1 / 77

Appraising REO/Foreclosures Course No. 125

Columb Ia Inst I T u t e. Appraising REO/Foreclosures Course No. 125. Instructor: Diana T. Jacob Email: dianatjacob@yahoo.com Phone: 800.437.4160 office or 254.582.3940 hm. Course Objectives. Recognize indicators that define a declining market

leena
Download Presentation

Appraising REO/Foreclosures Course No. 125

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Columb Ia Inst I T u t e Appraising REO/Foreclosures Course No. 125 Instructor: Diana T. Jacob Email: dianatjacob@yahoo.com Phone: 800.437.4160 office or 254.582.3940 hm

  2. Course Objectives • Recognize indicators that define a declining market • Understand the terminology of a declining market • Practice formulas to assess a distressed market • Review engagement letter components that define distressed properties • Overview Scope of Work decisions in foreclosure assignments • Identify units of impact in market interactions when declining values are ongoing • Practice Case Study “as is”, “subject to” and making recommendations to the client and other intended users

  3. Page 1-3 What defines a declining market? • Properties selling for less than the amount sold in the same measure of historical time period used to analyze the movement or trend of a market is a market defined as one in decline. • The cause can also define a market which is trending downward for a short period or one which is appearing to steadily decline for a period which has had no forecasted end. If an event such as road construction is underway the decline may be short-lived. This cause has a definable period of end and creates what is known as a frictional market.

  4. Page 1-4 Time is always the final link in terms of whether or no a property will gain or lose its value. During a declining market both buyers and sellers can still profit. If the sellers bought during a time of increase but not at the peak then the sale will result in a profit. The buyers purchasing in a declining market will generally over a normalized holding term recognize a profitable gain. All markets are on a “see-saw” wave. The fall is always faster than the rise when property values change their trends.

  5. Page 1-5 Terms of a Declining Market • Pre-Foreclosure • Debt Forgiveness • Sheriff’s Sale • Trust Sale • Real Estate Owned • Friendly Foreclosure • Foreclosure • Short Sale

  6. Pages 1-5 & 1-6 Pre-Foreclosure and Debt Forgiveness Pre-Foreclosure An assignment where the relationship of the debtor/mortgagor and the lender/mortgagee has faltered. Problems for the appraiser is that often the inspection is from the exterior only across the street and the damage due to deferred maintenance is unknown but highly probable. Debt Forgiveness Generally associated with Friendly Foreclosure; a voluntary surrender of the interest is given. In a Debt-Forgiveness although the lender may accept the surrender the IRS will not forgive the taxes due on the forgiven portion of the debt seen as income earned.

  7. Page 1-6 Sheriff’s Sale and Trust Sale Trust Sale Debt is secured by a Deed of Trust. The lender is the beneficiary of the Trust. The Beneficiary, in the event of a default, orders the Trustee to sell the property at a Trust Sale much like the Sheriff’s Sale process. Sheriff’s Sale A process of foreclosure which results from a formal process of legal notification and court granted permission to sell property at an auction to the highest bidder for defaulting mortgage payments

  8. Page 1-7 Short Sales and REO’s Short Sales – A sales transaction which is the transfer of property from a property owner to a buyer with permission from the mortgagee/lender as a deficiency will take place as the sale price is below the balance due. This results in the lender receiving less than is owed. REO – Sometimes called ORE (Other Real Estate) properties that have gone through the foreclosure process and are now in the possession of the lender are called Real Estate Owned (REO’s).

  9. Economic Base –Affect on a Residential Market • The economic activity determines whether a neighborhood is in a state of growth, decline or stagnation. • The question that must be asked is, “How much of an area’s basic employment is tied to one industry or employer?” • The Location Quotient (LQ) is a ratio that communicates an industry’s share of the local economy. • A LQ > than “1” is a base industry that exports as opposed to one that has a LQ < 1 which serves local demand (non-basic). Page 1-7 & 8

  10. Page 1-8 & 9 Measuring the Supply of a Residential Market • Declining markets are often labeled as “Buyer’s Markets” • Sales Prices of comparables are > than the list prices which indicate a downward offering in order to move more rapidly in an over-supplied market • Listings have extended marketing time from previous quarters • Increase in FSBO signs with visibly lower prices than competing professionally listed properties # of listings ÷ # sales (in a month)= # months supply

  11. Page 1-9 Risk Analysis – A Measure of Decline Impact There are varied methods of performing risk analyses; but the first step in any method is to identify the risk factors associated with risk analysis. In the residential real estate market the risk factors can begin with mapping out those factors on a decision tree. Each branch will relate to a risk factor which will have market impact on the appraisal.

