Recently I have encountered the argument that it would be unfair to include short-sales and bank sales in CMA's. There are Realtors out there that intentionally remove those properties from their analysis.
Why is this wrong?
Well, it is important to understand the true purpose of the CMA. The analysis is there to provide an objective reference to a market value of a property as closely as possible; some Realtors unfortunately see it as a tool to justify setting a price they believe is fair. The problem with the later is that the market is blind, and regardless of what they think is reasonable, or what they have learned to expect in the neighborhood they work in through past experience, the market does not lie.
There is no good justification to exclude distressed sales as they are every bit as valid as any other sale. When a buyer compares their options, these short-sale or bank sold properties are part of the selection. Why would a buyer pay twice as much if they can find what they want as a discounted short-sale? Of course since those offerings are added to the available inventory, this must, inevitably, have an effect on the pricing throughout the entire inventory. If a hot dog stand opened next to a restaurant row, this would have an effect on some of the restaurants.
Artificially elevating the CMA price, by ignoring certain properties that do not fit into a Realtor's view of the universe, does not benefit neither the client nor the agent themselves. If the price is set too high, the likelihood is the property will languish on the MLS, and the client will either hemorrhage funds, or just grow skeptic of the agent's ability to sell it.
This is not to say some adjustment is not justified for distressed sales in the analysis. Obviously there are some limitations and shortcomings of distressed sales compared to regular ones. For instance the short-sale process is not equally suitable for every buyer and their purchase time frame requirements. These differences do impact the price. Making this adjustment however could be a tricky issue.
One way of figuring such adjustment as accurately as possible is to compare non-distressed properties to distressed ones, in the neighborhood at question, the specific property type, and the particular price range. The average difference in price ($) between the two groups of properties needs to be determined. Once this number is obtained, which will likely vary from neighborhood to neighborhood, you could use this number to make adjustments in the CMA, just as you would with addition or subtraction of features (bathrooms, parking, etc.). Of course this is still a gross approximation, but it at least does take this segment of the market into account when determining the appraised price.
The market has its own rules, even if those occasionally offend the sensibilities of an agent. The sooner the Realtor accepts their role as observer of events, rather than setter, the better a service they will provide.
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