Why shouldn't appraisals include foreclosures and short sales?
Filed under: Real Estate
The National Association of Realtors and other housing industry types are none too pleased with the effect that real estate appraisers are having on the market.The NAR reports that 17% of its members have lost a sale due to a low appraisal and 20% say that they've lost more than one deal. NAR chief economist Lawrence Yun blamed "faulty valuations that keep buyers from getting a loan" for May sales figures that weren't as strong as many had hoped.
But by far the dumbest complaint coming out of the real estate agents is the notion that including foreclosures and short sales as comparables when appraising non-distressed sales is somehow unfair. There are two reasons that this bellyaching is silly:
- Why the heck shouldn't foreclosures and short sales be included? A comparable property sold in an arms-length transaction is a comparable property sold in an arms-length transaction. Sure, having to compete with distressed sales is tough for sellers who just want to trade up or relocate, but there's really no rational reason to exclude a sale from an appraisal because it's a foreclosure.
- Including foreclosures as comps is appropriate and conservative because if a bank has to repossess a house, it will be selling it as a foreclosure. So actually, foreclosures are very appropriate properties to base appraisal values on because they provide an idea of what a property's recovery value might be.
Did you ever once hear Yun complain about inflated appraisals during the bubble? No, of course not. These people will support anything -- no matter how insane -- that will lead to higher prices and higher sales.
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Reader Comments (Page 1 of 1)
7-28-2009 @ 7:16PM
MTG101 said...
Who is the IDIOT that wrote this?!!!!!!!!!!!!!!! You obviously don't know enough to be posting. Having foreclosures and short sales as comps HURT those individuals trying to refinance their home for what it is actually worth. There are MANY people who have gotten the short end of the stick because their houses were devalued as a result of foreclosures and short sales. A person should not have to lose the real equity in their home just because someone else couldn't afford their house. And to call real estate people 'sleazy' was completely uncalled for. Who are you to say who has credibility? Please don't try and tell me you are in the real estate business as it is apparent that YOU don't have a clue. No one is whining; it is an unfair practice. There are good and bad arguments on both sides of this issue and they all need to be examined and addressed. But answer this...How would you like to lose $50,000 in equity and can't refinance and get a better rate because you have a couple foreclosures in your area? Is that fair? No. Next time, have an expert or at least someone who knows what they're talking about posting these things and not just some idiot with a keyboard.
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7-28-2009 @ 7:50PM
Randor said...
Uh....how about the fact that the price that foreclosures and short sales are unloaded for are a better reflection of what a property is actually WORTH rather than values that were inflated by easy access to credit?
Remember, credit (ala "equity") isn't the same thing as wealth.
7-28-2009 @ 11:25PM
ray said...
whos the scumbag who worte this article hahahaha a scavneger bottom feeding investor ???? everyone and his friggin borther knows a foreclosure or short sale is not a good accurate comparable for homes i just had a appraisal and in Idaho thank god they cannot use distressed junk to compare with as alot of times their neglected and dont include alot of things as people who walk dont give a damn, i disagree they should never be able to use them ever no matter where your at, if a apprasal justifies a realistic price then why go with a bottom feeding price
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7-29-2009 @ 12:31PM
Bas said...
I agree that the author is an idiot. Why should I be punished in my appraisal because Joe loser on the next block over walked away from his house?
Two houses down is a foreclosed house with the exact same floorplan as ours that sold for $40,000 less than our most recent appraisal. Of course, dollar comparisons don't take into account that the foreclosed house sat empty for over a year, part of the roof & soffit blew off in a storm, and the pipes froze over the winter & flooded the basement, causing a lot of damage.
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7-31-2009 @ 1:53PM
Greg in Tampa said...
An appraisal is supposed to be an accurate and dispassionate snapshot of value at a given moment in time by taking in to account what ALL of the other similar properties sold for around it. You simply cannot ignore short sales or foreclosures - especially when they are probably the ONLY sales that have taken place in many areas over the last year or so. As Sonny Corleone said in The Godfather "it's not personal, it's business". If you don't like the appraisal then don't sell - but you can't wish away market reality.
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8-01-2009 @ 5:48AM
Sha said...
