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Usage and Application for Default-Specific Valuation Methods

David Rassmussen
Jun 08, 2012

Industry statistics are starting to point to stabilization in the housing market. We are seeing more of a balance in performing and underperforming markets; however, properties still in or on the verge of default pose a significant challenge to the recovery of the housing industry. As of February 2012, it was reported that 3.8 million home loans were 30 or more days delinquent, but not yet in foreclosure and 2.1 million properties were in foreclosure. This means nearly six million properties were delinquent or in default, all of which need immediate attention and updated valuation data to minimize loss. How do stakeholders, mainly servicers and lenders, practically and economically obtain an accurate valuation on a default property to help quickly move it off the books? The answer is an REO AVM. Valuing a real estate-owned (REO) property can be difficult because of the many variables, including housing inventory, employment trends, and current and estimated interest rates that impact the property value. Additionally, there are specific valuation-related challenges brought about by distressed assets, increasing foreclosure rates, and expanding REO portfolios. Two of the biggest obstacles include the volume of foreclosures in the neighborhood/immediate area and the condition of the property. Typically, an inspection is required to verify property condition. Given the complexities of these variables, specialized REO valuation models should be used to most accurately estimate the value of an REO property and determine the next appropriate course of action. In the next three columns of ValueNation, I will explore the benefits of an REO AVM: ►What Goes into a Good REO AVM ►REO AVMs Compared to Other Valuation Methods ►An REO AVM Used Alongside an Inspection Report A good REO AVM The goal of an REO manager is loss mitigation and to get the highest price possible from a foreclosed property. Although the original loan amount may not be recoverable, loss severity can be minimized with an accurate valuation through a REO AVM. It will greatly lessen the chance of it being undersold. As a side note, it is important to remember not to make the assumption that a property is in poor condition just because it is in default or foreclosure. The ultimate function of an REO AVM is to provide realistic values for the foreclosed property in question. It should provide a complete analysis of neighborhood properties, including notices of default, notices of trustee sales, and foreclosure sales. This data can be used to develop an REO adjustment for a property and the final value can be compared to traditional sales with the REO adjustment factored in. A good REO AVM provides the advantages of providing all of this information quickly to shorten the time the property sits. It gives stakeholders the ability to diligently review portfolios on a regular basis and determine next steps. It is important to understand your market and know when you need to use a default valuation model. The practice of using traditional and REO AVMs is a highly effective strategy in managing residential real estate assets in today’s climate. Next month, we will delve into a comparison of an REO AVM to other valuation methods and how they can be used in conjunction with each other. David Rasmussen is senior vice president of operations at Veros Real Estate Solutions. For more information, call (714) 415-6300 or visit Veros.com.  
Published
Jun 08, 2012
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