ForeclosurE— by niusheng11

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									COVER STORY
                                                                  ForeclosurE—
  X
  by X                                      The Looming Threat to Property Values
                                                                                                         by John Lifflander




                                                                                                                    photo by Chris Bennett
  The statements made or opinions expressed by authors in Fair & Equitable do not necessarily represent a policy position of the
  International Association of Assessing Officers.

             ne of the consequences of what is becoming a real         homes which are difficult to value en masse because their

  O          estate crash in many locations, is the difficulty it is
             causing in some assessor’s offices. In many cases,
  appeals have multiplied, and values appear to be more
                                                                       amenities can vary greatly. One luxury home may have special
                                                                       stone exteriors, while another has an elaborate boat house and
                                                                       dock, or marble floors, or a host of other expensive features.
  diverse than ever before. Also, the lag time between the tax         These properties require individual scrutiny by an appraiser to
  bill’s arrival and the property’s valuation date has worked          determine an appropriate value which can take an inordinate
  against many assessors to make it appear that they are not           amount of time and put a burden on assessors’ resources.
  “on top” of the market.
    Reassessment has become more difficult in this market               No one is certain when the market
  environment. Those with the task of determining new values
  often find themselves with the conundrum of which sales to            will bottom out. Home prices
  use and which to discard. Sales prices for similar properties
  are covering ever widening ranges or, as some might say
                                                                       keep dropping in many areas,
  they are “all over the board.” This has caused even the most         and new revelations of fraud and
  experienced government and fee appraisers to step back to
  make certain their valuations are accurate.                          incompetence in corporate real estate
    Lenders are also concerned and are asking for much more
  information from appraisers than ever before as real estate,
                                                                       lending continue to surface.
  once considered perhaps the safest investment one can
  make, has become fraught with risk. No one is certain when
  the market will bottom out, as prices continue dropping in              In a similar way, the circumstances of the sale of proper-
  many areas, and new revelations of fraud and incompetence            ties require special scrutiny when market conditions are
  in corporate real estate lending continue to surface.                changing drastically and continue to be in a state of flux.
                                                                       Unlike the differences in luxury homes, the homes may be
                                                                       very similar—they may even be “cookie cutters” in the same
  New Complexities for Mass Appraisal
                                                                       subdivision, but the task of valuing them becomes exceed-
  The current problems in the real estate market complicate
                                                                       ingly complex because the sale prices vary greatly. The cur-
  mass appraisal Regression analysis is increasingly difficult
                                                                       rent real estate market, which is declining in most of the
  to utilize when the sales data used to determine values has
                                                                       United States as well as in many other countries, has placed
  become heterogeneous due to differing characteristics. The
                                                                       assessors in this predicament. Its resolution will require a
  situation can be compared to the appraisal of high-value