Actually, I agree with the writer. We need to take a hard look at what we are doing with real estate. A house is a used item, just like a car. When you buy a car, the value drops as you drive it off the lot. Think about the price states assess the home at - if they say its only worth 90K, then why oh why should anyone pay 300K?
Why anyone would pay more than 10K over the purchase price for a used home is beyond me. If the resident made some improvements then additional money would be justified. But to pay someone 50% more for a USED house, just because some "time has passed" is ridiculous!
As for all of us that made a devil's pact with the bank to pay them 3 times what the home is TRULY worth, shame on us. We should have known better.
We really shouldnt get mad at those that were smart and waited for prices to drop and bought 50% cheaper.
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8-17-2009 @ 12:01PM
hampuero said...
As an appraiser I agree 100% with this article.
The problem is not when Joe the loser leaves his home ( I do not agree with the term loser), it is when more than 25% of your neighborhood leave their homes. If there are no buyers for cheap foreclosures in your neighborhood, What makes you think that they will be willing to pay 40,000 over the last sale?
I am so glad the new rules are in place, no more buddy appraisers or deal makers.
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8-20-2009 @ 12:42PM
Daniel DeMeritt said...
I agree with the article as well, although I feel elaboration from a professional is needed. I have been in the feild since 1995 in Phoenix and I play both sides of the fence as an appraiser primarily and an agent and investor as well.
First of all, there is partial truth to the notion that short sales/ forclusures should not be used in an appraisal. But only the type of appraisal that is reflecting a retail "arms length" value. Yes folks... a value can be different based on the terms of sale. And only when there is a notable amount of retai "arms length" transactions in the immediate market area.
A retail "arms length" transaction includes seller warranties in which there is recourse if you are misrepresented about the condition of the home. A short sale/foreclosure is as/is and not representation of seller's warranties. There is an an intrinsic discount which would typically reflect whole sale value. Then back out the cost of the repairs needed and this should be the value of said property.
Unfortunately there are markets in which values have dropped so dramatically, there is little to no retail activity. This has happend in a majority of market sectors in the Phoenix area. Although we have started to see the curve, retail sales have to compete with multiple, similar listings of move in ready (or close to) homes.
Unless there is a notable amount of recent sales activity that reflects retail values, there is no way to provide an accurate retail value.
The notion that we as appraisers caused the bubble and now we are killing the recovery is hog wash. Walk in an appraiser's shoes and know what an appraisal is before making such rmarks. An appraisal is a dissinterested 3rd party providing thier opinion of value based on a scenario set forth by thier client at the point in time set forth by thier client (typically the time of inspection for mortrage related transactions) These opinions are good for that point in time only and for that purpose only.
More or less the appraiser reported the value and the trends as of the time of the appraisal and just because things have changed, the appraiser is not to blame. If you need to blame anything it should be deregulation of the finance industry, corportate greed, un checked free market capitalisim.... lastly the loan that was sold to you in 2005 probably wasn't the best loan for your situation, but you were priced out of the better loans because the broker was offered a premium yeald point spread.
See my blog at danieldemeritt.wordpress.com
8-29-2009 @ 1:50PM
lilly lunelle said...
Regardless of what the outcome, it doesn't stop the folks who want a real deal with the purchase of a short sale house. Want a deal contact the folks at mlsshortsales.com . They work with realtors all across the USA.
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8-31-2009 @ 5:18PM
brian said...
I don't agree with this article for several reasons. The first is that a short sale or foreclosure are not arms-length transactions, as 3rd and 4th parties are involved, not just a buyer and seller. This point was always relevant to the rules of appraisers until the past few years of value decline. The second reason is the majority of short sales and foreclosures are investment properties, and as such, subject to capital gains tax rules. If an investor short sells his property for $50,000 below his mortgage, they are subject to reporting $50,000 of income on form 1099 of the tax code. Does this income amount ever show up in the appraisal? Thirdly, as pointed out by other bloggers, many short sales and foreclosures are vacant and damaged properties. People are only buying them because they are such a steal, and they need to bring additional money to the house to fix it. Does a slighted investment property qualify as a proper comparible to the sales price of a family's home when they are needing to move because of a new job out of town?