Short sales and foreclosures - true comps or not?

There are very few - if any - markets that have not been affected by a flood of short sales and/or foreclosed properties on the market. Often, these homes sell well below what other similar surrounding homes sell for.  In most markets these distressed homes can make up as much as 30 to 40 percent or more of the market, making them hard to ignore when establishing prices for homes that are not short sales or foreclosures.

But is that really an accurate look at the market?

Four states are considering laws that would affect how appraisers should consider the sale of distressed properties. Here’s a breakdown of what each state is considering:

Illinois: Proposed law says that an appraiser may not “use as a comparable sale the sale price for a residential property that was sold at a judicial sale at any time within 12 months after the date of the judicial sale…” The Illinois law would sunset after five years.

Missouri: Legislation states that appraisers must comply with the Uniform Standards of Professional Appraisal Practice, but not in cases when a property has been foreclosed. “An appraiser shall not utilize the foreclosure price as a comparable property when developing an appraisal,” the legislation says.

Maryland: The propsed law is fairly vague, but it says in cases of duress or unusual circumstances “such as a foreclosure sale or short sale,” the appraiser is to “consider” the property’s history (e.g. whether it’s being sold at auction or as a short sale) and “consider” the seller’s motivation, such as if the homeowner was trying to avoid foreclosure.

Nevada: A pending law covers both short sales and foreclosures: “Except as otherwise required by federal law or regulation, an appraiser shall not include as a comparable sale in an appraisal a short sale or a sale of property which was the subject of a foreclosure sale.”

Combine this with the fact many lenders are now using appraisers from outside of the immediate area and you have to wonder: How accurate are our appraisals?

A recent appraisal for one of my sales was done by an appraiser from Miami - an area well outside of the Florida Keys. They admitted that they were not familiar with the area or with the differences of the surrounding neighborhoods. Some of our Keys neighborhoods have better boating access than others, better homeowners parks than others and a slew of other differences, yet this appraiser knew nothing of them. While the house did appraise high enough for the sale to close, the appraisal was still lower than what some smaller, lesser homes had sold for just weeks before.

Perhaps it was the use of the short sales and foreclosures that brought the appraisal down. Should distress sales be used as comparables?

To see how many foreclosures and short sales are affecting the market in the Florida Keys, click the following links.

Potential Short Sales

Foreclosure Properties