Sacramento Appraisal Blog

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REO

The foreclosure limbo game in Sacramento

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I’m reminded of limbo when thinking about distressed sales in Sacramento County. Both short sales and foreclosures used to absolutely dominate the market several years ago, but nowadays they just keep going lower and lower and lower (like limbo). Let’s digest some market trends together below.

Short sales and foreclosures in Sacramento County - by Sacramento Appraisal Blog

Bank-owned sales used to represent over 70% of the market five years ago, but now they are only 4.7% of all sales in Sacramento. That is an amazing shift, don’t you think? Short sales have also seen a rapid decline as they have decreased by nearly 19% over the past 12 months so they now only make up 15.3% of all sales.

Short sales and foreclosures in Sacramento County - by Sacramento Real Estate Appraiser

It still sounds alarming to think that 1 in 5 sales in Sacramento County is either a foreclosure or short sale, but this is a significant improvement from five years ago when 84% of all sales were distressed (in the entire county). This is a good reminder that change takes time.

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Question: I’ve been seeing quite a few short sales sell VERY low. What are you seeing out there?

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Monthly real estate trends in Sacramento County

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Here’s a quick update to highlight some monthly real estate figures in Sacramento County from January through April 2013. In a nutshell, we are seeing less foreclosures, the same amount of cash as Q4 2012 (but up 5% from one year ago), and fairly steady levels of FHA and conventional loans. For reference, we saw about 18% less sales during the first four months of 2013 compared to 2012. You can get a more in-depth context for the market in a previous post, Tour de Sacramento Real Estate.

What stands out to you? What are you seeing in the trenches?

Monthly Real Estate Trends in Sacramento County - by Sacramento Appraisal Blog

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Is a property worth less if it’s a short sale?

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No. A property is worth what it is worth regardless of being distressed or not. With that being said, when a house is a short sale it may need to be marketed at a more aggressive price level to dump the property before a foreclosure date or offset any negative perception in the market for being a short sale. Notice though we’re talking about an aggressive “price” and not “value”.

Here’s a good question to ask. If a short sale was not a short sale, would it sell for more? The answer is very often “yes” and that leads us to a better picture of what market value is. The truth is that properties are frequently marketed as short sales and end up generating little interest before resulting in foreclosure. But then after these same houses end up as bank-owned they generate very quick offers at or above the original short sale listing price. Of course part of this could be banks not cooperating with the short sale process and buyers tiring of waiting for months for the deal to close, but it’s hard to ignore that short sales often (not always) sell at lower levels.

Case-in-point: I appraised a house recently in the City of Galt where competitive properties in the neighborhood showed a distinct difference between short sales and everything else. Comparable non-distressed properties were selling around $105,000-$115,000, REOs were selling mostly between $85,000-$100,000 and short sales were selling closer to $85,000-$90,000 near the bottom of the competitive range. It’s certainly true that condition and quality of updates played a role in the price differences, but it’s not an accident either that short sales were consistently finding their place near the bottom of the market.

Why is this important to understand?

  1. Appraisers:  From the appraisal standpoint, if short sale comps are used in an appraisal report (without an adjustment upward), then the value in the report may be lower than what it should be. The value could really be a “quick sale” value rather than “market value”. That’s not good on many levels. Please understand though that short sales do not always sell less than fair market value, so an adjustment upward is not always warranted in an appraisal. It all depends on what is happening in the market.
  2. Investors:  I just spoke with a Sacramento investor yesterday who has been growing frustrated to see some of his properties compared to bottom-of-the-market short sales by appraisers. This investor found me online and he called me to see if I had any advice on how to deal with his situation. That’ll be a different blog post, but I did give him some tips, a few which I mention below.
  3. Real Estate Agents:  I recommend real estate agents (and investors) provide a detailed list of all updates to appraisers (with costs if possible). Send this via email or provide in person to the appraiser. You can also discuss any relevant marketing information (ie.. “There were 4 full-price offers in 3 days and I am still getting calls and back-up offers”). Lastly, feel free to share market research and properties that helped you establish your listing price. Don’t tell the appraiser which comps to use and how to do his job, but rather share data that helped you establish your price so the appraiser might understand your point of view. You are allowed to talk with appraisers about property specifics and the real estate market, but don’t coerce and pressure for a certain value.
  4. Sellers:  Know your market if you are selling. You will have to compete with distressed properties around you, which can impact your price, but that doesn’t necessarily mean you have to price your property the same as neighborhood short sales and REOs. A trusted real estate agent or pre-listing appraisal should be able to give you guidance to understand the market. Misunderstanding what the market is doing can cost you dearly.

