales.
If a law was passed that stated appraisers could not use distressed sales, I would have a big problem in this neighborhood and many others like it. Thankfully I know how to do my job though and I can use sales like this and sift through which ones may or may not represent market value (and make adjustments if appropriate).
Would you support this bill? Why or why not? What is the motivating factor behind a bill like this?
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Ryan – while the frustration of the current distressed market causes emotional responses to appraisals, I believe that distressed property has to be a part of the mix. The marketplace depends upon professionals like yourself that can sift through the inventory and make intelligent choices. If we make blanket choices to include homes based on how they came into the marketplace, we might as well let a computer model pick the price of any given home. Not every ‘distressed’ property is a dog, and not every ‘traditional’ property is a dream. Only a human being with insight and knowledge can make an appropriate determination.
Also, consider this; most of the complaint over appraisal comes from the sellers side. Yes, buyers too can be frustrated when a home does not come in at value, but it is mostly a sellers frustration. The seller and buyer have willingly entered into a contract at a set price, but the appraiser sees the value differently. By completely ignoring distressed properties, what we would be telling sellers and buyers is there are two different markets – a distressed market and a non-distressed market. As much as we all want it to be different here is the frustrating truth;
THERE IS ONLY ONE MARKET
Cheers!
Thanks for your insight, Michael. I like how you said, “Not every ‘distressed’ property is a dog, and not every ‘traditional’ property is a dream. Only a human being with insight and knowledge can make an appropriate determination.” It makes good sense too that more complaints would come from the seller end.
We may be saying the same thing in a different way, but I’m not entirely sure. I would say there is one housing market, but there are different segments of the market. We do see different price levels at times depending on the nature of the sale and most of all condition. Distressed sales can sell at the same level of traditional sales if they are “dreams” instead of “dogs” and vice versa, but it seems they tend to sell on the lower end of things in many cases. In that regard then, I’d say there are different markets within the one market because there are diferent tiers of activity and pricing (bifurcation). We are maybe saying the same thing. I don’t know.
You nailed it to say we cannot ignore sales though and we need to take into consideration everything that is out there.
There has definitely been a bifurcation in many markets, the big challenge is how it’s addressed within an appraisal. In my own city there is a 94% concentration of distressed sales for split entry/level design homes. I’m not sure how you anyone can ignore that fact when completing an appraisal.
Without getting on a soap box about the government’s attempt to manipulate the real estate market, all I’ll say is that there will be unintended consequences in regards to their interference.
Wow, Michael. 94% is a huge number. My guess is the distressed sales basically drive your market. How can they not? The government keeps coming into the market and it’ll only delay a recovery. Granted, if some people are able to reduce their rate, that’s wonderful. But if they are heading to foreclosure no matter what, then that’s another story. Recovery cannot happen without dealing with the mess. There is an analogy in here for marriage or friendship I think.
The whole market is “distressed” except that some of the homes will be easier to close. Is there a slight premium available for that, maybe. Should that be reflected in the appraisal, hard to say.
In a market like Natomas, where there are many model matches, the condition of the home is probably more important. In Sun City, many buyers value the ability to close quickly with a higher premium, hard to measure, but there’s a higher avoidance of short sales there. Finished rear yards are a bigger deal also. Time.
The upper end is still entertaining (maybe I should use the word “learning”), when sellers think they can price an extra $50-100 per foot because they’re “not distressed” and then come to the sad realization a few months later that their home should be price similar to the short sale model match down the road. Buyers with a lot of money don’t like to waste too much of it either.
I like how you said the whole market is distressed, and I agree that different markets respond differently too. There are so many factors to interpret in the market itself even without the distressed nature of the things that permeates everythings. It seems even with lower prices buyers are expecting superior condition and superior upgrades. They can afford more since the prices have come down, but they seem to want more bang for their buck too. Jeff, that must make things challenging as you list and buy. Good luck out there.
By the way, if anyone has a minute, read this article. Interesting ideas about what a lower inventory might mean: http://matrix.millersamuel.com/?p=12702 I’d be curious to hear anyone’s take.
I read the article, I personally think that it’s too early to tell. I believe that seller confidence is due to people being underwater and unable to move. In many of the markets I work in I’m already seeing prices increase (both distressed and non-distressed).
If inventory levels stay low I’m betting that the confidence level for many sellers will start to increase. With so much negative news about the market sellers and buyers aren’t gung ho to jump in.
Thanks, Michael. It’s impossible to say what will happen. Foreclosure inventory has stalled from the “flood” several years back, though banks have likely been a bit more paced when it comes to releasing their properties too (which is probably a good thing). The article resonated with me for the points on foreclosure inventory and Weak seller confidence. I like your take on seller confidence.
All great comments, and mostly agree.
Ryan’s article link to lower inventory numbers got me thinking about other government manipulation and the impacts. California received $700 mil for the federal program to help people stay in their homes. Its a 6 month program. Simple calcs, depending on cost, means this could take 50-100,000 homes off the market for six months, effectively a 6 month trough of inventory, only a delay if there are no jobs to provide house payment producing income at the end of the cycle. The national size of the program? Haven’t checked. (pesky day job to do) I did also notice there was a 12 month minimum forbearance to unemployed from FHA now offered…. again, how many 10s of thousands of homes did that remove from the inventory, even if only for 12 months? The political question is: Did we give out the fish instead of the fishing pole -OR- are we building fishing poles while we’re handing out fish… time will tell. Thoughts?
Jeff, great questions. I get the concern from the government, but if “help” only delays the inevitable, it’s really not all that helpful. I’m really concerned about the new program. From what I understand the program will serve owners who are not in danger of imminent foreclosure to some extent, so it sounds like more than just a six-month mortage payment will be provided. But I’m skeptical about the whole thing. While I’m an optimist to the core in so many areas of life, the results of governmental interference here are bound to produce temporary results. I think you nailed it when bringing up jobs. We need to see that 10.9% unemployment rate in Sacramento County go down before we begin to see any real change. Despite the rate coming down from about 13.0%, 10.9% is still very high. If nothing happens there, I cannot imagine programs as such having much success when the economy is so distressed. If an owner can truly afford the home at a new modified rate, then that’s great news. But if the owner cannot afford the home at the lower rate still, then it’s just delaying the inevitable.
Time will tell. We’ll see what happens and how it impacts the market. In 2008 and 2009 I was doing quite a bit of foreclosure work for asset managers and even assisting with some BPOs for an agent. Some of the big “REO Agents” in the market at the time had 50-100+ listings at any given moment, but now they have 10-35 listings. Hmm…
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