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Should appraisers take distressed properties into account as comps?

Are foreclosures the same as resale?

With recent news from the Appraisal Institute that Nevada, Missouri, Maryland and Illinois are considering legislation barring appraisers from using distressed sales as comparables, some are pondering what a divorce between short sales, foreclosures and the like from standard resale would look like.

Are distressed homes apples, oranges, or living organisms?

The first theory is that all houses in a neighborhood be they new, old, distressed or not, function as a living organism whose health is impacted by each and every part within the organism, so if one part (house) gets sick, the organism is unhealthy until that part gets better and if other parts get sick, the organism gets sicker.

The second theory is that distressed homes compared to healthy homes are not comparing apples to apples. In this theory, each part is independent from the other and bargain hunters will automatically seek out foreclosures regardless of condition, and buyers looking for a standard resale where they feel they carry less risk, therefore apples are not oranges.

Which theory is correct?

It depends on whose shoes you are in. If you’re a seller, then you agree that apples are not oranges, but if you’re a buyer and looking at a neighborhood, maybe it’s more like a single organism. If you’re an agent, an appraiser or a lender, your perspective may change as well.

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Regardless of validity, the move for states to exclude distressed sales from appraisals seems like a fair one to most we have spoken to and we anticipate other states could follow suit.

Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

19 Comments

19 Comments

  1. Troi Paris Kaz via Facebook

    March 25, 2011 at 1:46 pm

    I think they must be considered, but that we all need to use a bit of common sense when determining their weight, and adjust appropriately.

  2. Laurel Jack via Facebook

    March 25, 2011 at 1:48 pm

    In our area, many times the only comps are distressed sales so I think it’s extremely important they remain “considerable”!!!

  3. Mary Pope-Handy via Facebook

    March 25, 2011 at 2:01 pm

    Awesome!

  4. Benn Rosales

    March 25, 2011 at 2:11 pm

    I’ve been saying this for a year, just because you can get a bargain at walmart doesn’t mean it has to be cheaper at a name brand retailer – come on! Instant market credibility with this one change.

  5. Gina Kay Landis

    March 25, 2011 at 2:30 pm

    There was a thought at one time that foreclosures are a distinctly different market from regular sales. As foreclosures increased, however, it became apparent that every neighborhood was being affected by them – from the fact that they are often not cared for on the exterior or that the interior has been ravaged by vandalism. As such, people such as myself that do BPO’s (broker price opinions) and appraisers have had to take into consideration the foreclosures when valuing properties. Why? Because foreclosures could be the only sold comparables within a desired radius of the subject property. For a blanket assumption that this may not be true by the named states, I’d challenge anyone to find non-foreclosure comps in certain areas. As one increases the radius with which one hopes to locate non-foreclosure solds, distance from the subject property becomes too much to consider for comparative values of that property.

    Gina Kay Landis, REALTOR
    @ginakayRE

  6. Vicki Lloyd

    March 25, 2011 at 2:33 pm

    I have noticed that foreclosed homes seem to average about 5% under traditional sales, and short sales look like about 10% less. I’m sure it varies by area, but if appraisers could separate them out and use adjusting factors, it might be more accurate.

    The other problem with valuing short sales, is that it may record at one value, but the buyer had to pay back property taxes, HOA dues, and other liens that don’t show in the purchase price. This can add up substantially!

  7. James Malanowski

    March 25, 2011 at 2:44 pm

    Foolishness. Once again, real estate is local. And sometimes, real estate is extremely local (ie: one neighborhood is different from the next). An appraiser worth his fee will be able to analyze the market and determine which comps he should use.

    Our market is REO/Short-Sale driven. Distressed comps MUST be used because that IS the market. In fact, for the last year, REO actually sells faster and for more money than short-sales and, in some cases, the rare standard sale in our market. Walmart isn’t always the cheapest place to buy something.

    In addition, REO != crap. I’ve sold some pristine bank-owned properties that would put some traditional sellers to shame.

    If you have an area that is populated by standard sales, there is no reason to use the one REO comp unless it is a true comp for the neighborhood. Just as you should not use the one totally rehabbed and upgraded home as a comp for a stripped down REO sale that is surrounded by 50 other recently sold stripped down REOs.

    The government needs to keep their damn fingers out of the market and let us do our job.

  8. Ben Goheen

    March 25, 2011 at 3:06 pm

    In some areas I appraise 95% of sold comps within the past year are distressed. And I just appraised a condo where there were only 3 sales in the prior year in the development. Guess what – they were all foreclosures. How do you ignore those statistics?

    There is NO solution that will work for every area. As Troi said, you have to use common sense.

  9. Artur

    March 25, 2011 at 5:15 pm

    The answer is easy: yes, if they influence buyer’s decisions.

  10. SHERRI MELTON

    March 28, 2011 at 8:09 am

    I THINK WHEN THEY ARE FIGURING COMPS. THEY SHOULD COMPAIR APPLES TO APPLES. DISTRESSED PROPERTIES SHOULD BE IN A CATAGORY OF THEIR OWN.

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