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.
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.