The Price is Right! Right?
Sunday, March 29, 2009 at 7:35PM 
The Chicago Association of REALTORS® in last week's e-blast sent property statistics that separate foreclosures and short sales from traditional sales. COOOOL Right? Well, there is debate going on (in my head… right now) that perhaps we should not separate these numbers. I’m sure the wise one (President D.H. he’s everyone’s Facebook friend) who came up with this truly inspiring and brilliant idea, disagrees. I do not deny the fact that we need to know. I believe all information as detailed as it can be is GREAT! I work in the field and have to meet with, starts with A and they are sent by the banks, you guessed it APPRAISERS.
Appraisers are including foreclosures and short sales in the comparables when evaluating traditional property sales. Yes, it SUCKS! The banking institutions are looking for the comparables to include these distressed properties because the theory is that all sales impact an area and these must be included as well.
For example: Condo Building A (655 W. Irving Park) has currently 56 units for sale and 9 are either short sale or foreclosure; 16% of the inventory. Now let’s look at just one bedrooms; there are 31 for sale and 7 are either short sale or foreclosure, now that makes it 22% of this particular block of like-units. The bank and its weird way of doing math (mortgage backed securities, sub-prime, T.A.R.P., etc… don’t forget fees, I hate banks) believes we cannot ignore 22% of like-kind inventory within a building when doing a property evaluation. (data from MRED)
So what is the problem?! Well, how do I tell an appraiser the value is justified when they will include distressed properties anyway? Should we force their hand and use these brand spanking new statistics (and they have pretty colors) to wow them and convince them there is value. OR! Do we get used to this new upside down world and include them in our fancy packets we hand them. I would like to know which is best? Do we push the new stats and get told we are coercing them or suck it up and include the distressed like-kind units, especially in condo buildings. Especially when you have 2 units that have closed in the same tier and there is a $60,000- spread. So… which price is right?...(I read Bob Barker was back!)
Another group of people I talk to everyday and meet with are Buyers (folks who wish to live the American Dream). Just yesterday when writing an offer the buyer suggested starting at an approved short sale price for a unit in the same tier on a higher floor. The unit they wish to purchase is not distressed and the sellers have been making their payments. The Buyer believes that offering the approved, actually APPRAISED price, is what the unit is worth. Buyers believe from a negotiating standpoint that foreclosures, short sales and traditonal properties are all part of one market, not two.
Are we the last hold-outs, in an upside down world? This is a market correction, that's what the media says, in fact we have even said this as an industry. Since we all agree this is a correction, perhaps we do a disservice to sellers when we list it at a traditional price, and DO NOT include distressed properties. Or is market correction a myth that now is a truth.
Here is another myth that perhaps is true now. These properties were overpriced to begin with and that is why these seller's are defaulting.
HELP!
I do believe banking institutions are forcing depreciation in many communities; especially communities of color. It appears as if a fire sale has taken place. This forced depreciation has had a negative impact on many neighborhoods and if this continues it will start affecting those you would not think would have a foreclosure problem. Condo buildings are currently facing these challenges.
So what’s the next step for our industry, for REALTORS®?
I’d like to know. Help me here folks, I would really like to hear from you!
BLOG ON!... ADVISE ON!
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Reader Comments (9)
All sales have to go in the system as equally relevant......we do not have two markets, only one. Its unfortunate SS drag down the comps, but until the fluff is out of the market banks will not lend in earnest.
If the only closed sales in a community are short or foreclosed sales then they would reflect the current market value for the area. If no one is buying the real estate listed homes in the area then those homes would appear to be over priced. Thats just typical supply and demand.
I agree with Donald D. All sales in a specific location have to be assessed. SS and Foreclosures have to be evaluated since we only have 1 market. BUT, what also has to be evaluated is the condition of the property. Many of the foreclosed homes have major repairs (no kitchens, copper plumbing torn out of the walls, bathroom fixtures gone, no appliances, usually maintenance neglect internally and externally, past due/unpaid monthly assessments..etc) Not all foreclosures and SS are as cheap as they look on paper.
I see a troubling condition here that is the exact parallel of the failed lending practices in our last appreciating market being applied to our depreciating market. If banks continue to use abhorations as legitimate comps, we run the risk of more and more homeowners being under water on their mortgages. Just as they used unrealistic values which included such items as closing costs, cash backs, 125% LTV's and such, as legitimate reasons for over valuing homes and making loans that caused superficial supply and demand realities, I see them applying that same insane reasoning that is now crippling our industry. I can understand caution, but this is foolish.
I agree with Steve and have explained this to clients. Just because it is cheaper in price it may not necessarily be cheaper after the closing. You have the costs of replacing or installing fixtures that would be included in a "traditional sale", additionally the entity you transact with is at times more difficult and slow to respond. As they say you get what you pay for.
We have one system which in the past was severely manipulated. We have to include the ss and the foreclosures in comparables. This is a market correction and unfortunately some people will suffer a monetary loss. It is a great time to buy. Lots of incentives, great rates, prices, and a tax credit for firstime buyers.
You have to admit we could not believe some of these homes were selling for the prices they sold for, but that was the law of supply and demand. Loans were made available even to those who did not truly qualify. We are all paying the price for the greed created in wall street. This too shall pass. We must all take a bit of responsibility for not getting involved and letting things happen. Hoping that someone else will solve this problem. We must all guard the integrity of our business.
I agreed with Don, there is only one market, if 22% of sales are short sales or foreclosures that's your market. Everyone needs to realize this and adjust, including sellers because until all these units get moved through the system, which it wouldn't be anytime soon that's your competition, that is your market.
As a mortgage guy, I run into the same problems. The lender might say "well, what about this sale or that sale" and try to say the value is less than what the appraiser stated. My experience has been that I've had more problems with the lenders than with the appraisers.
But you throw in the new HVCC set to go into effect, and any "interested party" is "expressly prohibited" from having "any influence" or "expectations communicated" to the appraiser. To the letter of the law, it's just order the appraisal and keep your fingers crossed.
I There are not TWO markets. And the generic citywide stats trying to paint two markets ignor the local relevance of per-building, per-n'hood competitive situaions going on like Mabel points out. It is irresponsible and manipulative to put out large short sale/non short sale stats without balancing it with the point of view that shorts/reo's are defining the market in many areas.