  12. Page 1-10 Market Risk Factors in the Decision Tree Subject: SFR 800 Sq. Ft. GLA, 2-Bedroom 50 Yr.’s Actual Age ____ % of population having no dependents under age 18 These two questions can answer the initial question which is “What is the demand for an 800 square-foot, 2-Bedroom home?” ____% of households with annual income between $35,000 - $40,000 If a major percentage have no dependents under 18 and are in the annual income range then the house as it is designed can expect a reasonable demand if all other risk factors are positive.

  13. Page 1-10 Market Risk Factors in the Decision Tree __% of 3-Bedroom Houses in Market Subject is SFR 800 Sq. Ft. GLA 2-Bedroom 50 Yr.’s Actual Age __% of 2-Bedroom Houses in Market These branches relate to the subject’s physical design and age and conformity in the market. The List to Sale Price Ratios, Seller Concessions, % of REO’s are economic indicators. __% of 40-50 yr SFR __% of 25-39 yr SFR __% of 10-24 yr SFR

  14. Page 1-11 Formulating the Conclusion of the Risk Analysis One method of rendering a conclusion is to use a rating system which begins with risk categories. Each category will have a corresponding percentage range. Example: Category Proportion of 100% Very Low Risk 80%-100% Low Risk 70%-79.9% Moderate Risk 60%-69.9% High Risk 50%-59.9% Very High Risk 00.0%-49.9%

  15. What’s the Risk? Page 1-12 Subject is a 2-Bedroom House 2 Points 5 Points 20% of market is 2-BR 80% of market is 3-BR 4 Points 4 Points 4 month inventory 4 month inventory 1 Point 3 Points 5% Seller Concessions 2% Seller Concessions Total Points 7 Total Points 12 Total Points 7÷12 = 58% Moderate

  16. Pg 1-13 Market Conditions Form 1004MC This is a whole new form that is intended to be used in all mortgages delivered to Fannie Mae for 1-4 unit properties as of April 1, 2009 being a supplement addendum to the URAR form It is the supporting evidence of the summarized conclusions found (in the majority) in the checked boxes of the Neighborhood section of the URAR.

  17. Pg 1-14 Market Conditions Form 1004MC The instructions are very clear, note how many times the word “MUST” is used in the first two sentences…”The appraiser mustuse the information required on this form as the basis for his/her conclusions, and must provide support for those conclusions, regarding housing trends and overall market conclusions as reported in the Neighborhood section of the appraisal report form. The appraiser must fill in all the information to the extent it is available and reliable and must provide analysis as indicated below.…”

  18. Page 1-19 Websites to Research There are many websites where research on various appraisal assignments is beneficial. A few of those specific to declining markets are; www.indices.standardpoors.com www.ofheo.gov/download.asp www2.standardpoors.com/spf/html/products/url_homeprice.htm www.radian.biz (by zip code) www.ugcorp.com (by zip code)

  19. Page 1-20 Comments – Communicating Due Diligence • Is the market activity contrary to published reports? If yes, tell them and tell them why and how you were able to confirm this. • The market is not yet in decline but is beginning to be impacted such as extended marketing time. • The market is in decline. The SOW Rule requires the appraiser to identify the extent of their research and analysis. Communicating the market’s activity conclusion is extremely critical when markets are in decline or are surrounding by declining markets.

  20. Page 1-20 Communicating the Market’s Status Communicating the stage of the transitioning market is the due diligence of reporting the conclusion of the market analysis. • The market you’re assigned to evaluate in not in decline which is contrary to the published state reports. • The subject’s market is not yet declining in price or value units (i.e. sale price per sq. ft.) but its showing signs of transition such as increases in seller concessions and/or marketing time. • The market is in decline with no defined or projected time period for an end to the declining status.

