When Should Appraisiers Use Distressed Properties For Comparable Sales

Choosing Comparable Sales

When choosing comparable sales for an appraisal, often times there is more analysis done than most realize. The use of distressed properties for an appraisal should be avoided if possible, however, if the concentration of distressed sales is so prevalent, then their use can't be avoided without creating a misleading appraisal report.

Why Distressed Sales May Be Needed

The appraiser should indicate as to why distressed sales were needed within their appraisal report, which is why for every appraisal I estimate the concentration of distressed sales within the subject’s market area. 

The chart above is for cities within a certain county, however, I use the same process when appraising a property within a certain neighborhood and/or market. This helps to explain to the client as to why they were needed within the appraisal report.

Adjusting for Stigma

If a decision has been made to use a distressed comparable sale for an appraisal, then there is most likely going to have to be an adjustment for stigma. 

As you can see from the chart above, there is definitely a significant difference between the different median selling prices for the different types of properties. I do a similar analysis for the particular type of property (style/design) being appraised within it’s neighborhood or market area.

Adjusting for Condition

When using distressed sales for an appraisal, besides making an adjustment for stigma, there is most likely going to have to be an adjustment for condition. This is going to be based on some research done by the appraiser. The following is some examples of ways to assess the condition of comparable sales:

• Use interior/exterior photos supplied by the MLS.
• The MLS description will often tell if there were major problems.
• Check for prior expired and or canceled MLS listings.
• Contact the agents involved in the sale for any major issues.
• Get the opinion(s) other Realtor's that do a lot of work in the area as to how a particular comparable sale compares to other sales in the area.
  

By juxtaposing two pictures of bank foreclosed properties, you can see that there can be a significant difference between the levels of condition. That’s why it’s important to do some investigating, and try to ascertain the condition of the comparable sales being used within an appraisal report. In this particular case there would definitely be an adjustment for condition.

Making the Adjustment When Using a Distressed Sale

There is no magic formula for determining how much of an adjustment should be made to comparable sales when using distressed sales (short sales, bank REO’s, divorce properties, estates, or relocation) for an appraisal; however, by doing some analysis of the different median selling prices, and by confirming the condition of the comparable properties, the appraiser will be able to come up with a very defensible adjustment, or why one wasn't used.

This will help bring the adjusted comparable sale into parity with the other non-distressed comparable sales used within the appraisal report.

 

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