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REO market, origination, and all related areas," he explained. "The need for someone who is a local market expert is going to grow," Pistilli said, "whether it's a real estate professional or an appraiser." He believes that finding a more accurate valuation of properties, regardless of the market, is essential. Perceptions Drive Values Changing perceptions among investors and consumers have helped elevate REO prices, says Dr. Alex Villacorta, director of research and analytics at Clear Capital. "At the beginning of the housing crisis, perception was that REO properties were not desirable," Dr. Villacorta said. But that was before investors, both large and small, realized REOs could yield large profits as rentals, sometimes as much as 40 percent, he says. With the rental population expanding from families displaced by foreclosure and rental rates escalating, REOs became desired assets for individual and institutional investors within a short time frame. "Before the downturn, REOs represented less than 5 percent of the real estate market," Dr. Villacorta noted. "Then as home prices collapsed, lenders offered big discounts on distressed properties." He says this pattern continued through 2009, when the REO share of home sales hit its peak and home prices hit a cycle low. In 2010, REO inventory swelled—a development many thought posed a threat to recovery— but an interesting thing happened in 2011, Dr. Villacorta points out. "The perception of what REO meant changed," he said. The "REO stigma" subsided and traditional homebuyers became more open to purchasing bank owned homes. Increased demand from both investors and owner-occupants caused REO—and non-foreclosure—values to rise, Dr. Villacorta explains. Although prices are increasing, they remain about 37 percent below their 2006 peaks, he notes. "Those peak values in 2006 were themselves very overinflated and were not normal from a historical perspective," he explained. Dr. Villacorta projects overall market prices to rise about 3 percent in 2013, and he said it's clear "the peak of REOs has passed." Value's Not Always the Attraction The REO bidding wars taking place in some markets are positively impacting the overall values of affected neighborhoods, contends Greg Stephens, SVP of operations and compliance for Metro West Appraisal Co. "Previously, any large population of REO properties would drag neighborhood values down by 10 percent or more," he explained. "Now, however, bidding above asking prices in some areas is bringing REO pricing more in line with non-REO and short sale properties." At the same time, some buyers are leery of purchasing banks' homes because they've heard too many "purchase from hell" scenarios about THE CONSEQUENCE OF FALSE VALUES Doctored REO valuations are a clear indication of fraud, and one Metro-West exec says they're alarmingly prevalent in hard-hit markets. By Sandra Lane Legitimate sales of REO properties require accurate professional valuations. The foreclosure crisis and its unprecedented volume of repossessed homes, however, have opened the gate for fraudulent activity in many parts of the country. Unscrupulous real estate professionals and investors have taken advantage of a distressed situation to purchase properties significantly below market value, assisted by deceptively low broker price opinions (BPOs) or appraisals that allow buyers to flip properties at a tremendous profit. According to Greg Stephens, SVP of operations and compliance for Metro-West Appraisal Co. in Northville, Michigan, "This is something that is on the increase and something we really have to be concerned about." Stephens points to the latest report from Interthinx, which identifies markets where mortgage fraud risk is highest. It reveals states with the greatest fraud risk are the same states with the biggest sales price gains from 2011 to 2012 and some of the highest REO activity. "Not a coincidence," Stephens said. Florida and Nevada are at the top of that list, with several California metros also an 56 area of concern. And fraud risk is spreading to eastern states, most notably Illinois and Ohio. "These are the same markets that experienced the highest level of investor activity and price increases prior to the market collapse," Stephens explained. "Investors are now returning, which is driving up the pricing and creating opportunities for fraudulent transactions to take place." Stephens says the latest fraud schemes use straw buyers who pay above market prices for several distressed properties in the same neighborhood, creating a false market level for surrounding property values. Those sales then become comparables used to support higher values for bank loans on subsequent purchases. Once the loans close, the fraudsters take the money and disappear, leaving the properties to go back into foreclosure. Another example is a reversal of the previous scenario. The property is staged to look terrible so that it appraises low. The buyer then gets it at an extremely discounted price. Without the depreciating staging, just a few dollars on minor renovations put the property in sellable condition, and the perpetrator unloads it for a substantial profit. "The Dodd-Frank Act has included some regulations to help prevent some of these fraudulent sales," Stephens said. "For higher-priced mortgages, if there is a 10 percent increase in the resale price within 90 days, or a 20 percent increase within 180 days, a second appraisal is required." According to Stephens, the appraiser is really the lender's last safety mechanism against fraud. He cites some of the experiences he had when previously working for a bank. "Our greatest losses occurred with fraudulent REO and short sales," he said. "BPOs would undervalue properties, and we began to track sales, discovering that the value of the property had originally been understated. The buyer, usually a relative or accomplice of the selling agent, would sell the property for a significantly higher amount than the amount for which the bank sold it to them." Stephens says the bank went after the fraudsters it identified and sued them for misrepresentation. They were then taken off the bank's list of approved vendors, so their shortsighted fraud schemes wound up costing them more money in the end.

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