Do Foreclosure Sales Hurt Real Estate Values ?
Many people are told that appraisers cannot use distressed sales as a comparable – thus these sales will not impact prices. This is incorrect.
It’s common to hear real estate agents say “appraisers cannot use distressed sales to value a property”. This used to be somewhat true but the rules have changed. And here are several examples of how and why distressed properties do have negative impact of properties.
• Buyers Perception. If a buyer has a choice of many similar homes, and one is a distressed property offered at a 20% discount, they are likely to buy the discounted property. And as long as the inventory of these discounted properties remain available, they will likely sell before the non-discounted properties. This is a common value based purchase.
• Valuation for Loan / Lender. If one is obtaining a loan for a purchase, the bank will require an appraisal. Appraisers are allowed to use distressed sales as comparable with clarification. And because we have so few transactions here at this time, finding enough sales are difficult. Here are several examples:
o If there are not “fair market” comparables available. Then distressed sales are used but the appraiser must adjust for the situation. In other words they can explain the situation and make adjustment for the loan. But banks do not like large adjustments. Typically 10% is ok. But if there’s a sale at $300,000 and the loan is for $400,000, then that is a problem.
o If there are some “fair market” and some “distressed” sales, then again, adjustment can be made. But appraisers are only allowed to adjust so much.
o Bank will always ask the appraiser the amount of distressed properties / sales in the area. If there are more foreclosure in a particular area, then bank will tend to be more strict regarding values.
• Valuation for Quick Sale. If a seller orders an appraisal because they needs to sell it fast, then the appraiser will take all comparables into account and value it near the distressed prices.
As much as we’d like to think the distressed properties do not have an impact on our homes value, it’s inevitable that they will given our situation. And the situation is this: we live in a small community. There are very few comparables; even in good times there are not a lot of sales. And with so few sales, we tend to be affected by the swings of the market more than larger cities.