This has become a growing question in the real estate community especially for buyers and sellers as the market has seen a large increase in short sale/foreclosure/distressed properties. Before this was such an issue, generally appraisers would not consider one of these types of properties since they were "not comparable" or an outlier from the comparable homes.
Well, with so many of these short sale/foreclosure/distressed properties flooding the market, appraisers have had no choice but to consider them since they are in fact "the market". Unfortunately, this has brought down housing prices and decreased homeowners equity in the same neighborhood because of the neighboring houses declined/lower value.
Last month, the Appraisal Institute issued an article on the subject. In the paper, the Institute explained that:
“Foreclosures and short sales can provide important information for appraisers, who develop valuations based on market data and market forces.”
On whether an appraiser should use distressed properties as comparables, the Institute was very direct (all items in boldwere shown as bold in the original paper):
“An appraiser should not ignore foreclosure sales and short sales if consideration of such sales is necessary to develop a credible value opinion.”
And they explained the possible differences between short sales and foreclosures:
“A short sale … might have involved atypical seller motivations and so might not be an ideal comp…
"A sale of a bank-owned property might have involved typical motivations, so the fact that it was a foreclosed property would not render it ineligible as a comp.”
Some will argue that distressed properties should not be used when appraising non-distressed properties. However, there is no longer any doubt that they will be considered...at least during the current market begins heading north again.
Sean S. Williams
Licensed Broker, Realtor®, ABR®, e-Pro®
1st Time Buyer & Relocation Specialist
of Louisville, Kentucky
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