Foreclosures - And How They Affect Appraisals ??

that is the way I see it.  Would love to hear differently from someone who can give a good reason why it wouldn't be considered as a comp.

I'd say so. I sale is a sale. Generally the high and low sales are excused, and the median prices per square foot are used. Over time, with several "low" closed sales- there would be a definite effect.

All I can say is the listing agent had better meet that appraiser and protect his pricing.  I'm surprised at the number of listing agents that don't meet the appraiser these days. 

 

Appraisals definitely have an impact on neighborhood property values.  It is more minimal when it is one froeclsure value comp in a larger neighborhood, but when there are multiple foreclosures the impact is significantly greater.  And the impact seems to increase exponentially the more foreclosures that have sold in the recent past to the date the comps are pulled. 

This is a great example of one of the benefits of short sales and why we as realtors should support them... there is less negative price impact in neighborhoods, which keeps buyers' confidence in a given area higher and gets someone into the house who can keep the appearance of the neighborhood clean and well kept.

As an appraiser myself, I do not use distress properties if the subject home is an arms-length transaction. I only match distress sale properties with other distress sale properties...For instance an REO appraisal for a bank.

If you know that a property around your listing was a distressed sell, take note and make sure your appraiser does not over look that fact.

I hope this helps.

Kevin, From what I have learned about appraisal methods this situation may not impact the neighboring values as much as some would think. An appraiser has notation options that allow for adjusting comparable properties for short sales and foreclosures. If sales consistently occur at higher values for comparable homes outside of distress, the foreclosure may not actually get used at all. Many foreclosures in a neighborhood will in fact affect future appraisal values.

Foreclosures, Short Sales, and REOs are NOT used and should not be used as comparables to the subject property in an appraisal.  That is a misconception on the part of many.  Also the  HIGH and LOW  sales are not excused  and the  Price Per Square Foot (median or otherwise) is definately NOT used to determine value.  If any or all of these were used in an appraisal then the value would be as inaccurate and misleading and all of the online valuation sites like Zillow, Cyberhomes, HouseValues, Reply, etc.

An appraiser is REQUIRED to thourghly research the market area for recently sold properties that are the most similar to the subject in all aspects and closest to the subject in location.  If the subject property is not a foreclosure or bank owned, then any forclosure or bank owned sales are not similar and are not comparables.   IF, however, a distressed property HAS to be used, an adjustment is made to the comparable by using Matched Pairs Sales Analysis.

Often an appraiser needs clarification on a potential comparable.  Appraisers are not allowed onto the property of a comparable, so a call is made to the listing agent and/or selling agent for things like a low sale price, concessions, room count (bed/bath), prior listings, and amenities.  Also, regulations state an appraiser cannot discuss the appraisal with anyone other than the client who ordered the report.  So meeting with the appraiser would not be very beneficial except to learn more of the How and Why's of the process.

 

David, thanks for the definitive word on this.  Very helpful.

 

Jill

You're welcome.   A very informative group that may be useful and educational regarding appraisals that members of this group may like to check out or join is   Appraisers.    If anyone pulls up my profile, a direct link to the group is listed.   It was started by Sarah Goodwin quite some time ago and is open to anyone.

A lot of good topics, comments, and discussions that dispell myths and misconceptions and provide a better understanding of the appraisal process, regulations, and requirements.

 

Great post/blog and thank you to David for sharing his expertise!