                                                                                                          Fair & Equitable • June 2008       3
 Cover Story
 new degree of appraisal expertise and         They often have not entered the property       sure, and homeowners are often coop-
 an analysis of how the circumstances of       to ascertain its condition. Because some       erative and do not damage the property
 sales should be considered in determin-       owners have been known to vandalize            since they have a vested interest in the
 ing market value.                             their homes before they are forced to          sale price. Short sales are listed in the
                                               relinquish them through foreclosure pro-       local multiple listing service (MLS) just
 The Looming Question                          ceedings, foreclosure-sale buyers account      like any other property, so unlike fore-
   With the specter of declining values        for this risk and generally bid quite low.     closures, they are not limited to a certain
 comes the critical question of what sales     Sales of this type would almost never be       type of buyer. Unquestionably, there is
 assessors should use to determine market      used to determine market value.                an element of duress involved in a short
 value. Typically, state statutes guide ad                                                    sale, but if there are numerous short-sale
 valorem practices used to arrive at market                                                   properties available in an area, there is
 values. These statutes are often supple-      Unquestionably, there                          a good chance that potential buyers will
 mented by administrative rules that fur- r                                                   opt to purchase them over conventional
 ther define which sale circumstances can
                                               is an element of duress                        listings to save money. Eventually, hom-
 be included in market value calculations.     involved in a short sale.                      eowners selling for the typical reasons
 Sales selection can have a marked effect                                                     will have to lower prices to compete.
 on the results. If sales have been made       If there are numerous                          In this way, short sales may become the
 with “undue stimulus” or under some                                                          predictor of where the market is going.
 type of duress, they may not be considered    short-sale properties                          In any event, if a majority of sales in an
 valid for sales comparison purposes. At                                                      area are short sales, their influence on
 some point, however, sales that involved      available in an area, there                    the market can hardly be ignored.
 some type of stimulus may be the only                                                          Another type of duress-driven sale is
 properties selling, or they may comprise      is also a good chance
                                                                                              known as the “deed in lieu of foreclosure.”
 the majority of sales. Then, stimulus-
 driven sales have essentially become the
                                               that potential buyers                          These sales occur when owners relinquish
                                                                                              the deed to the lender rather than forc-
 market. When this happens, assessors,         will opt to offer less to                      ing it to obtain the property through the
 whose overriding directive is to appraise                                                    foreclosure process. The lender then
 properties at their market value, may need    purchase them.                                 markets the property usually through the
 to consider including these sales.                                                           MLS. Often builders will use this method
   This type of analysis is always open to                                                    to alleviate themselves of mortgages,
 debate. Some would argue that only trans-        On the other end of the spectrum are        which explains why there may be clusters
 actions without a hint of pressure should     short sales which have become more             of newly constructed homes in a certain
 be used. This position might be hard to       common in recent years. Short sales are        subdivision offered for sale by a lender.
 explain to homeowners, however, when          not strictly speaking foreclosure sales, but   These sales, called REO for “real estate
 their neighborhood contains listings for      they do involve some duress. With short        owned,” have the same effect on the mar- r
 similar properties with asking prices that    sales, the owner is typically behind on the    ket as short sales. Another tactic builders
 are lower than their assessed values. These   payments and often owes more on the            use to reduce their excess inventory is
 taxpayers may well challenge the assessor     home than it is worth. This condition is       to heavily discount the homes or even
 to explain how they could get more for        often referred to as being “upside down”       sell them at a loss. This pricing strategy
 their houses should they decide to sell       in the property. The lender, hoping to         may, in some instances, enable buyers
 than repossessed properties being liqui-      avoid the expense and time involved in         to purchase new homes for prices lower,
 dated by lending institutions or homes        a foreclosure, allows the owner to list the    or only slightly higher, than similar used
 nearing foreclosure being offered subject     property with a real estate agent, with the    homes. Since builder-discounted homes,
 to short-sale approvals.                      condition that the lender can approve          short sales, and REO properties are listed
                                               the sale price. Depending on the terms         among the other properties for sale in
 The Circumstances of the Sales                of the agreement, the owner may be re-         the MLS, assessors may find it difficult
 A true foreclosure sale represents one        lieved of the obligation to pay for the loss   to identify them for exclusion without
 extreme on the continuum of sales that        if the property cannot be sold for the full    further examination of each listing.
 include an element of duress. In many lo-     amount of the outstanding mortgage.
 cations, a foreclosure sales are auctioned    Or, the agreement may leave the owner          Time is of the Essence
 off “on the courthouse steps.” Buyers         open to a deficiency judgment, which            Under these market conditions, it is im-
 of these types of properties usually are      would require payment of the difference        portant for assessors to consider the time-
 required to pay the purchase price in full    between the sale price and the mortgage        liness of the sales when making choices
 with a cashiers’ check as soon as the bid-    amount if the lender elects to sue to try      about which sales to include the determi-
 ding is over. Bidders will have conducted     to collect in court.                           nation of value. Even if short sales are not
 research to make certain they are bidding       Lenders prefer short sales because they      considered in a valuation study, assessors
 on a first trust deed and not a second.       save the time and expense of a foreclo-        can get closer to the current market value


