In a market saturated with bank-owned sales, an appraiser valuing a typical resale should treat REO transactions as:
Correct Answer
A) Investigate and use relevant verified sales with supported analysis of differences
Foreclosure or REO transactions are not automatically included or excluded. Verify their transaction conditions, exposure, condition and relevance, including whether they compete with the subject. Market prevalence is useful context but does not make every distressed sale representative.
Why This Is the Correct Answer
Option A is correct because REO transactions should be investigated and, when relevant and verified, used with supported analysis of their differences from the subject. Fannie Mae accepts the use of such sales when the appraiser adequately documents the analysis and explains why they were used. The appraiser needs information on the market conditions surrounding each transaction.
Why the Other Options Are Wrong
Option B: Exclude the REO sales, since they do not reflect market value
Option B excludes the REO sales on the ground that they do not reflect market value. REO sales are not automatically excluded; in a market saturated with them, they may be relevant evidence after verification and analysis.
Option C: Use the REO sales as reported, without verification
Option C uses the REO sales as reported without verification. Distressed sales can involve unusual conditions, condition problems or limited exposure, so they need to be verified before they are relied on.
Option D: Apply the same arbitrary distress percentage discount to each sale in the market
Option D applies the same arbitrary distress percentage discount to each sale. An arbitrary uniform discount is not market supported and ignores differences in each sale's conditions and condition.
Verify, then decide
With REO sales, verify the facts of each transaction first, then decide whether and how to use it.
How to use: Use this when an answer choice automatically includes, excludes or discounts distressed sales.
Exam Tip
Prefer the option that calls for investigation and supported analysis over options that apply a blanket rule.
Common Mistakes to Avoid
- -Excluding all REO sales without analysis
- -Using REO sales without verifying their conditions
- -Applying a uniform distress discount without market support
Concept Deep Dive
Analysis
This question tests how to handle REO or bank-owned sales when they are common in the market. Such sales are not automatically included or excluded. The appraiser investigates their conditions, exposure, physical condition and whether they compete with the subject, then uses relevant verified sales with supported analysis.
Background Knowledge
REO and foreclosure sales may involve atypical motivation, condition or marketing. When they make up a large share of a market, they can also influence what typical buyers pay. Appraisers verify each sale's circumstances and decide its relevance with documented reasoning.
Real-World Application
In a neighborhood where many recent sales are bank owned, an appraiser checks each REO sale's condition, marketing time and buyer pool. Some well-exposed REO sales that compete with the subject are used with documented adjustments, while others are set aside with an explanation.
More Sales Comparison Questions
Supported adjustments are: non-market financing $10,000, GLA $36/sf, garage $3,500 per car, pool/spa $12,500. A comparable identical to the 2,800 sf subject sold for $267,000 with non-market financing. What is its adjusted price?
Using GLA $36/sf and non-market financing $10,000: a 3,100 sf comparable sold for $277,000 with non-market financing; the subject has 2,800 sf. Bath count differences are not adjusted. What is the adjusted price?
Using garage $3,500 per car and pool/spa $12,500: a comparable with a 2-car garage and a pool/spa sold for $268,000. The subject has a 3-car garage and no pool. What is the adjusted price?
Using GLA $36/sf, garage $3,500 per car and pool/spa $12,500: a 2,600 sf comparable with a 2-car garage and a pool/spa sold for $264,000. The subject is 2,800 sf with a 3-car garage and no pool. What is the adjusted price?
In a neighborhood with declining values and marketing times over six months, what must Fannie Mae lenders confirm about the sales comparison analysis?
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