  21. Page 2-3 & 4 The Engagement of the Pre-Foreclosure Client and any other intended users Assumption: The bank ordering the appraisal is the client. Question: Is there a secondary market involved? Intended Use(s) Assumption: Decision in process on defaulting mortgage. Question: Is this an in-house decision only or will someone else be relying on the information and/or have additional questions?

  22. Page 2-4 The Engagement of the Pre-Foreclosure Clearly there is a deficiency of information in the engagement letter needed to proceed with solving the appraisal problem. Question: Is the lender aware that under the market value definition using REO transactions may not be suitable if the sale represented undue stimulus? Do REO’s dominate the market or comprise a portion of the market? If the REO’s comprise a portion then use a proportionate share in the analysis and in the approaches to value to represent the market in its current status. The RUSH job conditions may not be acceptable based on the data available and data necessary to obtain under an exterior only inspection.

  23. Page 2-5 & 6 The Engagement of the Pre-Foreclosure Subject’s Relevant Characteristics Assumption: The date of exterior inspection is the effective date of the appraisal upon which these characteristics will be based and used in the appraisal. Question: What is the date that was in effect when the last reported relevant units of comparison were confirmed? Does the reader understand the impact of the assumption that those conditions may be changed; this is especially true on foreclosure properties where depression and anger are being experience by the homeowners who are losing their home. The risk and consequences should be discussed and considered in the analysis

  24. Page 2-7 The Case Study The appraiser has a comparative focus when viewing the subject-looking for relevant characteristics and units of comparison. From the exterior all properties appear to be in average condition. Quality of construction, sq. ft. of living area and similar number of rooms (according to tax records)

  25. Page 2-9 The Case Study • From the exterior the appraiser can observe and make the following data notations for the comparative analysis; • No sidewalks, concrete curb and gutter, paved asphalt street with streetlights • Subject is on an interior lot • City garbage pickup is a public service available • Subject is masonry brick with attached garage and composition roof with front door being a storm door. • Based on exterior observation condition is average and the quality of construction is also average. However, due to pre-foreclosure discussion with client condition will be deemed poor.

  26. Page 2-10 The Case Study • 3 ½ years ago the subject listed for $112,600 selling at $108,000 • Assessor Data: • Lot value $30,000 • Assessed Value $116,000 • No built in appliances • 2 bedroom 1 ½ bath • 40 years old

  27. Page 2-11 The Case Study-Land Value

  28. Page 2-12 “?” The Case Study “?” Land Value $__________________ R. Cost New Above Grade (1,212 SF) __________________ R. Cost New Below Grade Finished __________________ R. Cost New Below Grade Unfinished __________________ R. Cost New Garage above grade 400 SF __________________ Less Physical Curable $____________ Physical Incurable ____________ Functional _____-0-_____ External _____-0-_____ Subtotal =$_________________ Plus Site Contribution Improvements +_________________ Equals Value =$

  29. Page 2-12 Solution to the Case Study Land Value $________27,000.00_ RCN Above Grade (1,212 SF @ 105) _______127,260.00_ RCN Below G. finished (788 SF @ 85 _______ 66,980.00_ RCN Below G. Unfinished (424 SF @49) ________20,776.00_ RCN Garage ________18,800.00_ Equals (without land) subtotal $ 233,816.00 Less Physical Curable $ 2,200.00 Physical Incurable __168,616.00 (rounded)__ 233,816 – 2,200 x 0.728 *.0182 x 40 = .728 Functional _____-0-_____ External _____-0-_____ Subtotal =$_______63,000.00__ Plus Site Contribution Improvements +_______14,000.00__ Equals Value =$ 104,000.00

  30. Page 2-14 2.2.4 Practice Case Study-Sales Approach

  31. Page 2-15 Solution to Reconciled Value Summarized Conclusion of Pre-Foreclosure Reconciled Value: The subject was purchased nearly 4 years ago for $108,000 with all closing costs paid by the current owner. The difference between the purchase price and the current market value is a negative 6.38% (-6.38%). The downward market trends due to many of the subprime mortgages have created a risky market for houses owned less than five years. The subject, if placed on the open market, competes with similar age range houses which have neared the end of their economic life and offer little long term investment opportunity because the cost to renovate cannot be recovered at this time. The appraiser places the greatest weight on the sales approach which showed a comparative analysis of similar properties and the impact of difference between two-bedroom markets and three-bedroom markets. The appraiser makes the extraordinary assumption the condition of the property is poor based on trends of foreclosed properties which have become real estate owned. If this assumption is incorrect, the value could be significantly impacted.

