Should foreclosures and short sales be used in appraisals? (or CMAs?)
Bryan, wrote an excellent blog about one of the problems in the current housing market: appraising a property at fair market value. The influx of REOs and short sales are driving the market down. Often these homes are more than a little distressed: all the good stuff is gone. When appliances are ripped out, door handles, faucets and more these homes can not be compared by size and location alone.
As Bryan pointed out: home values of homes in good condition can not increase in value and sell for fair market price. Even the homes that "sold" for X dollars and not appraise come back on the market because buyers can't come up with the short fall which the lenders don't want to cover.
In my opinion, no, they shouldn't. Even in a market where the bulk of the homes sold are foreclosures they still shouldn't. The National Association of Home Builders has made the claim, in a recent study, that using foreclosures and short sales as comparables in appraisals is creating a downward spiral in prices. The appraisals, they say, even come in at below the price to build a new home. Comparisons are made between a foreclosed older home to a brand new one with upgrades. How is that a fair comparison? It isn't.
Foreclosures seldom sell at market rates. I'll repeat that...
Foreclosures seldom sell at market rates.
And you're sitting there thinking, "That's ridiculous, of course they do.". No, they don't. Buyers of foreclosures are all looking for one thing...a bargain. By default, foreclosures are seen by buyers as worth less than any other home. It's the psychology of the market and buyers within the market. So, no, foreclosures don't sell at market rates because buyers are discounting their value before they ever make an offer. A few more reasons foreclosures don't sell at market rates:
- Buyers expect a "deal" and discount them 10-20% over a "normal sale"
- The media trains buyers to expect bigger discounts on foreclosed homes
- The bank doesn't care about market rates, just getting the home sold and agrees to a lower price
- Most REO brokers SUCK at marketing and do a poor job of showing and marketing the homes which means not everyone gets to see them
Appraisers make a lot of mistakes. I recently had an appraisal done that was revised up 10% because I questioned the comps used. In California, the issue of bad appraisals has been major. The California Association of REALTORS has worked with the state government to understand and fix the issue. By the time it's fixed, the market will have corrected. It'll take that long. So, what should we, as REALTORS, do about it? Talk to the appraiser before they do their job. Send them the comps you think are most appropriate. Sometimes it works, sometimes it doesn't. At least you tried.
REALTORS should not use foreclosures (REOs) in their CMAs. It's common sense, if the value of a foreclosure is 10% or more below the value of a normal sale - all other things being equal - then it hurts the value in the CMA. Right? The same can be said for short sales. I sold a home last year where I had to cherry pick the homes in my CMA to avoid all the foreclosures. I sold the home for about 10% more than the nearest foreclosure sale and the appraisal required some work to get through because I had to show all my comps. It can be done, but we have to help!
If you get an appraisal back with an REO or short sale, push back on it and ask for a revision. The market can be turned around as long as we consider that normal sales and foreclosure sales are two different markets.
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Bryan Robertson, Broker Associate | T: 650.799.9951 | Email: bryan@serenogroup.com | Website: http://www.BryanRobertsonHomes.com |CA License: 01191946 | Sereno Group - Los Altos branch | 369 S. San Antonio Road | Los Altos, CA 94022
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