What do you think? Agree? Disagree? Any stories to share?

If you have any questions, or real estate appraisal or property tax appeal needs in the Greater Sacramento Region, contact Lundquist Appraisal by phone 916-595-3735, email, Facebook or subscribe to posts by email.

Grasping REO, Short & Regular Sales

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Is there a price difference between bank-owned sales, short sales and regular sales in the Sacramento area? Usually there is, but the level of difference really depends on the neighborhood. The following two graphs are taken from pages 10-11 of The Wright Report and they show average sales price by type of sale.

Based on these graphs for the Sacramento area, there is an obvious difference between conventional sales and REO & short sales, don’t you think? Of course we need to consider that there could be condition issues that warrant a price variance too since many bank-owned sales are not in pristine “move-in” shape. But overall the difference is fairly obvious.

Neighborhood Mini-Case Study: Let’s look at a particular neighborhood to get a closer view of distressed vs traditional sales. The data below represents the “Bridgegate” model in Sun City Lincoln Hills. Less than 30% of all sales in Sun City Lincoln Hills last year were distressed, which is a low percentage for the Sacramento area. However, even with a lower distressed percentage, if appraisers and agents do not consider all the data points, it can be easy to get the value or marketing price wrong.

  • REO sale on 02/28/2011 – $212,000 (cash)
  • Traditional sale on 05/13/2011 – $248,000 (conv/20% down)
  • Traditional sale on 06/17/2011 – $230,000 (FHA/ 2 days on market)
  • Active traditional sale: $239,000
  • Pending traditional sale: $359,900 (outlier: massive upgrades w/ a view)

It looks like the bank-owned sale sold at the lowest end of the market because it is not consistent with the rest of the sales or listings. At the same time, the latest traditional sale sold in only two days and that also might not represent the market, right? There was no short sale, but it would not be surprising to have seen a short sale sell anywhere from $220,000-$230,000. There are a whole host of value issues to consider for the properties above, and one of them looks to be the nature of the sale – whether distressed or typical (and even how long the property was marketed). A market may be driven by foreclosures, but if we assume that across the board, we could really get an off-base picture of the market.

It can be very challenging to see any differences between distressed and regular sales in a neighborhood where the market is far more saturated with REOs and short sales (say 95% of all sales were distressed), but ultimately appraisers and agents still need to do their homework and use the right data in a neighborhood to correctly interpret the market because there is usually a difference. Typically in the Sacramento area we see traditional sales on top, then bank-owned sales and then short sales. Agree? Disagree?

Implications for the Difference between REO and Traditional Sales:

  1. Avoid REOs in appraisal reports: REO sales should be avoided in appraisal reports where possible. However, many areas in Sacramento have a percentage of distressed sales (bank-owned + short sales) near 70%, so it’s not always possible to use only traditional sales. I just appraised a condo recently and 35 of 36 sales over the past year were distressed.
  2. Note the difference: If REO sales are used in an appraisal report and there is a difference noted in the market between distressed and traditional sales, an upward adjustment should be made (or at least less weight given to the distressed sale). The same principle applies to selling a property. A property is not worth less because it is a short sale. It is worth what it is worth, but it may need to be marketed more aggressively to offset any stigma in the market and avoid foreclosure. If the short sale was not a short sale, would it sell for more? That is the critical question to ask and leads us to a better picture of what market value is.
  3. Marketing Strategy: Sometimes a property does not generate interest as a short sale, but that does not mean it is not worth the listing price or more. Short sales tend to have a stigma among buyers, so they often need to be priced more aggressively to generate interest. Moreover, it is very common to see short sales generate very little interest at a certain price, but the same property will sell quickly as an REO at that same price. The listing agent and/or home owner need to understand the market in order to set the right price for the property, whether a short sale, REO or traditional sale.
  4. Quick Value vs. Market Value (tax appeals / FSBO): Avoid using only distressed sales when appealing your property taxes or listing your home as a FSBO. These sales may not represent the market. If they don’t represent the market, then you’re probably focusing on a “quick sale” value instead of “market value”

How have you seen foreclosure sales impact pricing in a neighborhood? What other implications do you see when we misinterpret the market?

If you have any real estate appraisal, consulting, or property tax appeal needs in the Greater Sacramento Region, contact me at 916.595.3735, by email, on our appraiser website or via Facebook. 

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