4 Fair & Equitable • June 2008
of properties by using the most recent        not have adjusted their expectations to       about 2 to 3.5 percent. Without calling
sales and excluding older ones that they      the realities of the market and may still     the listing and selling agents on each sale,
might ordinarily have used under normal       be asking excessive prices.                   it is difficult to ascertain whether a sale
circumstances. For instance, in a normal                                                    has included concessions. Some assessors
market, sales may be examined as far                                                        send questionnaires to new owners, which
back as six months to a year, but in a        However, the present                          can provide a way to estimate the percent-t
declining market, sales older than two or                                                   age of sales that involved concessions.
three months may already be obsolete. In                                                    However, even if it could be determined
addition, more weight can be given to the                                                   that, for instance, 60 percent of all sales
newest sales—even within a three-month        least in the United States,                   included concessions, it would be difficult
period. For example, in a three-month                                                       to apply the proper adjustment without
sales study, properties that have sold
                                              is unprecedented. It is                       knowing which sales were affected. Nev-   v
in the most recent month may receive          not that the U.S. has                         ertheless, if it is known that concessions
three times the weight of properties that                                                   are prevalent in the market, and an ap-
have sold in the oldest month. Similarly,     never experienced a                           praiser has a range of values from which
properties that sold in the middle month                                                    to choose, he or she may want to take this
may be given double weight.                   marked decrease in the                        factor into consideration.
  Therefore, by selecting the most re-
cent sales, the assessor may be able to
                                              real estate market before; Realities of the New Market
account for the market impact of short                                                      Economists are fond of saying that the
sales without actually including them in                                                    economy goes through cycles. However,
                                                                                            the present financial situation, at least
the data—assuming, that is, that short        condition of the country                      in the United States, is unprecedented.
sales have not saturated the market to
the extent that there are no normal sales     (and homeowners) in                           It is not that the U.S. has never expe-
available. It also should be remembered                                                     rienced a marked decrease in the real
that a sale that closed in a given month      the midst of such a real                      estate market before; rather it is that
was probably in escrow for at least 30 days                                                 the financial condition of the country
before that, meaning it probably defines       estate decline that has                       (and homeowners) has never been as it
the condition of the market one month                                                       is today in the midst of such a real estate
prior to the closing date. And in today’s
                                              never been seen.                              decline. To gain a better perspective on
fast-changing market, one month can                                                         the current situation, some historical
make a difference.                                                                          knowledge is valuable. A century ago
                                                 When listing prices are used, a “listing   most home purchases required a down
Check the Listings                            to sale price adjustment” should be con-      payment of at least 20 to 25 percent.
A recent trend in fee appraisal assign-       sidered. This adjustment is based on the      And decades ago, with the exception
ments has lenders asking not only for         ratio of the listed price to the sale price   of Veterans Administration (VA) and
sales that have closed within the last        that is prevalent in the market. In other     Federal Housing Administration (FHA)
three months, but also for current listings   words, if properties typically end up sell-   financing, most home loans required at
of similar properties. With the market        ing for about 95 percent of the asking        least 10 percent down. In January 2006,
changing so rapidly, such a request is not    price shown on the MLS, this percentage       a survey conducted by the National As-
unreasonable. On a recent assignment,         can be used to calculate the potential sale   sociation of Realtors showed that, of the
a fee appraiser, looking at sales over the    price of listings—provided the properties     new owners who responded, more than
previous three months, set the value of a     have been reasonably priced. In many          40 percent had purchased their homes
property at $380,000. However, when he        assessment offices, examining MLS list-    t   with no money down (Tse 2006, F1)., If
checked the current listings, he found        ings has not been part of the normal          concessions had been included in those
several homes in the same subdivision         revaluation procedure, but in this new        sales, the buyers would essentially have
with the same plan with asking prices of      market, it could be an important tool.        been paid to buy their homes. Conse-
around $360,000. He had to revise his         If lenders are requiring listing informa- a   quently, except for the negative impact
initial estimate to take this new informa-
                                         a    tion of fee appraisers to determine how       on their credit rating, these buyers may
tion into consideration, and make time        much they will lend, then assessors may       see no financial reason to keep making
adjustments to the sales to reflect the       want to include this data as part of their    payments on homes that are now worth
percentage of decline.                        revaluation research.                         less than their mortgage. In addition,
                                                                                            many homeowners were tempted by easy
  Listings, it should be noted, only de-
termine the upper limit of a property’s       Concessions Skew Sale Prices                  access to home equity loans to spend
                                              Sales concessions have become very com-       their equity to maintain a lifestyle that
value. They often are not good indicators                                                   was above their means. Many of them are
of true market value because sellers may      mon, and typically inflate sale price by
                                                                                            now finding that the equity “piggy bank”



