Historically, a real estate owned tag indicated that a property was discounted. The explosion in the number of REOs became a great way for investors and consumers to purchase properties for a steal.
However, this is not always the case anymore. REO prices now align more closely with those of retail properties. The difference between the sale is now close to par in certain areas of the country. This dramatic change—not to mention increased appraisal and valuation guidelines and a decreasing inventory of REO properties—has made conducting accurate valuations more important than ever.
Record High Bids for REOs
We have seen the news that last year’s home prices nationwide experienced the largest increase since 2006. Even notoriously hard-hit Phoenix saw a 22.9% increase.
As home prices rise and foreclosure inventories decrease, there are fewer discounted REO properties that once were available for borrowers and investors across the nation. REO assets are now receiving record high bids—both in the number and the amounts being offered. Today’s motivated sellers are met by equally motivated investors and borrowers, and growing competition means assets must be valued at the correct price to be liquidated at the best value.
For a property to receive multiple offers in the first week is no longer uncommon. When this situation arises, there are a few questions that must be asked in regards to the valuation including: What details were missed during the valuation of this property? What is affecting the appetite for properties? And what type of due diligence was performed?
Yes, it is important for financial institutions to get REO properties off their books as quickly as possible to protect their bottom lines; however, poor valuations should not be a substitute for timeliness. Quick drive by visits and basic photographs of a home’s exterior simply are no longer acceptable.
Local Agents: Key to Quality Valuations
Producing accurate valuations and upholding compliance are priorities for minimizing losses and working toward the stabilization of neighborhoods. Quality cannot be sacrificed for the sake of time, so the right individuals must be employed to do the work.
REO appraisers must be certified in the state in which they work and receive proper, ongoing instruction—they require in-depth knowledge of not only market conditions but of the local community as well.
An agent performing a broker price opinion should be immersed in the area and have a firm sense of the price at which similar properties are selling. Local agents have an idea of what the homes tend to look like, both inside and out, and since they live in the area they also have a better idea of how much repairs cost.
This kind of insight cannot come from anyone other than a member of the community, and the choice not to use local appraisers can often mean forfeiting quality for a quick turnaround. Appraisal providers are doing their clients a disservice by not selecting a local professional to conduct such an important process.
Agents must also be accountable for producing extremely detailed reports, which should go through either an internal or outside quality control process to ensure valuations are of a high quality on a consistent basis.
Quality control should be conducted by expert appraisers, not solely automation. There are far too many details and nuances that can easily be missed with a completely technology-driven process. In the long run, ensuring that a specialist reviews appraisals will be paramount to producing correct valuations and satisfied clients.
The Effect of REO-to-Rental Programs
Another factor affecting REO valuations today is increasing investor activity and a growing REO-to-rental market.
The previously large inventory of REOs paved the way for investors to purchase properties in bulk at a discount. This trend provides an appealing option for institutional investors and lenders as well as countless borrowers forced to relocate following a foreclosure. REO-to-rental initiatives are designed to complement disposition strategies and improve home values, and with growing investor activity in recent months, the effect of this trend is certainly being felt.
Companies do not have control of the changes in the REO market.
How the evolving environment changes property values is also largely out of our hands. What we do have control over is the ability to put strong practices for valuations in place.
Since REO no longer translates to a smaller price tag, it is critical that these properties are valued correctly. And to do so, certified, licensed and more importantly, local agents are arguably the most valuable asset.
