Why are appraisers using short sales and bank-owned properties as comparables in appraisals?

How have out-of-area-appraisers affected our recovery?  It's been hamstrung.  Many appraisers are using short sales and REO's as comps in non-distressed appraisals.  The main distinction which needs to be made is why compare apples to oranges?  Let me explain.  If a buyer wants to buy a short sale versus a regular (non-distressed sale) they would do so because they are selling for much less (as much as 20-25%).  This is due to longer marketing times.  The longer marketing times are because of longer decisions by lenders.  If the buyer has the time to wait a short sale is a great buy.  REO sales typically represent the bottom tier of sales prices due to stolen high ticket items and depreciation from lack of maintenance.  The point is many appraisers are not using TRUE comparables.  This is having an adverse affect on a recovery, killing many deals, and making people who are already in a tough situation have to pay for one or more appraisals because the deal was killed.  The main reason has to do with out of the area appraisers being used by lenders.  See my blog if you want more information about my area.  [edited by Zillow moderator to remove website]

Best,

Jonathan Tipton

  • August 10 2011 - Tampa
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Answers (5)

A sale is a sale, in my opinion. Seller and Buyers have to deal with the reality of today's market. Of course, appraisers should take into consideration additional market time and the condition of the property with any sale. However, I don't think appraisers should make any sort of adjustment just because a property was labeled a short-sale, or an REO.

I do agree however, that appraisers (and lenders) should be able to give more weight to the Buyer's willingness to make an offer. I think that weight should be somehow connected to the amount of money a borrower/buyer is putting into the property up-front. In my experience, folks getting 90%-100% financing are less concerned with over-paying than those putting down 20%+ ... I don't think there's a good solution to the problem - but a sale is a sale and I would absolutely expect an appraiser to take all recent sales into consideration, regardless as to whether or not they are "distressed" sales.
  • August 10 2011
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Profile picture for Michael Helton
Michael, I disagree.  A sale is not a sale when you are looking at comparables.

In my market (#9 in the country for distressed properties) there are so many shortsales that a normal sale draws an instant 10-20% premium on the price.  It is a buyer's market and many buyers do not want to wait months and months to buy.

So, we are not talking pie-in-the-sky numbers.  I am talking about a concrete, unilateral price differential that most definitely effects the list and sale price of a home.  An appraisal is supposed to reflect hat the house will bring in the current market, and not taking distressed properties into account shows a lack of judgement and understanding of the market.

Comparing a shortsale to a normal sale is inaccurate and the appraisers who do it should not be hired.

I have to agree with Jonathan that it is causing an unrealistic expectation with lenders and killing deals.  This in turn leads to foreclosure, another family is crushed, the bank loses money, and the property values of surrounding homes dip even more.

No one wins.
  • August 10 2011
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Profile picture for SoCal Engr
There are a few appraisers on this board, it would be interesting to hear their opinion.

As annoying as it may be, it seems that distressed sales - especially if there are many of them - have to be factored into a house's value. If similar houses are selling for $200K, then how can a $400K value be supported? Of course, the condition of the houses needs to be taken into consideration, but...
  • August 10 2011
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Profile picture for Michael Helton
Jonathan, good blog post.  Thank you for not hiding it behind some registration screen.  Hopefully a Zillow admin will not delete it, as I think it will add to the discussion. 
  • August 10 2011
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Profile picture for Mark LeMenager
There is a simple solution to out-of-area appraisers.  Put a clause in the contract that requires the appraiser be from the same County as the property is located in.
  • August 10 2011
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