                                                                                                           Fair & Equitable • June 2008    5
 Cover Story
 is empty, but the increased mortgage               world’s reserve currency and it is also the     the timing of sales, among other require-
 payments must still be paid.                       currency in which oil is traded. But as         ments. And this additional workload is
    Furthermore, the Federal Reserve                the dollar loses its value, oil costs are in-   coming at a time when resources may
 Bank’s monetary policy aimed at alleviat-   t      creasing, and the Euro has begun to look        be shrinking—meaning assessors will be
 ing the mortgage crisis does not seem to           more attractive to international investors.     faced with doing more with less.
 be working as expected. One of the rea-    a       This is pushing the U.S. to make some
 sons that the U.S. is in this debacle is that      difficult choices. Will the Fed continue         Reference
 interest rates have been held down for so          to keep interest rates low and risk a steep     Tse, T.M. 2006. Down payments’ down-
 long. So what is the solution at the Fed?          increase in inflation? Because if rates are      ward trend. Washington Post. January 21.
 Lower them some more—or at least lower             kept low, more money must be printed,
 them towards where they were around                which will increase costs for everyone.           John Lifflander, ASA, has been ap-
 2003, when rates were the lowest they had          Or will the rates be raised, which will           praising for more than 25 years, and
 been in 40 years. The problem with this            have the effect of increasing housing             is president of Covenant Consultants,
 strategy is that because the previous buyers       mortgage costs in an already troubled             Inc., an appraisal and property tax
 of mortgage-backed securities have lost so         real estate market—possible reducing              consulting firm which specializes
 much money on bad loans, and because               values even further and postponing any            in the valuation of semiconductor
 all mortgages are looking riskier, there are       hoped for recovery?                               plants, paper mills, food processing
 fewer investors willing to buy. And with             The choices are not pleasant, and               plants, and other large industrial fa- a
 fewer buyers for mortgage-backed securi-           markets generally do not stabilize when           cilities. In prior years, he was a senior
 ties, the reduction in rates is not having         economic conditions are in turmoil. The           industrial appraiser for the Oregon
 the intended effect. Mortgage rates are            realities of these circumstances portend          Department of Revenue, and an ad-
 not coming down substantially, even as             that the valuation of properties, especially      ministrative law judge for the Oregon
 the Fed lowers the discount rate.                  with the use of mass appraisal techniques,        Construction Contractors Board and
                                                    will only continue to be more challenging.        for the Oregon Department of Rev-       v
   These factors not only mean that the                                                               enue, where he adjudicated property
 current storm may not soon be quelled,             To keep values accurate, assessors may be
                                                    faced with the necessity of increasing the        tax appeals. Mr. Lifflander teaches
 they also put the U.S. in a “Catch 22”                                                               courses on industrial appraisal and is
 position that is unprecedented. The                monitoring of markets, delineating more
                                                    segregation and diversification of neigh-          the author of the recent IAAO text,
 country’s debt binge has been made                                                                   Fundamentals of Industrial Valuation.
 possible because the dollar has been the           borhoods, and putting a new emphasis on



                           Types of Nonmarket Sales with “Undue Stimulus”
   Short Sale                                       ally takes place on the courthouse steps.       Fannie Mae sale. Often, property is in
   Buyer cooperates with lender to sell prop-       Generally these sales should not be used        substandard condition.
   erty. Property most like is listed in local      to determine market value.
   MLS, and is marketed along with normal                                                           VA Sale
   sales, making it available to any buyer.         REO Sale                                        When the U.S. Department of Veteran’s
   The lsiting will generally have a comment        Stands for “real estate owned” and is           Affairs, previously know as the Veteran’s
   stating that it is a short sale and subject to   a lender sale. The lender has already           Administration, repossesses property, it
   bank approval. In some areas, the MLS            taken possession of the property and            is generally listed in the local MLS, and
   will require special paperwork for writing       is now the owner. The property is most          is marketed along with normal sales,
   the purchase money agreement.                    likely listed in the local MLS, and it          making it available to any buyer. Often
                                                    is marketed along with normal sales,            property is in substandard condition.
   Foreclosure Sale or Sheriff’s                    making it available to any buyer. It is
                                                    rare, but some REOs may be auctioned            FHA Sale
   Sale                                             off, or sold directly from the lender;          Generally marketed along with other
   The bidders are at risk because they             perhaps advertised on lender’s Web              properties in the MLS. Often property
   generally cannot go inside the property          site. Lender might have acquired prop-          is in sub-standard condition.
   and it may have deficiencies that are ex- x      erty by “deed in lieu of foreclosure” in
   pensive to repair. Sometimes buyers who          which the buyer voluntarily deeds the           Other Auctions
   are being evicted tear out plumbing or           property back to the lender. Property is        These are becoming more common as
   HVAC systems or vandalize property in            generally not damaged by the buyer.             the market declines. However, some have
   other ways before they leave. Bidders also
                                                                                                    no reserves, others start at a certain price
   risk buying second or third mortgages,           Fannie Mae Sale                                 minimum, and property may actually sell
   instead of a first, so research is required                                           r
                                                    Generally, Fannie Mae property is mar-
   to avoid such a mistake. Bidders must                                                            at a price similar to the a typical market
                                                    keted in the MLS along with normal
   have all the cash in the form of a cashiers                                                      sale. Generally these sales should not be
                                                    sales. There is a 10-day period during
   check to pay at the auction, which gener- r      which a buyer can to back out of a              used to determine market value.



6 Fair & Equitable • June 2008

								
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