  32. Page 3-3 Web Pages Info on Declining Markets • If the published source indicates a decline the appraiser should also research and communicate; • Housing inventory > 6 months • Change in seller concessions • Change in value unit measure (i.e. sq. ft. GLA) • Key elements that characterize declining markets are; • Closing costs • Time • Effective age versus condition Web Sources www.ofheo.gov www.standardardpoors.com www.realtytrac www.radian.biz www.ugcorp.com/decliningmarkets.html

  33. Page 3-4 Closing Costs-Seller Paid Items “?” • Two categories of closing costs • Recurring – known as “pre-paids” inclusive of escrowed taxes, property insurance, flood insurance and/or PMI • Non-Recurring – a one time cost paid up front at closing. They can include a host of items such as Impact Fees, Recording Fees, Title Policy, Wire Transfer Fees, Home Inspection Fees etc. • There is no such thing as “NO CLOSING COSTS”. The appraiser must review the contract terms and the local market to ensure the terms are identified as being reasonable for the current market and whether or not seller paid concessions could be earmarking a changing or declining market. If negotiations show seller paid concessions are typical for the transactions in virtually all cases then an adjustment for the concession would be unreasonable.

  34. Page 3-5 Seller Closing Costs – “To be or not to be!” At the heart of the issue is the “CASH EQUIVALENCY” of the transaction. In declining markets sale prices are often elevated to cover the masked seller concessions. You can readily identify this activity by comparing the other sales. Inflated sales have an excess of typical seller costs in the market. For this reason a careful review of all sales transactions in a specified market for the subject need to be scrutinized to ensure whether seller concessions are on the rise. Is it only the one sale inflated beyond a reasonable market or “arms-length” transaction? Or is the market moving solely because of a government subsidy program?

  35. Page 3-6 Case Study – Neighborhood Analysis Case Study Illustration of Sales in a Neighborhood Analyzed for Financing 1. Are seller concessions apparent in virtually all transactions?

  36. Page 3-6 Case Study – Neighborhood Analysis Case Study Illustration of Sales in a Neighborhood Analyzed for Financing 2. Which loan types typify the dominance of financing?

  37. Page 3-6 Case Study – Neighborhood Analysis Case Study Illustration of Sales in a Neighborhood Analyzed for Financing 3. What percentage if any would be a reasonable seller contribution?

  38. Page 3-6 Case Study – Neighborhood Analysis Case Study Illustration of Sales in a Neighborhood Analyzed for Financing 4. Are there comparables that are outside the normal market interactions between buyers and sellers?

  39. Page 3-6 Case Study – Neighborhood Analysis Case Study Illustration of Sales in a Neighborhood Analyzed for Financing 5. If Sale #5 is considered comparable to the subject is an adjustment necessary for the seller concession?

  40. Page 3-6 Case Study – Neighborhood Analysis 1. Are seller concessions apparent in virtually all transactions? YES 2. Which loan types typify the dominance of financing? Conventional Fixed Rate 3. What percentage if any would be a reasonable seller contribution? 0%-3% Two of the ten sales (20%) were around 5%; one was at 6%, one at 7%. 60% of the sales (6 of the 10) ranged between 0% - 3%. This majority is the basis for any adjustment beyond 3% made to sales in a Sales approach to Value. 4. Are there comparables that are outside the normal market interactions between buyers and sellers? Sale 4, 5, 9 and 10 all exceed the list price. 5. If Sale #10 is considered comparable to the subject is an adjustment necessary for the seller concession? 3% maximum contribution x List Price (maximum market believed property could be obtained) = $10,320. The amount paid was $24,300. The difference, $13,980, would be a reasonable adjustment.

  41. Pages 3-7 & 8 Time Adjustments-Analyzing the Market’s Change and Impact First Step Average Annual Rate of Change -0.09 ÷ Number of Months in a Year ÷ 12 = Average Monthly Rate of Change = -0.0075 Second Step Average Monthly Rate of Change -0.0075 Multiply by number of months old sale is (Comp. 10) x 10 mo.s Equals Accrued Percent of Change to Date = -0.075 Add a whole number 1 to create a factor + 1.00 Multiplier or Factor to apply to comparable = .925 Third Step Factor/Multiplier of Time 0.925 Multiply by dated sale price x $233,200 Time Adjusted Sale Price = $215,710 NOTE: On the Sales Approach Grid this process would not be shown, rather the sale price of $233,200 would be shown with an adjustment of minus ($17,500) rounded from $17,490

  42. Page 3-8 Sol. to Case Study 3.1.3-Time Adj. Sales 11 & 12 NOTE: Factor of Sale Number 11and 12 are the same because both are 10 months old. The formula for obtaining that factor is: -0.09 Annual change ÷ 12 Months = -0.0075 Monthly change X 10 Months = -0.075 Accrued + 1.00 Whole number to convert impact into factor = 0.925

  43. Page 3-11 Effective Age vs Condition-Setting Up the Sale Sale No. 1 is in a declining market; being 6 months old it requires an adjustment due to the recognized on-going loss in demand./value Annually the measure of loss is 8%. -0.08 ÷ 12 months = - 0.00667 x 6 months = - 0.04 Plus converting whole + 1.00 = Factor/Multiplier = 0.96 Time Factor 0.96 Sale Price x $155,000 Time Adjusted Sale = $148,000 Minus Land Value - 38,800 Improvement Total $110,000 Less Site Improvement - 4,100 PV Main Improvement $105,900

  44. Page 3-10 Solution to 3.1.5- Setting Up the Sales

  45. Page 3-12 Solution to Calculating the External Loss Two relevant conclusions can be drawn from this analysis; 1) effective age inclusive of external impact and 2) market reaction to the differences in EA

  46. Page 3-13 Conclusions of Analysis 3.1.5 (b) In markets of uncertainty, it is customary to consider that new construction will slow down significantly and demand for existing housing will be competitive between sellers. …”based on the economic Principle of Integration, Growth, Stabilization, Decline and Gentrification, i.e., life cycle of the neighborhood, the typical three x 20 years normal cycle is generally limited by the investor’s diminished confidence in the real estate market.

  47. Page 3-13 Conclusions of Analysis 3.1.5 (b) A lowered market confidence will result in the buyer’s view of the lifecycle being limited to a two cycle period (two x 20 years) or 40 to 50 years. It is with hesitation that any expectation of economic demand for the location beyond the 50 years can be made when markets are in a state of decline. This is a qualitative judgment under a principle and noted market conditions which indicate a slow-down or decline.

  48. Page 3-15 Conclusions of Analysis 3.1.5 (b) Comparative Conclusions 8.9% accrued difference divided by 3 years = 0.0296 per year EA difference When analyzed comparatively there is a recognition of market reaction to the EA differences. Conclusion 3% per year EA difference.

  49. Page 3-16 Contrast of Transaction Type Before identifying the transaction type the appraiser must first identify the property type. Each property type has its own distinct ownership characteristics. Example; a condo unit will not have the same privileges of use, ownership or obligations of maintenance as the detached single-family or even the garden home or town-house. Secondly the appraiser must identify the reason for the demand. Is the demand for owner-occupancy or for tenant/income production? Depending on the type of investor basic market characteristics that have impact on the value will surface. For example: the investor of income property will be more concerned with the Durability, Quantity and Quality of the income with secondary consideration given to the residential amenities.

  50. Page 3-16 Contrast of Transaction Type The third consideration in the tier of gathering and analyzing data are the physical characteristics. This will generally be associative with some type of demographic analysis in the market place. From that point forward the trends can be identified in that location for that specific property type which is defined by matching up the current physical characteristics of the market along with the demand from the investors. The appraiser having identified these important characteristics (property type, type of investor, physical characteristics of the property and the trends) can then view the sale as being either an arms-length or bank owned transaction.

More Related